LCC Faces Gloomy Outlook for Q3... Concerns Over Seven Consecutive Quarters of Losses Since COVID-19

Delta Variant Virus Shrinks Travel Sentiment
Paid Employment Support Fund Expires Next Month
All-Out Effort to Expand Capital Including Paid-in Capital Increase

On the 13th, overseas arrivals were waiting for transportation guidance at the arrival hall of Terminal 2, Incheon International Airport. The Korea Disease Control and Prevention Agency Central Disease Control Headquarters announced that as of midnight, the cumulative number of confirmed cases in the country increased by 1,990 to 220,182. There were 1,913 domestic confirmed cases and 77 imported confirmed cases. Photo by Mo Honam munonam@

Domestic major low-cost carriers (LCCs) are expected to continue operating losses in the third quarter, despite hopes for a recovery in international travel demand. The industry expressed concerns that if the spread of the COVID-19 Delta variant prolongs into the second half of this year, financial difficulties due to lack of funds could worsen.

According to financial information firm FnGuide on the 30th, the consensus operating profit estimates for the third quarter of this year for the three major LCCs?Jeju Air, Jin Air, and T'way Air?are operating losses of 62.4 billion KRW, 43.2 billion KRW, and 27 billion KRW, respectively. Since the COVID-19 outbreak began in earnest early last year, these companies have recorded operating losses in the hundreds of billions of KRW per quarter for seven consecutive quarters.

Initially, the aviation industry expected a recovery in international travel demand in the third quarter due to increased vaccination rates and the establishment of 'travel bubbles' (travel safe zones) that exempt travelers from quarantine between countries. However, with daily confirmed cases hovering around 2,000 recently, travel sentiment has significantly weakened.

According to the Ministry of Land, Infrastructure and Transport, since resuming flights on the Incheon?Saipan route on July 24, the total number of travel bubble users on this route over the past month (July 24 to August 21) was only 42. The Ministry of Foreign Affairs also extended the 6th special travel advisory for overseas travel worldwide, originally issued from June 14 to August 14, until September 13, preparing for the prolonged COVID-19 situation.

LCCs are reaching the limits of their financial structures as losses continue.

Jeju Air's capital impairment ratio reached 57.9% in the first half of this year, already entering partial capital impairment, while Jin Air's cumulative losses during the same period reached 100 billion KRW, pushing its capital impairment ratio up to 139%. If these two companies fail to reduce their capital impairment ratios below 50% by the end of the year, they may be designated as management targets, and if the situation persists for two years, their listings could be delisted.

Accordingly, Jeju Air plans to conduct a free capital reduction by reducing the par value of its common stock from 5,000 KRW to 1,000 KRW next month, along with a paid-in capital increase of 210 billion KRW. Jin Air also plans to raise a total of 183.4 billion KRW through a paid-in capital increase of 108.4 billion KRW and the issuance of 75 billion KRW in perpetual bonds.

However, the industry points out that such capital injections cannot be a fundamental solution if the COVID-19 crisis prolongs. Since international travel demand, which accounts for over 90% of total LCC sales, is delayed in recovering, there are concerns that financial difficulties could intensify at any time.

With the government's paid employment retention subsidy set to end next month, workers' worries are growing. The paid employment retention subsidy supports 70% of workers' average wages, with the government and companies sharing the cost at a 9:1 ratio, but if converted to unpaid leave, the support amount decreases to about 50% of the average wage.

An aviation industry official said, "The LCC industry is trying to open a path by expanding domestic routes, but even this is caught in a vicious cycle of cutthroat competition," adding, "It is a critical time when fundamental additional government measures are urgently needed."