Budget carriers feel the pinch

Eastar, T’way on brink of collapse

By Lee Hyo-sik

The country’s five budget carriers ― Jeju Air, Jin Air, Air Busan, Eastar Jet and T’way Air ― are facing financial difficulties due largely to huge initial investments and high fuel costs.

Low-cost airlines had been enjoying a surge in the number of Korean and non-Korean passengers flying with them on both domestic and international routes over the past few years.

They now handle over 50 percent of domestic route passengers here and have expanded their reach overseas by launching flights linking Korea with destinations in Japan, China and Southeast Asia, providing both inbound and outbound travelers with more choices.

However, despite the recent travel boom, they are struggling to stay afloat.

Low-cost carriers, most of which are inadequately capitalized, have to buy aircraft worth tens of millions of dollars or lease them by paying large sums in rent. Airlines also need to spend more to maintain planes, and hire cabin crews, mechanics and other personnel.

They are vulnerable to changes in international crude oil prices, foreign exchange rates and other macroeconomic conditions, making it extremely difficult to make money from operating budget carriers.

Even, the country’s two flagship carriers ― Korean Air and Asiana Airlines ― failed to meet market expectations for the first six months of the year, despite the soaring air travel demand.

Korean Air posted operating profits of 26.8 billion won (about $23.6 million) during the January to June period, down sharply from 143.2 billion won during the same period in 2011. Asiana Airlines also didn’t perform well, recording operating income of 62.5 billion won, down 54.2 percent

Both airlines have been suffering from surging fuel costs in line with high international crude prices and declining demand for air cargo amid the global economic downturn.

Eastar Jet, T’way Air in trouble

Among five budget carriers, Eastar Jet and T’way Air have been struggling to stay afloat under a pile of huge debts.

Eastar Jet, headquartered in Gunsan, North Jeolla Province, currently operates eight Boeing 737s on its three domestic and five international routes. It launched its first flight in January 2009 but has failed to make money over the past three and a half years.

In 2011, it posted net loss of 26.9 billion won, up sharply from 8.4 billion won the previous year. As of December 2011, its liabilities exceeded assets by 20.6 billion won.

Despite its deteriorating financial soundness, stakeholders of Eastar Jet have no plan to either inject capital into the struggling firm or dispose of it to a third party. The firm is owned by Saemangeum Tourism Development, Jeonbuk Bank and other entities based in North Jeolla Province.

``We have not yet tallied our first-half performance. I am not in a position to comment on it,’’ a spokesman for Eastar Jet said. ``We have been carrying out a series of investor relations sessions this year in a bid to attract financial investments.’’

The situation is not much different for T’way Air, which has been under the control of the Korea Deposit Insurance Corp. (KDIC) since its parent Tomoto Savings Bank went bankrupt in September 2011.

As of June, its debts exceeded assets by 26 billion, up from 18 billion won six months earlier, as the airline continued to incur losses due to surging oil and other operating costs, despite a rise in the number of passengers.

Over the past year, KDIC has been seeking to dispose of the budget carrier in a bid to recoup part of its funds injected into the troubled savings banks to clean up its bad loans.

Daemyung and several other businesses have shown interests in acquiring T’way. But both sides have failed to narrow their differences over the sales price. KDIC wants to generate up to 50 billion won from the sale

``KDIC recently selected the preferred bidder. The bidder is now conducting due diligence on the company,’’ a spokesman for T’way Air said.

Jeju Air, Jin Air, Air Busan, faring better

Three other low-cost carriers ― Jeju Air, Jin Air, Air Busan ― had a hard time in establishing a foothold in the budget airline industry over the past few years because at first they had to spend tens of millions of dollars to secure planes and other operational assets.

But they have begun performing better since the beginning of 2012, thanks largely to continued support from their parent companies.

Jeju Air, the country’s largest budget carrier, posted 155.9 billion won in revenue in the first six months of this year, up 42.3 percent from the same period last year, on the back of the soaring number of passengers. But its operating profit plunged 62.5 percent to 600 million won from 1.6 billion, due to high fuel costs.

According to the Korea Tourism Organization, the number of foreign visitors jumped 23.3 percent to 5.33 million in the first half of this year from the previous year.

Jeju is owned by Aekyung Group, a mid-tier conglomerate specializing in chemical, household goods and retail businesses. Aekyung has been extending financial and other support to turn Jeju Air into Korea’s leading low-cost carrier over the past few years.

Similarly, Jin Air, a wholly-owned budget carrier unit of Korean Air, and Air Busan, an affiliate of Asiana Airlines, have managed to turn around on the back of support from their parent firms.

Jin Air posted operating income of 7.8 billion won during the January to June period, up 256 percent from the previous year. Air Busan also earned operating income of 40 million won in the first half, compared with operating loss of 3.1 billion won a year earlier.