Korean Low-Cost Carriers Face Survival Challenges Amid Industry Restructuring

The airline industry is bracing for a major restructuring, with low-cost carriers (LCCs) facing significant survival challenges. Following a prolonged period of poor performance and weakened financial health, the anticipated launch of a 'giant LCC' formed by the merger of three airlines next year adds to the pressure. Analysts warn that the current management practices of LCCs, which rely heavily on support from parent companies, may become entrenched.

According to industry sources, a substantial restructuring of the domestic airline sector is expected to occur by the first quarter of next year. In December, Korean Air and Asiana Airlines will merge, followed by Jin Air's absorption of Air Busan and Air Seoul in March. This will reduce the number of existing airlines from 11 to 8, comprising one full-service carrier (FSC) and seven LCCs.

Despite the reduction in the number of airlines, the LCC sector is concerned about intensified competition. Even after the restructuring, a competitive landscape with seven LCCs will remain. The emergence of a large LCC formed by the merger of Jin Air, Air Busan, and Air Seoul could further burden existing carriers.

The core issue is that the financial strength needed to withstand competition has already deteriorated. The LCC sector has faced declining profitability since early last year. The four largest publicly listed LCCs—Jeju Air, Jin Air, Air Busan, and Trinity Air—reported a combined operating loss of approximately 171 billion won in the first half of this year, a 13% increase from a loss of about 151 billion won during the same period last year.

This year, challenges such as high oil prices and exchange rates have compounded the difficulties, making recovery in performance increasingly elusive. Consequently, LCCs are focusing their operations on short-haul routes to Japan and China, where operational risks are relatively lower. Long-haul flights pose a risk of demand falling short of expectations, leading to increased fixed costs such as aircraft operation and fuel expenses.

With the launch of the merged Jin Air next year, non-Hanjin Group affiliates are likely to face intensified management challenges. The merged Jin Air will operate a fleet of 60 aircraft and establish major hubs in Seoul and Busan, positioning itself as the largest LCC in the country, surpassing Jeju Air, which currently has a slightly smaller fleet. The number of international routes will also increase to 46, providing advantages in route planning and flight frequency. Non-Hanjin LCCs will inevitably face pressure in terms of pricing, fleet, and route competition.

These airlines are already relying on parent company support for funding. Jeju Air secured liquidity this year by selling its entire stake in IT subsidiary AKIS to AK Holdings for 43.3 billion won. Additionally, Trinity Air received financial support through a 110 billion won third-party allocation capital increase after Daemyung Sonogroup acquired management rights last year.

However, the three airlines being integrated into Jin Air also face challenging financial conditions. As of the end of the first half of this year, Jin Air and Air Busan had debt ratios of 635.7% and 1646.7%, respectively. Air Seoul is also estimated to have a capital impairment ratio of 58.3%, indicating partial capital impairment. While the merger will expand the fleet and routes, it will also bring increased debt and cost burdens.

Ultimately, experts suggest that the launch of the merged Jin Air may further entrench the current management practices of LCCs that rely on parent company support. If poor performance persists, these airlines may struggle to manage their own aircraft investments and operational costs, leading to repeated calls for additional capital increases and financial support from parent companies. Hwang Yong-sik, a professor at Sejong University, noted, "While parent company support may have contributed to the growth of LCCs, it is crucial for them to establish a solid revenue model to achieve genuine growth."