Increasing Losses Due to COVID-19 and Delays in AOC Issuance
[Asia Economy Reporter Yoo Je-hoon] New low-cost carriers (LCCs) that obtained licenses last year are facing difficult situations due to the impact of the novel coronavirus disease (COVID-19). As the timing for the normalization of the deteriorated industry conditions is being delayed, the market is already buzzing with merger and acquisition (M&A) rumors targeting airline licenses.
According to the aviation industry on the 23rd, Fly Gangwon will suspend operations on the Yangyang?Gimpo and Yangyang?Daegu routes, which were previously operated as charter flights, starting this October. These routes were established to capture seasonal vacation demand, and with their suspension, Fly Gangwon will be left with only one route: Yangyang?Jeju.
Fly Gangwon, which was the first among new LCCs to obtain an Air Operator Certificate (AOC) from the Ministry of Land, Infrastructure and Transport at the end of last year and began operations, has been operating charter flights targeting main demand areas such as Gimpo and Daegu after international flights were suspended earlier this year.
However, since mid-last month, the airline has encountered difficulties due to a surge in cluster infections. With the implementation of enhanced social distancing level 2 (also known as level 2.5), reservation rates have declined and refund requests have increased, putting the airline in crisis. On the 10th, it was unable to pay employee wages due to worsening liquidity.
A Fly Gangwon official stated, "The Gimpo and Daegu routes are charter routes, and we have decided not to extend operations during the winter season," adding, "The issues caused by temporary liquidity problems will be resolved once consultations with financial institutions are completed."
Aero K (based at Cheongju International Airport) and Air Premia (based at Incheon International Airport), which have not yet obtained AOCs, are relatively free from the industry downturn caused by COVID-19, but their situations are not favorable either. Both airlines continue to incur fixed costs and have significantly depleted the capital they had prepared. They have expressed intentions to raise additional capital in the future, but no concrete plans have been made yet.
The industry believes that even if these airlines obtain AOCs and begin actual operations, they are likely to face the worst business environment. The suspension of international flights due to COVID-19 has turned the domestic market into a "red ocean." A representative from a national airline said, "Practically, the only domestic route that guarantees profitability is the Jeju route," adding, "Especially since the average airfare has already hit rock bottom, it seems difficult for new airlines to be competitive in terms of pricing."
For this reason, M&A and sale scenarios targeting new LCCs are already emerging in the market. There are rumors that Fly Gangwon has received acquisition proposals from companies based in Daegu and Gyeongbuk (TK). Given the low likelihood of new airline licenses being issued in the coming years, it is analyzed that the focus is more on the value as a sale item rather than immediate profits.
An industry insider said, "Due to the regulatory nature of the aviation industry, licenses are intangible assets, so new LCCs have at least some value as sale items," adding, "New airlines planning to launch in the future will face significant challenges unless the industry conditions dramatically improve."
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