Fleet and Passenger Numbers Grow,
But Stable Growth Remains Elusive
Financial Health Still Lags;
Industry Faces Intensifying Competition
Eastar Jet, which was recently at the center of acquisition rumors, is expected to continue operating under the private equity fund (PEF) manager VIG Partners for the time being. This appears to be because, although the airline's performance is improving and both its fleet and routes are expanding, it is not yet considered to be on a stable growth trajectory.
According to the investment banking (IB) industry on October 16, VIG Partners does not plan to put Eastar Jet up for sale in the near future. Recent rumors of a sale were reportedly a misunderstanding that spread among M&A advisory firms. A private equity industry insider explained, "M&A advisors made the usual proposal to look for potential buyers, and in response, a general answer was given that 'if there is a good buyer, a sale could be considered.' However, this was blown out of proportion. Given the current situation, it would be difficult to get a fair price, so VIG Partners is likely to hold on to Eastar Jet for now."
In fact, VIG Partners believes it is still too early to sell Eastar Jet. Although the airline has begun to rebound from its lowest point, it has not yet met market expectations. Eastar Jet is still in a state of capital impairment, with accumulated losses exceeding its capital. As of the end of last year, total equity stood at minus 1.49 billion won, resulting in a capital impairment ratio of 199.4%. Since acquiring Eastar Jet for 40 billion won with its fourth blind fund in 2023, VIG Partners has invested more than 200 billion won through capital increases and other means, but the consensus is that there is still a long way to go.
Nevertheless, Eastar Jet has grown significantly compared to the early stages of the acquisition. The number of aircraft increased from three in March 2023 to 19 as of this month, with plans to introduce a 20th aircraft by the end of the year. From January to September this year, the number of passengers reached 6,030,874, up 16.8% from the same period last year. This is the second-highest growth rate after Air Premia (11.2%), and stands in contrast to the overall domestic low-cost carrier (LCC) sector, which saw a 0.1% decrease in passenger numbers during the same period.
However, uncertainty remains about when Eastar Jet will return to profitability. Airline profitability is highly sensitive to factors such as oil prices, exchange rates, the pace of demand recovery, and the intensity of competition. It is unlikely that these variables will align favorably for a sale in the short term. The potential for a price war also persists. While the total supply among domestic LCCs is increasing, passenger demand is not growing as quickly, leading to intensified competition. Already, at the beginning of last month, Parata Air (formerly Fly Gangwon) received its Air Operator Certificate (AOC) from the Ministry of Land, Infrastructure and Transport and began selling tickets. The number of domestic LCCs has now increased to nine, matching the United States. There is a risk that the entire industry could enter a "chicken game," putting downward pressure on fares.
In addition, the aviation industry is currently undergoing market restructuring, including the integration of Korean Air and Asiana Airlines and subsequent restructuring among LCCs. With so many variables during this period of upheaval, there is little incentive for bold investment in a company with uncertain prospects, making it likely that VIG Partners will seek to foster growth within its portfolio for now. An IB industry insider commented, "There are doubts as to whether the momentum in performance is sufficient to justify the rumored price tag of 500 billion to 600 billion won. After acquisition, the burdens of debt, competitive pressure, route acquisition permits, and regulatory issues are significant, making it difficult for anyone to take bold action."
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