Cash Drought Caused by COVID-19... Parched LCCs

Even with securing funds such as inheritance, liquidity crisis persists... Financial authorities' support is crucial

Jeju Air

[Asia Economy Reporter Yoo Je-hoon] The impact of the novel coronavirus disease (COVID-19) pandemic has led to contrasting outcomes among low-cost carriers (LCCs) pursuing capital injections.

According to the aviation industry on the 21st, Jeju Air recorded a subscription competition rate of 79.87 to 1 for its rights offering to general investors conducted on the 18th and 19th. This was a subscription for 1.2 million forfeited shares arising after subscriptions by existing shareholders and the employee stock ownership association, resulting in about 1.2 trillion KRW being concentrated in the general public offering.

Following Jeju Air, Jin Air, ranked second in the industry, is also pushing for a rights offering worth 109.2 billion KRW. Given the successful rights offerings of Korean Air and Hanjin KAL, the industry expects Jin Air's rights offering to also achieve favorable results.

The reason each company is desperately seeking capital injections is that cash flow has dried up due to the prolonged COVID-19 crisis. According to the Financial Supervisory Service's electronic disclosure system, the cash and cash equivalents (cash and cash equivalents, short-term financial instruments) held by the four listed domestic LCCs totaled approximately 351.9 billion KRW. This is more than a 50% decrease compared to the end of last year (about 752 billion KRW), just before the spread of COVID-19. Industry leader Jeju Air saw a 53.2% decrease from 224.2 billion KRW to 105 billion KRW, and Jin Air, which had relatively abundant cash, also dropped 56.6% from 297 billion KRW to 129.1 billion KRW. T'way Air decreased by 44.5% to 102.6 billion KRW, and Air Busan fell 67.0% to just 15.2 billion KRW.

However, not all LCCs are smoothly securing funds through rights offerings and other means. T'way Air attempted a 50 billion KRW rights offering but failed due to low participation from its parent company, T'way Holdings. An industry insider said, "Considering that T'way Air's business performance was relatively better than others, it is essentially the size of the parent company that determined the success or failure of the rights offering," adding, "As the COVID-19 crisis prolongs, differences in such fundamental strength will become more pronounced."

The problem is that liquidity crises can recur at any time regardless of the immediate success or failure of capital injections. LCCs had planned to steadily expand their networks starting with a large-scale increase in domestic flights in the third quarter, but with clear signs of COVID-19 resurgence recently, even this has become uncertain.

Therefore, the industry is pinning hopes on additional financial support from regulatory authorities. Earlier this month, the Korea Development Bank completed audits by accounting firms on the capital needs of each LCC through the end of this year or early next year and stated that it is reviewing additional financial support.

Yang Ji-hwan, a researcher at Daishin Securities, said, "With the resurgence of COVID-19 in Korea, the outlook is pessimistic," adding, "If the rights offerings succeed, Jeju Air is expected to hold about 255.7 billion KRW and Jin Air about 238.4 billion KRW in cash, but if the COVID-19 situation continues, funds are expected to be depleted by the end of the first half of next year."

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