Jeju Air, South Korea's largest low-cost carrier, is facing significant challenges following a crash that resulted in 179 fatalities on December 29. The company's future was already uncertain, and discussions of potential acquisitions of smaller rivals to counter threats from a merger between the country's two largest airlines have now been overshadowed by the investigation into the accident.
On Thursday, South Korean authorities raided Jeju Air's offices and imposed a travel ban on CEO Kim E-bae as part of the investigation into the crash, marking the worst air disaster in South Korea in nearly 30 years. Following the incident, the airline experienced a spike in booking cancellations, straining its already debt-laden financial position. Jeju Air’s stock price has dropped 10 percent since the disaster.
In response to the crash, Jeju Air announced it would reduce flight capacity by 15 percent until March to improve operational stability. Investigators are examining the causes of Jeju Air Flight 7C2216's crash, and the airline is under scrutiny regarding its operational practices, including its frequency of flights compared to its rivals and its outsourcing of maintenance overseas.
Mr. Kim assured at a news conference that there were no prior issues reported with the aircraft involved and stated that Jeju Air is fully cooperating with the investigation. The airline, committed to supporting those affected by the crash, has not provided further comment following the incident.
Jeju Air’s financial outlook had already been problematic, with rising costs due to inflation and increasing interest rates. The airline’s operational capacity remains below pre-pandemic levels, operating 4 percent fewer flights than in 2019.
The timing of the crash coincides with the completion of Korean Air’s acquisition of Asiana Airlines, which is expected to establish a single national carrier that will include budget airlines, thereby surpassing Jeju Air as the largest low-cost carrier in South Korea.
Founded twenty years ago, Jeju Air began as South Korea's first budget airline, catering primarily to the popular route between Seoul and Jeju Island. The airline expanded into Asian markets, often utilizing a single model, the Boeing 737-800, to maintain cost efficiency.
Since the pandemic, Jeju Air's financial health has seen volatility, resulting in three capital raises totaling nearly $500 million and a government loan of $29 million conditional on maintaining its workforce. Although there was a surge in demand after travel restrictions were lifted, the airline's revenue growth has been offset by increasing costs, leaving it with significant debt obligations.
As Jeju Air prepares to repay approximately $165 million in short-term loans by next September, analysts continue to express concern regarding the airline’s liquidity amid ongoing flight cancellations. However, a company representative dismissed these concerns, stating planned expansions including a deal for up to 40 new Boeing planes.
The South Korean government intends to support low-cost airlines, which could benefit Jeju Air in securing new international flight routes. Nevertheless, the airline's operational practices, particularly its frequent flight schedules and reliance on overseas maintenance, have sparked scrutiny in light of the crash.
Jeju Air's strategy of high operational frequency has been noted, with its planes averaging over 14 hours in the air daily, significantly more than competitors Korean Air and Jin Air. While this practice is typically seen as efficient, the recent tragedy has raised questions regarding safety protocols.
Despite these challenges, Jeju Air's financial performance has seen improvements, with its revenues more than doubling in 2023, although maintenance costs remained relatively stable. The industry norm of outsourcing maintenance is acknowledged, with all airlines participating in such practices under strict regulations.
In the wake of the tragedy, Jeju Air has prioritized restoring its reputation and providing support for victims and their families, ensuring that the aircraft involved is insured for up to $1 billion to facilitate necessary assistance.