LCC operators pull back on M&As

A passenger jet from Eastar Jet / Courtesy of Eastar Jet

Operators for major low-cost carriers (LCCs) here are retreating from their planned acquisition of other budget airlines, as the industry faces an unexpectedly severe downturn with no immediate signs of recovery, market watchers said Friday.

All eyes are on the fate of Eastar Jet, as VIG Partners, the largest shareholder for the LCC, is moving to sell the company after achieving rapid earnings normalization for the once-cash-strapped budget carrier.

The private equity firm purchased a 100-percent stake in Eastar in January 2023 at 40 billion won ($28.78 million). The airline has since rapidly reduced its operating loss, while expanding sales. Eastar Jet is widely expected to turn a surplus this year, after reporting an operating loss of 37.3 billion won last year.

Aekyung Group, the operator of Jeju Air, has been considered one of the strong potential bidders for the upcoming deal. The LCC acutely needs to expand its external size ahead of its planned launch of a converged budget carrier following Korean Air’s acquisition of Asiana Airlines. The mega LCC — which combines Jin Air, Air Seoul and Air Busan — will operate 59 aircrafts once it begins operation by the end of 2026.

Jeju Air has 42 passenger jets and two cargo planes for now, but its fleet of aircraft will increase to 59 if it acquires Eastar and its 15 planes.

However, it remains unclear whether Aekyung Group will aggressively push for the acquisition of Eastar amid Jeju Air’s worsening profitability and growing risks from the cutthroat competition within the LCC industry. According to an earnings projection by market tracker FnGuide, Jeju Air is forecast to have reported some 40 billion won in operating loss in the second quarter.

“Our top priority is on the timely sales of our beauty affiliate, Aekyung Industrial, not the acquisition of another LCC,” a spokesman at Aekyung Group said.

Eastar Jet is valued at a range of 500 billion to 600 billion won on the market, so it appears unlikely that the operator of Jeju Air will take on such a huge financial burden amid the industry’s downturn and the falling profitability of its existing LCC affiliate.

Air Premia's B787-9 Dreamliner aircraft / Courtesy of Air Premia

Sono Hospitality Group, which recently acquired T’way Air, also frequently places its name on a list of strong contenders for the possible acquisition of Air Premia. Last year, Sono International, the group’s holding firm, purchased an 11 percent stake in the LCC at 58.1 billion won, which raised the possibility for Sono to take over a controlling stake in Air Premia in the near future.

However, as T’way is also widely expected to turn a deficit with a forecast of some 50 billion won in operating losses between April and June, Sono is unlikely to commit large amounts of capital for any hasty acquisition of Air Premia.

Industry officials said LCC operators will not rush to purchase new airlines, as the industry faces a cloudy outlook in the latter half of this year.

“Following multiple reports of fatal accidents involving LCCs, their brand image has been seriously tarnished, which also affected their earnings,” an industry official said. “LCC operators will take a wait-and-see attitude for the time being to ensure their internal financial stability, rather than pushing for any acquisitions of other carriers."