Eastar Jet Enters Rehabilitation Process, Faces Challenges from the Start Amid Numerous Issues

Complete Capital Impairment of Financial Status
Challenges Including AOC Repurchase and Founder Controversy

[Asia Economy Reporter Dongwoo Lee] Although Eastar Jet has entered corporate rehabilitation proceedings by court decision, numerous challenges for business normalization are expected from the start. Attention is focused on whether the airline can navigate through issues such as its completely capital-deficit financial status, the reacquisition of the Air Operator Certificate (AOC) necessary for future operations, and political controversies surrounding the founding family of Lee Sang-jik, a member of the Democratic Party.

According to industry sources and the court on the 5th, the Seoul Bankruptcy Court Rehabilitation Division 1 (Chief Judge Seo Kyung-hwan) decided yesterday to commence corporate rehabilitation proceedings for Eastar Jet.

Eastar Jet plans to select a buyer through a public auction process led by the court before the rehabilitation plan is approved. Currently, four parties have shown interest in acquiring Eastar Jet: two private equity funds (PEFs), one mid-sized company based in Honam, and one financial firm.

However, if a buyer is selected, the repayment of bonds with the acquisition price will pose a significant burden, as the debt amounts to 256 billion KRW. Since the suspension of the Air Operator Certificate in May last year, the equity value has been nearly zero. After resolving issues such as unpaid wages, aircraft lease fees, and rent arrears, the industry analyzes that the cost of business normalization may be greater than the benefits.

The reacquisition of the AOC, essential for resuming operations, is also a hurdle. Due to the slow recovery of passenger demand amid the COVID-19 pandemic and the ongoing big deal between major airlines such as Korean Air and Asiana Airlines, the Ministry of Land, Infrastructure and Transport has hinted at restructuring low-cost carriers (LCCs). There are concerns that qualifications for obtaining an AOC may become stricter if LCC restructuring accelerates.

Political controversies surrounding the founding family, including Lee Sang-jik, also pose major risks for potential buyers. In September last year, Lee was reported to the prosecution by the Eastar Jet Corruption Investigation Special Committee on charges including embezzlement, breach of trust, and violations of the Capital Markets Act involving amounts in the hundreds of millions of KRW. Recently, an Eastar Jet executive A, a relative of Lee, was arrested and is under investigation.

Discord between the labor union and the two appointed administrators, including CEO Kim Yoo-sang of Eastar Jet, is also growing. The pilots' union states that they cannot trust the current management, which is accused of mismanagement and breach of trust. On the other hand, the Workers' Solidarity, representing about 420 employees including flight attendants, argues that the rehabilitation process should be completed quickly through the current management, who are familiar with the company's situation, to prepare for business normalization.

Professor Yoon Moon-gil of the Department of Business Administration at Korea Aerospace University said, "Given the prolonged COVID-19 pandemic and the increasing market dominance of major airlines due to mergers and acquisitions, Eastar Jet's chances of rehabilitation will face considerable difficulties," adding, "Even after the rehabilitation process is completed, it is expected to take several more months to achieve business normalization."

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