Eastar Air D-DAY, Jeju Air Without Delay

"Automatic Contract Termination Does Not Occur Even After Midnight Today"

[Image source=Yonhap News]

[Asia Economy Reporter Yoo Je-hoon] As the deadline for the final ultimatum sent by Jeju Air to Eastar Jet approaches, industry attention is focused on the situation. While Jeju Air continues to deliberate without deciding whether to proceed with the acquisition, there is also interest in whether the authorities will unveil additional support measures to facilitate the deal.

According to the aviation industry on the 15th, the deadline for fulfilling the preconditions set by Jeju Air to Eastar Jet is midnight of that day. On the 1st, Jeju Air demanded the resolution of unpaid debts from Eastar Jet, stating, "If the preconditions for acquisition are not met within 10 business days, the contract may be terminated."

So far, there has been no significant progress. However, it seems unlikely that Jeju Air will decide on the acquisition by tomorrow (the 16th). This is because Jeju Air’s ultimatum does not include a mandatory clause that automatically cancels the deal once the deadline passes. A Jeju Air official explained, "The contract is not automatically terminated after midnight." A Ministry of Land, Infrastructure and Transport official also said, "There are still matters left for discussion between the parties."

Eastar Jet has been focusing on reducing approximately 170 billion KRW in unpaid debts. Some progress has been made. The Eastar Jet Pilots’ Union expressed willingness to forgo back wages on the condition of job retention, which could reduce about 6.5 billion KRW. There were also reportedly some positive responses during negotiations with leasing companies.

However, it remains difficult for Eastar Jet to fundamentally resolve the unpaid debt issue. The majority of the unpaid debts stem from leasing, fuel, and ground handling fees, which are not easily settled. These companies involved in the payment issues are also struggling due to the impact of COVID-19, leaving them with limited capacity to compromise.

Thus, the ball seems to be back in Jeju Air’s court. Jeju Air and its parent company, the Aekyung Group, are reportedly internally deliberating on whether to proceed with the merger and acquisition (M&A). For Jeju Air, both the success and failure of the deal carry significant burdens. If the deal falls through, Jeju Air is likely to face criticism and responsibility. They must also consider their relationship with regulatory authorities such as Minister of Land, Infrastructure and Transport Kim Hyun-mi, who mediated the deal. Conversely, if the deal goes through, the financial strain caused by the COVID-19 crisis could worsen. Jeju Air posted a loss of around 60 billion KRW in the first quarter, and a deficit of several tens of billions is inevitable in the second quarter as well.

For this reason, the industry interprets that Jeju Air may be considering additional government support. Although KDB Industrial Bank and others have agreed to provide 170 billion KRW in acquisition financing, this amount alone is insufficient to resolve unpaid debts and restore normal operations.

Minister Kim Hyun-mi also met with Aekyung Group Vice Chairman Chae Hyung-seok and Democratic Party lawmaker Lee Sang-jik on the 3rd, stating that support measures could be devised on the premise of the deal’s success. A source familiar with the transaction said, "Since the government does not rule out the possibility of 170 billion KRW plus alpha, Jeju Air will likely seek practical benefits such as low-interest loans."

However, given that additional support from policy authorities remains difficult, many expect Jeju Air will eventually give up. An industry insider said, "There are concerns about fairness with other low-cost carriers (LCCs) and controversies related to Democratic Party lawmaker and founder Lee Sang-jik, which could lead to accusations of preferential treatment. Considering these difficult circumstances, Jeju Air is likely weighing the timing carefully."