Jeju Air to acquire Eastar Jet, portending overhaul in low-cost airline sector

Seoul: Jeju Air Co., South Korea’s biggest low-cost carrier, said Wednesday it has signed an initial pact to acquire smaller LCC Eastar Jet, heralding a shake-up in the country’s airline sector.

Jeju Air will take over a 51.17-percent stake in Eastar Jet for 69.5 billion won ($60 million) and sign a share purchase agreement with Eastar Holdings within this year, the company said in a statement.

“The acquisition is aimed at realizing economies of scale, gaining a bigger market share and strengthening the company’s competitiveness in global markets,” a company spokeswoman said.

On Wednesday, Jeju Air jumped 7.6 percent to 27,700 won, far outperforming the broader KOSPI’s 0.04 percent loss. But bigger rivals Korean Air Lines Co. fell 0.4 percent to 27,750 won and Asiana Airlines Inc. remained unchanged at 5,350 won.

The planned acquisition will reorganize the local passenger-carrying market, with national flag carrier Korean Air, Asiana and Jeju Air plus Eastar Jet leading the market and five LCCs competing in the highly-competitive LCC market, analysts said.

“With the acquisition, Jeju Air will be better positioned to compete with rivals helped by expanded fleet and routes. If the airline industry makes a turnaround in terms of business cycle, Jeju Air will benefit from having more planes and routes,” Kim Young-ho, an analyst at Samsung Securities Co., said over the phone.

Kim expected local airlines will continue to suffer declines in earnings until the first half of 2020 due mainly to lower travel demand to Japan amid political tensions between Seoul and Tokyo over the latter’s export curbs since July.

In the January-September period, Jeju Air swung to a net loss of 17.5 billion won from a net profit of 84.9 billion won a year earlier. Other local air carriers also posted poor earnings results.

Its net profit plunged to 3.9 billion won in 2018 from the previous year’s 32.2 billion won due to political tensions between Seoul and Beijing over the deployment of an advanced U.S. missile defense system, called THAAD, in South Korea in 2017.

Eastar expects its earnings will fall further this year as it has suspended operation of two B737 MAXs delivered in December since March following two tragic accidents involving the plane.

Eastar operates 23 planes – 19 B737-800s, two B737-900ERs and two B737 MAXs – on four domestic and 34 international routes to China, Japan and Southeast Asia.

In March, Boeing promised a fix would be in place “in the coming weeks” after a B737 MAX operated by Ethiopian Airlines plunged to the ground killing 346 people. The same type of plane flown by Indonesia’s Lion Air crashed in October 2018, with everyone on board perishing.

Boeing said on Monday (local time) that it will temporarily suspend the production of the jets from January. It appears it will take some time for the U.S. company to get approval from the Federal Aviation Administration (FAA) for the plane to fly again.

Other local airlines that have signed contracts to add the B737 Max 8 to their fleets said they won’t operate the controversial plane until safety matters have been definitively resolved.

Korean Air has ordered 30 B737 Max 8 planes, with six of them scheduled to arrive this year. T’way Air Co. expects four B737 Max 8s to be delivered within this year.

But Korean Air and T’way said the controversial planes won’t be delivered until the FAA and the Seoul government give the green light for the plane to resume flights.

Meanwhile, Jeju Air operates 45 B737-800s — 42 chartered and three purchased. The planes serve six domestic routes and 82 international routes, mainly to China, Japan and other Southeast Asian countries.

From January to September, Jeju Air shifted to a net loss of 17.5 billion won from a net profit of 84.9 billion won in the year-ago period.

The decline is mostly attributable to lower numbers of passengers on routes to Japan since July, when Tokyo tightened regulations on exports to South Korea of three high-tech materials crucial for the production of semiconductors and displays. In August, Japan officially removed South Korea from its list of countries given preferential treatment in trade procedures.

Japan’s moves are seen as retaliatory measures against a Seoul court ruling that ordered Japanese companies to compensate South Korean workers forced into labor during World War II.

South Korea has two full-service carriers – Korean Air and Asiana Airlines Inc. – and seven low-cost carriers – Jeju Air, Jin Air, Air Busan Co., Air Seoul Inc., Eastar Jet, T’way and Fly Gangwon.

Two more LCCs – Air Premia Co. and Aero K Airlines Co. – are expected to join the market next year, bringing the country’s total number of LCCs to nine.

“A market-dominant player, like Jeju Air, will have an advantage (over smaller rivals) in the expanding local LCC market. But the number of LCCs in Korea is similar or higher than advanced countries and it does not guarantee profitability for players,” Bang Min-jin, an analyst at Eugene Investment & Securities Co., said.

There should be some restructuring in the local LCC markets as was seen in developed markets such as the United States, Europe and Japan, she said.

The number of LCCs in the U.S. plunged to nine from 100, with Japan and China having eight and six budget carriers in operation, respectively, according to the brokerage.

AK Holdings Inc., the holding firm of South Korean retail conglomerate Aekyung Group, holds a 59.93-percent stake in the carrier.

YONHAP