Goal to Resume Gimpo-Jeju Route from April
Plan to Open Japan Route After Normalizing Jeju Route
Cost Reduction Through Parts Sharing and Paid In-flight Services
[Asia Economy Reporter Hwang Yoon-joo] Domestic private equity fund VIG Partners (hereinafter VIG) has completed the acquisition of Eastar Jet and plans to resume domestic flights from the second quarter. Subsequently, with the introduction of new aircraft, it aims to expand international routes such as Japan, grow its scale, and escape from deficits through cost reduction.
A senior VIG official recently told Asia Economy, "Our goal is to resume the Gimpo-Jeju route starting in April." VIG plans to entrust the management of Eastar Jet, including flight operations, to the new CEO Jo Jung-seok and the management team.
VIG's first goal is to resume the Jeju route after reissuing the AOC. An aviation industry insider said, "They will likely start operations on the profitable Gimpo-Jeju route and gradually expand to international routes."
VIG and the aviation industry cite Eastar Jet's strengths as its slots and small scale. Slots refer to the number of aircraft takeoffs and landings allowed per hour. Currently, Eastar Jet has 3 aircraft, and as of January 2020, Eastar Jet operated 36 routes (4 domestic, 32 international).
The airline business earns money by flying planes. Low-cost carriers (LCCs) like Eastar Jet need to operate aircraft for more than 12 hours a day?domestic flights during the day and international flights at night?to be profitable. The break-even point (BEP) is considered at an aircraft utilization rate of 75-80%. This explains why most LCC Southeast Asia routes used to depart in the evening.
Securing slots is especially important to operate flights. The more slots an airline has on a route, the higher the aircraft utilization rate can be. Currently, slots on the Gimpo-Jeju route are tight. The same applies to popular international routes.
Eastar Jet has more routes and slots than new airlines like Aero K and Fly Gangwon, and compared to existing LCCs, it has relatively lower fixed costs related to aircraft. After reissuing the AOC, it plans to use up to 6 aircraft to maintain domestic slots.
Once domestic flights stabilize, international routes will be normalized. An aviation industry insider said, "If expanded to international routes, they will likely prioritize the Japan route, which was competitive in the past." The Japan route, along with the China route, is considered a golden route for LCCs. Both routes accounted for about 20% of total sales each. Targeting the Japan route first is interpreted as considering uncertainties with the China route and aircraft availability. Since COVID-19, China’s insistence on 'zero COVID' has virtually wiped out the China route. The Japan route can be operated with at least 10 aircraft, but the China route requires expansion to more than 15 aircraft, which is also a burden.
"The airline industry is good for making profits through cost reduction"
VIG has been interested in acquiring airlines since 2016. Before COVID-19, when Asiana Airlines was up for sale, private equity firms including VIG paid attention, saying, "It would be good if the price fits, but it's unfortunate." The private equity industry views the airline business as one where profits can be made after cost reduction. The aviation industry understands JKL Partners’ capital increase in T’way Air and JC Partners becoming the major shareholder of the new airline Air Premia in the same context.
Reducing unnecessary costs is one of the management strategies of LCCs. AirAsia is a global LCC that has maximized this by charging for most services such as water, meals, and snacks. Although Eastar Jet is unlikely to immediately charge for in-flight services, it is expected to start charging for areas with less consumer resistance.
For major airlines, cargo accounts for a larger share of revenue than passengers. LCCs focus on ancillary services such as duty-free goods and in-flight food and beverages. Before COVID-19, the LCC industry maximized sales revenue through franchise and in-flight meal collaborations and merchandise partnerships.
Costs can also be reduced through parts sharing. Operating only short-haul routes allows for aircraft standardization. This lowers unit costs from parts procurement to inventory management.
The merger of Korean Air and Asiana Airlines could also benefit other airlines. An aviation industry insider said, "The three LCC subsidiaries of the two airlines (Jin Air, Air Seoul, Air Busan) will also merge. Some routes will be reorganized and likely transferred to remaining LCCs or HSCs."
Currently, Korean Air is transferring some routes to LCCs or HSCs to gain merger approval. The corporate merger of Korean Air and Asiana Airlines requires approval from overseas authorities, and due to monopoly concerns, some routes are being handed over to competitors. The aviation industry agrees that "distributing routes to domestic competitors rather than overseas ones minimizes controversy."
In this process, Air Premia benefited. Classified as a hybrid airline (HSC), Air Premia was the first non-major airline to operate the Incheon-LA route. Currently, Air Premia is also highly likely to take over Asiana Airlines’ Incheon-Paris route. Air Premia is currently the only airline capable of long-haul operations. T’way Air has announced plans to introduce the A330-300 capable of medium- to long-haul flights, but it has not yet operated flights to the US or Europe.
Some slots on short-haul routes are also expected to become available. Excluding the merger targets, the remaining domestic LCCs are T’way Air, Eastar Jet, Jeju Air, Aero K, Fly Gangwon, and including the HSC Air Premia, a total of six. Since Air Premia has positioned itself as a long-haul specialized airline, effectively five airlines will compete.
An aviation industry insider said, "Routes and slots are allocated by the Ministry of Land, Infrastructure and Transport. Considering airlines’ operational experience, flight hours, and accident history, even if distributed evenly, existing airlines will have an advantage."
A VIG official said, "Eastar Jet will continue to run at a deficit for the time being, but once flight operations fully resume, it can return to profitability. We aim to grow Eastar Jet’s sales to around 500 billion KRW within five years."
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