Failed Jeju+Eastar... Aviation Industry Restructuring Stuck in Quagmire

Will the Drifting Asiana Acquisition Battle Be Affected?
Experts Say "Government Should Support Structural Reorganization"

The departure hall of Terminal 1 at Incheon International Airport is quiet on the 22nd amid the ongoing COVID-19 pandemic. Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Yoo Je-hoon] The attempted merger and acquisition (M&A) of Eastar Jet by Jeju Air, the first corporate merger attempt between national airlines, ended in disaster, plunging the airline industry restructuring into a quagmire. As the COVID-19 pandemic has severely limited the operational scope of each airline, concerns are growing that instead of industry restructuring, cases similar to the 'second Eastar Jet' may continue.

◆ Airline Industry Restructuring Stuck in a Quagmire = The immediate impact of the collapse of the Eastar Jet acquisition, considered a 'small deal' in the airline industry, will be felt in the Asiana Airlines M&A. The 'big deal' of Asiana Airlines M&A has also been at a standstill since the COVID-19 outbreak. Despite repeated demands from Kumho Industrial and creditors to conclude the deal, HDC Hyundai Development Company has remained silent. Industry analysts suggest that HDC Hyundai Development and Kumho Industrial may be building justifications anticipating the failure of the acquisition, similar to Jeju Air and Eastar Jet.

If this also fails, Asiana Airlines is expected to undergo a mid-to-long-term process of separate sales under creditor management. In this case, not only Asiana Airlines but also its subsidiaries Air Busan and Air Seoul may have to go through restructuring. Professor Hee-young Heo of Korea Aerospace University said, "It is true that the processes taken by Jeju Air and Eastar Jet, and by HDC Hyundai Development and Kumho Industrial, share many similarities," adding, "HDC Hyundai Development needs to clarify its position to ease the burden on Asiana Airlines."

Meanwhile, as airlines are left to fend for themselves, the possibility of autonomous internal restructuring within the market is gradually fading. This is because, in a situation where liquidity has dried up due to COVID-19, no party has the incentive or capacity to push for industry restructuring. An industry insider said, "Jeju Air, the largest and most liquid among LCCs, has withdrawn from M&A, so for the remaining airlines, it is out of the question."

◆ Will There Be a Second Eastar Jet? = As airline restructuring stalls, concerns are widespread inside and outside the industry that "the case of a second Eastar Jet may become a reality." Even if Eastar Jet undergoes liquidation, eight airlines remain in the market: Korean Air, Asiana Airlines, Jeju Air, Jin Air, T'way Air, Air Busan, Air Seoul, and Fly Gangwon. Adding Aero K and Air Premia, which are preparing to launch services, means ten airlines will be engaged in a chicken game.

The problem is that the impact of the COVID-19 pandemic shows no signs of ending. The International Air Transport Association (IATA) has predicted that global air demand will not reach last year's level even in 2023. This means the current recession could last at least one to two more years. NH Investment & Securities noted in a report that "if Eastar Jet is liquidated, the burden of oversupply will ease and fare competition may partially relax, but the recovery from COVID-19-related flight disruptions is very slow, leaving long-term uncertainties."

Meanwhile, airlines' liquidity is rapidly drying up. As of the first quarter, the cash assets of the four listed LCCs totaled 363.8 billion KRW, a 61% decrease from the previous year. In the second quarter, when the impact of COVID-19 intensified, some companies may have fallen into capital erosion. This is why each company is rushing to raise capital and borrow funds.

Because of this, the industry does not rule out the possibility of a second Eastar Jet emerging. An industry insider said, "Until this year, companies may somehow buy time through capital increases and asset sales, but from the end of this year or next year, some airlines may start to consider personnel restructuring."

Experts advise that the government should support industry restructuring from the sidelines. They emphasize the need to promote voluntary restructuring through various incentives. Professor Moon-gil Yoon of Korea Aerospace University said, "It is necessary to consider giving priority in the allocation of traffic rights and slots to companies that proactively undertake restructuring and reorganization, and to supply liquidity by utilizing part of the corporate stabilization fund as policy funds," adding, "Regarding personnel restructuring, support programs for job transition should be considered for special occupational groups such as cabin and flight crew."

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