Asiana and Korean Air Receive 2.9 Trillion Won Injection... What About Support for LCCs?

[Asia Economy Reporter Jo Gang-wook] The Korea Development Bank and the Export-Import Bank of Korea have urgently injected 2.9 trillion won in new funds into Korean Air and Asiana Airlines, which have fallen into financial difficulties due to the COVID-19 pandemic.

Next, there is growing interest in whether support will be extended to low-cost carriers (LCCs). However, since no additional support has been confirmed so far, there is also an interpretation that some restructuring of LCCs may be underway.

According to financial circles on the 25th, the Korea Development Bank and the Export-Import Bank decided on the previous day to urgently support Korean Air with 1.2 trillion won.

This is a measure to provide urgent support before the establishment of the more than 40 trillion won Industrial Stabilization Fund, which was confirmed by the government at the '5th Emergency Economic Meeting' on the 22nd.

Support for Korean Air will be provided through the purchase of 200 billion won in operating funds, 700 billion won in asset-backed securities (ABS) related to cargo transportation, and 300 billion won in perpetual bonds with stock conversion rights. The two banks will secure a 10.8% stake in Korean Air through the purchase of perpetual bonds and other means. Combined with the 9.98% stake held by the National Pension Service, the government’s stake is expected to reach 20%.

However, the Korea Development Bank and others have set conditions for support, including the airline’s own capital increase and management improvement efforts, employment stability efforts, restrictions on high salaries, dividends, and stock repurchases to prevent moral hazard, and sharing of future corporate normalization profits.

Korean Air is experiencing severe financial difficulties as most international routes, which account for 94% of passenger revenue, have been suspended due to the impact of COVID-19.

Earlier, on the 21st, the Korea Development Bank and the Export-Import Bank decided to support Asiana Airlines with a credit line loan of 1.7 trillion won.

The Korea Development Bank stated, "We expect that HDC Hyundai Development Company, the acquirer, will complete the corporate merger approval process and successfully conclude the acquisition of Asiana Airlines."

With the announcement of support measures for Korean Air and Asiana Airlines, there is speculation that the next step could be support measures for low-cost carriers (LCCs).

The Fair Trade Commission approved Jeju Air’s acquisition of Eastar Jet on the 23rd. Earlier, the Korea Development Bank announced plans to support Jeju Air with 150 billion to 200 billion won together with other banks this month after the Fair Trade Commission’s corporate merger review is completed. The Korea Development Bank is operating an LCC financial support program within 300 billion won and has supported 126 billion won so far.

However, the Korea Development Bank said it is not currently considering additional support for LCCs. Apart from the existing 300 billion won support and Jeju Air’s acquisition financing support of 150 billion to 200 billion won for Eastar Jet, no additional support has been announced.

Accordingly, some voices express concern that LCC restructuring may be intensifying.

An industry official said, "Requiring additional self-help efforts as a condition for support seems to imply that some of the nine LCCs will be restructured," adding, "Unlike major airlines, LCCs have almost no assets to sell."