40 Trillion Draft Fund Activation Imminent... Attention on Auto Parts Following LCC (Comprehensive)

Jeju Air and Air Busan 'Meet Borrowings Exceeding 500 Billion Won'

On the 18th, airplanes were halted at Incheon International Airport. / Photo by Mun Ho-nam munonam@

[Asia Economy Reporters Kim Hyo-jin and Yoo Je-hoon] As the 40 trillion won-scale Industrial Stabilization Fund (ISF) to respond to the damage caused by the novel coronavirus infection (COVID-19) is set to be fully operational this week, the related industries are on high alert over the specific support targets and criteria.

Among low-cost carriers (LCCs) facing the brink of collapse, Jeju Air and Air Busan are expected to be included as recipients of the ISF support. There is also growing interest in whether additional industries such as automobile parts manufacturing will be added to the support list.

According to the government on the 25th, financial authorities and the KDB Industrial Bank will hold the inaugural ISF Headquarters launch ceremony and the first Fund Operation Deliberation Committee meeting on the 28th. The committee will discuss the detailed application directions of the guidelines announced by the government last week. The screening process for eligible companies is expected to begin in early next month.

Among the support requirements of "borrowings of 500 billion won or more and 300 or more employees," the "borrowings" criterion will use "total borrowings," which includes both long- and short-term borrowings as well as lease liabilities. A government official said, "Total borrowings include all loans such as lease liabilities on the financial statements," adding, "There was no disagreement on this point during the initial discussions."

Considering only long- and short-term borrowings, only Korean Air and Asiana Airlines meet the criteria in the aviation industry. However, when using total borrowings including lease liabilities as the standard, some LCCs such as Jeju Air and Air Busan can also receive support. Jeju Air's total borrowings amount to 641.5 billion won, and Air Busan's total borrowings are 560.4 billion won.

The government has explicitly designated the aviation and shipping industries as eligible sectors for ISF support. However, if there is a significant impact on core technology protection, industrial ecosystem maintenance, the national economy, employment stability, or national security, the Ministry of Strategy and Finance and the Financial Services Commission may consult to provide support.

Therefore, in principle, there remains a possibility that LCCs not meeting the total borrowings criterion could be included as support targets. However, the government has decided to provide liquidity support through policy banks such as the Industrial Bank rather than the ISF. Exceptional support through the ISF is either not being considered or, if considered, would be a lower priority.

Within the industry, there is speculation that a sorting process for LCCs has begun. With the prolonged suspension of international flights due to COVID-19 and the inability to overcome liquidity crises, some LCCs are inevitably facing bankruptcy within this year.

Professor Lee Hwi-young of Inha Technical College explained, "Even before the COVID-19 crisis fully unfolded, oversupply was widespread," adding, "Even if demand recovers 100% to previous levels under the current system, airlines facing difficulties will continue to emerge."

Competition is expected to intensify. Currently, seven companies?Jeju Air, Jin Air, T'way Air, Air Busan, Eastar Jet, Air Seoul, and Fly Gangwon?are fiercely competing in the narrow domestic market, while two more companies, Air Premia and Aero K, are scheduled to launch flights within the year.

An industry insider said, "It seems the government raised the support hurdles considering market oversaturation."

Meanwhile, the government is positively reviewing support measures for automobile parts manufacturers through the ISF. The automobile parts industry is considered to have a significant impact on the domestic economy and the overall industry regardless of its size.

There are also suggestions that SsangYong Motor, which is in a severe liquidity crisis and recently received a refusal of audit opinion from an accounting firm, might receive ISF support. SsangYong Motor employs over 5,000 people, and if it fails to overcome the current crisis, the ripple effects on related industries and the regional economy could be substantial. The key issue is whether the fund support can help secure its self-sustainability.

Meanwhile, the Industrial Bank recently established the Industrial Stabilization Fund Headquarters to operate the ISF. The headquarters consists of 35 members and is composed of two offices: the Fund Secretariat and the Fund Operation Office, established under the Corporate Finance Division.

This content was produced with the assistance of AI translation services.