Tuesday, March 31, 2020
Snowballing Refund Cost Threatening Korea’s Low-cost Carriers
Some LCCs May Lose Business Licenses
Snowballing Refund Cost Threatening Korea’s Low-cost Carriers
  • By Choi Moon-hee
  • February 13, 2020, 14:10
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Korean low-cost carriers are facing an unprecedented crisis.

Korean airliners are facing an unprecedented crisis. Following Jeju Airlines, four low-cost carriers (LCCs) are receiving applications for unpaid leave from employees, and Asiana Airlines has received applications for a unpaid leave of absence from cabin crew members.

Jeju Air's sales increased last year, but it swung to an operating loss of 32.9 billion won and net loss of 34.1 billion won. T’way Airlines turned to a deficit, even though its sales increased by 10.7 percent to 910.4 billion from 731.8 billion won in the same period of 2019. Jin Air not only saw a decrease in sales last year, but posted an operating loss and net loss.

The most direct cause of these carriers’ poor performance is oversupply. As service routes overlap, airliners started a ticket price war, hurting themselves. To make matters worse, Korean tourists boycotted tours to Japan, and a new coronavirus broke out in Wuhan of China. If the coronavirus fiasco is prolonged, some carriers could lose their licenses due to capital impairment.

Refund requests by passengers are also negatively affecting LCCs’ earnings. As the corona-19 virus spreads around the world, passengers demand refunds of their tickets, including those to China which have no refund commissions. For some carriers, the amount of refunds has surpassed that of new ticket sales. In this way, LCCs are running out of operating funds. They are now asking the government to ease regulations for the time being and provide them with financial support to jointly purchase fuel and cover labor costs.

As LCCs’ earnings have deteriorated, it is expected that big changes will occur in the airline industry. Jeju Airlines has been in negotiations to acquire Eastar Airlines. It has found a large amount of contingent liabilities during a due diligence process on Eastar Airline, which has long been unable to solve its capital impairment. Eastar Airline is expected to receive an order to improve its financial structure from the minister of land, transport and infrastructure as early as next year due to a revision of the Airline Industry Act. If an airliner leaves over 50 percent capital impairment unaddressed for more than two years after receiving an order for improvement, the airliner will have its license revoked or its business suspended. Meanwhile, following Jeju Air, four LCCs are accepting applications for unpaid leaves of absence.

On the other hand, Asiana Airlines announced on Feb. 12 that it posted 5,953.9 billion won in sales and 368.3 billion won in operating loss last year. During the same period, its net loss arrived at 672.7 billion won, a sharp increase in the deficit. Airline industry watchers put the blame on the following facts for Asiana Airlines' poor earnings. The profitability of its passenger business deteriorated due to a conflict between Korea and Japan in the second half of 2019 and a glut of the supply of LCC services. Its cargo transportation suffered poor sales due to a global economic slowdown and a cut in cargo volume. Stronger foreign currencies against the Korean won triggered an increase in foreign currency cost. Finally Asiana Airline expanded investment in the enhancement of on-time performance and safe flights.