Jin Air, Overcoming Boritgogae to Achieve Earnings U-Turn

Resumption of Southeast Asia Routes
Possible Return to Profit in Q4 This Year
Korean Air-Asiana Merger
Completion Within the Year Would Facilitate Fundraising

Although daily COVID-19 cases have surpassed 50,000, airline stocks are on the rise. This is because governments around the world have increasingly expressed the view that the COVID-19 virus can be managed like the flu, raising expectations for the reopening of air routes. This trend reflects the possibility of easing regulations on domestic arrivals and the potential relaxation of travel restrictions worldwide due to the pandemic. In particular, it is anticipated that LCC (Low-Cost Carrier) companies will be the biggest beneficiaries during the COVID-19 lull phase. Although the Omicron variant has somewhat delayed the full recovery of passenger demand, the demand is not disappearing but accumulating, which is boosting expectations for stock price increases. However, the deterioration of financial soundness due to accumulated losses after COVID-19 remains a risk factor for investors. Asia Economy analyzed Korea’s leading LCCs, Jin Air and Jeju Air.

[Asia Economy Reporter Park So-yeon] Jin Air is expected to be the biggest beneficiary of the reopening of air routes. Jin Air operates air transportation with a total of 23 leased aircraft, including 19 Boeing 737-800s and 4 Boeing 777-200s. The largest shareholder is Hanjin KAL, holding 56.38% of the shares.

Revenue exceeded 1 trillion KRW in 2018 based on individual financial statements and recorded 910.2 billion KRW in 2019, maintaining a scale of 800 billion to 1 trillion KRW for three years before the COVID-19 outbreak. After the pandemic began, revenue sharply dropped to 271.8 billion KRW in 2020 and is estimated to have recorded 234 billion KRW (according to securities firms’ forecasts) last year.

The majority of revenue comes from passenger transportation. As of the third quarter of 2021, 91.4% of total revenue was generated from passenger transportation services.

Before COVID-19, domestic passenger revenue accounted for less than 20%, but it increased to 45.7% in 2020 and 85.7% in 2021 (up to the third quarter). Conversely, the share of international passengers decreased from 74.2% in 2019 to 42.8% in 2020 and 5.7% in 2021.

Looking at the financial situation, losses began in 2019 before the pandemic. Operating losses started at 48.8 billion KRW in 2019 and accumulated to 184.7 billion KRW in 2020 and 198.7 billion KRW (according to securities consensus) in 2021.

Due to accumulated losses, interest-bearing debt has rapidly increased. Interest-bearing debt rose from 29.4 billion KRW at the end of 2018 to 370.4 billion KRW by the end of 2020.

The securities industry expects that once the COVID-19 situation passes its peak and enters a lull phase, Jin Air could return to profitability starting next year. There is also optimism that Jin Air, which has a high revenue share in Southeast Asia, could be the first among LCCs to achieve a turnaround to profitability.

Before COVID-19, Jin Air’s international revenue was composed of 66.1% from Southeast Asia, 20.5% from Japan, and 1.5% from China. The industry expects the reopening of air routes in Asia to proceed in the order of Southeast Asia, Japan, and then China.

This is because Southeast Asia, which heavily depends on tourism, has a lower hurdle for easing restrictions. Some analyses suggest that if Southeast Asian routes resume operations, Jin Air could achieve quarterly profitability as early as the fourth quarter of this year.

During the COVID-19 situation, most airlines, including Jin Air, have relied on market financing as bank loans were unavailable. This is because aircraft leasing results in large amounts of debt recorded as operating leases.

Jin Air resolved concerns about capital erosion for the 2021 fiscal year by issuing 74.5 billion KRW in perpetual bonds in the third quarter of 2021 and conducting a paid-in capital increase of 123.8 billion KRW in the fourth quarter. However, the possibility of capital erosion remains due to accumulated deficits in 2022.

The approval of the corporate merger between Korean Air and Asiana Airlines is also a variable. If the merger is completed within the year, capital raising through Hanjin KAL is expected to become easier. The major shareholder Hanjin KAL had difficulty focusing on funding Jin Air as it raised 800 billion KRW from the Korea Development Bank to participate in Korean Air’s paid-in capital increase during the merger process between FSCs (Full-Service Carriers).

Researcher Bae Gi-yeon of Meritz Securities said, "Once domestic Fair Trade Commission approval is completed, the environment for Hanjin KAL to provide capital to Jin Air will be sufficient," and added, "Jin Air, which targets the Southeast Asian region, is expected to have the fastest pace of performance turnaround."

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