Failed M&A, Started Restructuring... LCCs Also on Edge

Following Eastar Air, Air Busan and Others Also Face Potential Parent Company-Led Restructuring

[Asia Economy Reporter Yu Je-hoon] Among the places where the shadow of restructuring is looming due to the collapse of the merger and acquisition (M&A) with Asiana Airlines, the crowded low-cost carriers (LCCs) are singled out. Inside and outside the industry, there are calls for the government to respond swiftly with additional support and to provide policy support to facilitate natural restructuring.

The restructuring of the LCC industry has already become a reality with the Eastar Jet incident. On the 7th, Eastar Jet notified 605 employees of layoffs with the premise of future reemployment. Eastar Jet, which had been struggling financially even before the COVID-19 pandemic, is considering resale after the M&A talks with Jeju Air fell through, and has pulled out the last card of layoffs for this purpose.

This is not just a problem for Eastar Jet alone. The possibility of restructuring is gradually increasing across the industry. Immediately after the collapse of the acquisition of its parent company Asiana Airlines, Air Busan and Air Seoul have also been consistently mentioned as candidates for resale and merger/consolidation.

The situation of other LCCs is also not easy. Jeju Air, which gave up on acquiring Eastar Jet, as well as Jin Air and T'way Air, ranked second and third in the industry, are also making every effort to secure liquidity through rights offerings and other means.

The biggest cause of the crisis is still COVID-19. Unlike major airlines, LCCs, whose business portfolios are limited to the passenger sector, have been directly hit by the shock of COVID-19. Inside and outside the industry, there are forecasts that from November, when the government's employment retention subsidy ends, through next year, each LCC could be driven into a survival crisis.

However, the oversupply problem, which has been raised even before COVID-19, is generally evaluated as another factor holding back LCCs. After each company competitively increased supply, the government also actively granted licenses to new airlines, which it had hesitated to do until now, resulting in a situation where one problem piled on another.

Professor Hwang Yong-sik of the Department of Business Administration at Sejong University said, "The Ministry of Land, Infrastructure and Transport's policy of limited license issuance was overturned by regional and political logic, which ultimately fueled oversupply. The COVID-19 crisis arrived faster because of this." He added, "The longer COVID-19 prolongs, the more natural restructuring will continue, and in this process, there is a high probability that considerable pain will be involved, as seen in the cases of foreign airlines."

Experts unanimously agree that the government’s additional support to overcome the crisis should proceed swiftly. Currently, the government’s additional support measures for LCCs remain silent. The government proposed supporting LCCs through creditors and Primary Collateralized Bond Obligations (P-CBO), but even a month after receiving due diligence documents from each company, the scale of support has not been finalized.

Some advise that the government should also prepare programs such as job transition support in anticipation of the upcoming restructuring phase. However, an industry insider pointed out, "Due to the nature of airline industry workers, reemployment is inevitably limited, so it is questionable whether job transition support is a realistic alternative."

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