When Jeju Air’s status as South Korea’s low-cost carrier appeared threatened by the merger of the country’s two largest airlines last year, the company’s chief executive assured employees that it would “actively respond,” possibly by acquiring smaller competitors.
Now, a week after the crash that killed 179 people on December 29, the future of Jeju Air is shrouded in even deeper questions.
South Korean officials on Thursday raided the company’s offices and imposed a travel ban on chief executive Kim E-bae as part of an investigation into the country’s worst air disaster in nearly three decades. Passengers are canceling bookings, adding further pressure to the debt-laden balance sheet. And Jeju Air’s stock price, already trading near a record low, has fallen 10 percent since the disaster.
Earlier in the week, Mr Kim said Jeju Air would cut 15 percent of its flights until March to “improve stability.”
As investigators look into what caused Jeju Air Flight 7C2216 to crash, the airline has come under increased scrutiny from the government and the public as to how it operates. Some of its operating methods are being challenged, including how it flies its planes more often than its competitors and how it outsources its maintenance overseas.
At a press conference at Muan International Airport on the day of the accident, Mr. Kim said that to check whether it was in good condition, he found a problem with the plane, which he said had no history of accidents. In a public statement, Jeju Air said it is “committed” to helping anyone affected by the crash and is “fully cooperating” with the investigation into its cause. It did not immediately return a call seeking comment.
Jeju Air’s business outlook was already uncertain. Over the past two years, like other airlines, the company has faced rising costs due to inflation and higher interest rates. Jeju Air’s flight capacity has not fully recovered to 2019 levels, according to OAG, a global air travel data provider. The carrier used 4 percent fewer flights in 2024 than before the Covid pandemic in 2019.
The crash happened after Korea Air completed its acquisition of a majority stake in Asiana Airlines last month. The merger — a $1.05 billion deal that was agreed upon four years ago — will eventually create one national company. As part of that deal, the three budget carriers operated by the two companies will be combined under one brand to overtake Jeju Air as South Korea’s largest low-cost offering.
Two decades ago, Jeju Air became the country’s first budget airline with the aim of challenging the duopoly of Korean Air and Asiana. Jeju Air will fly a busy tourist route between Seoul and Jeju, a beautiful island off the southern coast of South Korea. The airline is majority-owned by AK Holdings, a conglomerate best known for selling detergents and toothpastes. Jeju Air’s second largest shareholder is the Jeju provincial government.
Jeju Air emerged from the merger of other small airlines to become the country’s leading low-cost carrier. It has added routes across Asia, including stops outside the usual travel destinations, to cater to affluent South Koreans looking to vacation abroad. As measured by the number of available seats, it has increased capacity by 20 percent per year on average over the past 12 years, the OAG said.
Like many budget airlines, Jeju Air was tight on costs, put new technology in place and squeezed travelers for small benefits. It focuses on short-haul regional flights served by the same aircraft model, the single-seat Boeing 737-800.
“It is a reliable low-cost carrier with good reach in Southeast Asia and North Asia,” said Mayur Patel, OAG’s regional marketing director.
After the initial public offering in 2015, Jeju Air was in a strong financial position until the pandemic hit. As of 2020, it has been forced to raise money on three separate occasions, totaling nearly $500 million. It also received a $29 million federal loan on the condition that it retain 90 percent of its workforce.
Even after the travel restrictions were lifted and Jeju Air was forced to close, its debt problems continued because its costs were rising as fast as its revenues.
In corporate filings, Jeju Air said it must repay approximately $165 million in short-term loans by the end of next September. That already exceeds its cash and cash equivalent balance of nearly $150 million. And this was before the start of the cancellations that are expected to further boost its cash balance.
But analysts say liquidity concerns are common among low-cost airlines.
“Most of these airlines, if you look at their financial situation, you would think that many of them are in financial danger but airlines have a way of surviving these things than other companies,” said Brendan Sobie, an independent consultant and airline analyst. . He explained that the companies in the airline chain have a strong incentive to help airlines in trouble.
On Thursday, a Jeju Air executive dismissed financial concerns, saying the company was continuing with expansion plans, including an agreement to buy up to 40 new planes from Boeing in the coming years.
The company wants to modernize its fleet now to take advantage of the South Korean government’s low-cost airline support program as a countermeasure to the threat to independence posed by the Korean Air and Asiana union. The government said it plans to prioritize the airline budget on providing new international routes from South Korea to Europe and Asia.
But now, some of the operating procedures that helped Jeju Air keep its costs down are under the microscope.
Jeju Air flies a fleet of Boeing 737-800 aircraft more often than its competitors. In the first 11 months of 2024, Jeju Air flew its flights for an average of 14.1 hours per day, according to South Korea’s Ministry of Land, Infrastructure and Transport. This compares with 8.6 hours for Korea Air and 11.4 hours for its low-cost carrier, Jin Air, according to the department.
Under normal circumstances, the difference in aircraft utilization would be raised as a sign of Jeju Air’s efficiency, an important consideration for low-cost carriers operating on thin margins. But because of the fatal accident, the difference has raised concerns.
Analysts who follow the aviation industry have said that frequent flyers will not affect airline safety as long as regulators maintain strict oversight of how many hours their pilots fly and their fleet retention standards.
At a press conference on Tuesday, Jeju Air was bombarded with questions about maintenance, including its practice of outsourcing maintenance to overseas technicians. Unlike Korean Air or Asiana, which have larger facilities and staff that can handle more, Jeju Air and the country’s other private low-cost carriers rely heavily on outsourcing.
This trend has also helped Jeju Air to keep maintenance costs low as its other capital costs have increased.
In 2023, Jeju Air’s revenue doubled from the previous year. It spent twice as much on fuel and airports to keep up with the increase in traffic, but maintenance costs, fixed costs, did not rise at the same rate.
Jonathan Berger, managing director at Alton Aviation Consultancy, said some maintenance releases are common in the industry. Maintenance work is highly regulated and audited regardless of whether it is done outside or on-site, he said.
“Jeju Air is not unique,” said Mr. Berger. “All airlines offer a great deal of care.”
For now, Jeju Air said it will focus on repairing its reputation and supporting the victims and their families. The company said the plane involved in the accident had up to $1 billion in insurance that will ensure the families receive the help they need.
Jin Yu Young responsible reporting.
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