Credit Card Companies, What Will They Do About Eastar Jet Cancellation Refunds?

Jeju Air and M&A Deal Apparently Collapsed
If Self-Rescue Is Difficult, Bankruptcy Likely
Risk of Loss from Unrefunded Ticket Cancellation Fees

[Asia Economy Reporter Ki Ha-young] As the merger and acquisition (M&A) contract between Jeju Air and Eastar Jet has effectively entered the process of being canceled, credit card companies face the risk of having to write off losses on the airline ticket cancellation fees they have not been reimbursed by Eastar Jet. While card companies are taking a wait-and-see approach, they are anxious about the possibility of not recovering the cancellation fees amid concerns over deteriorating performance this year.

According to the aviation and credit card industries on the 20th, the prevailing view is that the M&A contract between Jeju Air and Eastar Jet has effectively fallen through. Jeju Air has fulfilled the conditions for terminating the contract with Eastar Jet and is now only left with the final declaration of a 'no deal.' If the M&A collapses, Eastar Jet is expected to follow the path of bankruptcy as it will be unable to recover on its own. If it enters court receivership, liquidation is considered more likely than corporate rehabilitation.

With the possibility of Eastar Jet going bankrupt, credit card companies are also in a position where they may lose the airline ticket cancellation fees they have not yet recovered. The amount Eastar Jet owes to card companies is reported to be around 10 billion KRW. Depending on the card company, the amount ranges from as little as 500 million KRW to as much as 2 to 3 billion KRW. Eastar Jet had promised to refund the cancellation fees after the M&A with Jeju Air, but with the deal effectively off the table, card companies are inevitably facing losses.

This situation stems from the severe financial difficulties airlines have faced due to the COVID-19 pandemic, which completely shut down global air routes. Eastar Jet suspended all international flights on March 9 and halted domestic flights on March 24. As of the end of the first quarter this year, its debt stood at 220 billion KRW, placing it in a state of complete capital erosion.

Airline ticket payments are made by card companies advancing the payment to airlines and then settling with customers monthly to recover the funds. However, due to the surge in ticket cancellations caused by COVID-19, card companies had to refund customers first. In March, airlines struggling with liquidity requested card companies to defer payment of ticket cancellation fees. Except for Eastar Jet, most airlines repaid the cancellation fees owed to card companies after March and April, when COVID-19 spread rapidly.

Card companies say they will monitor the situation regarding Eastar Jet’s ticket cancellation fees. A representative from one card company said, "Since the final outcome of the M&A between Eastar Jet and Jeju Air has not been decided, we have no choice but to watch the situation. We cannot even demand payment from Eastar Jet, so in the worst case, we may have to consider writing off the unpaid amounts as bad debt."

Another card company official said, "Eastar Jet does not account for a large portion of total airline ticket sales, so not recovering the cancellation fees will not cause immediate significant damage. However, since the impact of COVID-19, such as reduced card payments, will be reflected in performance from the second quarter, no company welcomes an increase in unpaid amounts."

The problem is that the credit card industry’s performance outlook from the second quarter is also poor due to the effects of COVID-19. This is because the impact of consumption contraction due to social distancing and interest repayment deferrals for small business owners is being fully reflected. According to the Bank of Korea, the use of payment cards such as credit and check cards from February to May this year, when COVID-19 spread in earnest, decreased by about 2.1% compared to the previous year. This is the fourth decline since related statistics began in 2003. Both credit cards (-3.8%) and check cards (-0.1%) decreased, and excluding prepaid cards, payment card usage recorded a -3.0% decline.

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