Korean LCCs Facing Life and Death Crisis

Korea’s nine low cost carriers (LLCs) are facing an unprecedented crisis due to the recent spread of the novel coronavirus.

Korea’s nine low cost carriers (LLCs) are being forced to restructure themselves in the face of the recent spread of the novel coronavirus.

Air Busan’s debt ratio in 2019 stood at 812 percent, an eight-fold increase from 99 percent recorded in the previous year, the Financial Supervisory Service said on April 7. Jeju Air, the first-ranked LCC in Korea, more than doubled its debt ratio from 170 percent to 351 percent over the same period. The same goes for Jin Air (95 percent to 267 percent) and T’way Air (91 percent to 328 percent). The COVID-19 outbreak is expected to worsen the financial health of these LCCs in 2020.

Korean LCCs are vulnerable to external shocks because the market is overcrowded. Korea has nine LCCs, the same number as the United States. Korea has three more LCCs than China where travel demand is exploding.

Aviation industry experts say that competition among provincial governments and greed sparked off the establishment of too many LCCs compared to the size of Korea’s population. The Korean LCC industry had six LCCs until 2018, but three new LLCs — Fly Gangwon, Air Premia, and Aero K — were added in 2019. The three additional operators entered the LCC market at a time when LCC sales already plunged due to a diplomatic conflict between Korea and Japan. In the end, there was no restructuring other than Jeju Air’s takeover of Easter Jet, which is believed to be in capital erosion.

The problem is that the novel coronavirus crisis generated pressure on the government to provide support to LCCs, creating an environment where LCCs may be able to stay afloat. Experts say that as LCCs are based on regions, and employ a large number of local residents, they cannot be easily restructured due to political reasons.

This is why experts say that LCC restructuring may take the path of the shipbuilding industry. The number of small and medium-sized shipbuilders exceeded 50 in the past, but it has been reduced to just five after intensive restructuring during the past 10 years. The “Big Three Shipbuilder” system also came to an end recently as Hyundai Heavy Industries Group decided to take over Daewoo Shipbuilding & Marine Engineering. During this process, a huge amount of taxpayers’ money was spent through Korea Development Bank and the Export-Import Bank of Korea.

The restructuring of the shipbuilding industry was impeded by the populism of the Korean political world. As the shipbuilding industry was one of the pillars that supported local economies, the Korean political world influenced the restructuring of the shipbuilding industry, hindering its effective restructuring.