Jeju Air’s problems mount after crash that killed 179 people

Seoul, South Korea: When Jeju Air’s status as South Korea’s biggest low-cost carrier seemed under threat from the merger of the country’s two biggest airlines last year, the company’s CEO assured employees that it would “actively respond,” possibly by acquiring smaller rivals.

Now, a week after a crash that killed 179 people on December 29, Jeju Air’s future is clouded by even deeper questions.

South Korean officials on Thursday raided the company’s offices and imposed a travel ban on Kim E-bae, the CEO, as part of the investigation into the country’s worst air disaster in almost three decades. Passengers are canceling bookings, adding further strain to a balance sheet heavy with debt. And Jeju Air’s stock price, already trading near record lows, has fallen 10 per cent since the disaster.

Earlier in the week, Kim said Jeju Air would cut 15 per cent of its flights until March to “enhance operational stability.”

As investigators look into what caused Jeju Air Flight 7C2216 to crash, the airline has come under intense government and public scrutiny for how it operates. Some of its operational practices are being challenged, including how it flew its planes more frequently than competitors and how it outsourced its maintenance overseas.

At a news conference at Muan International Airport on the day of the crash, Kim said maintenance checks had found no problems with the plane, which he said had no history of accidents. In a public statement, Jeju Air said it was “committed” to helping anyone affected by the crash and was “fully cooperating” with investigations into its cause. It did not immediately respond to a phone call seeking comment.

Jeju Air’s business outlook was already uncertain. Over the past two years, like other airlines, the company has grappled with increased costs because of inflation and higher interest rates. The capacity of Jeju Air’s flights had not fully returned to prepandemic levels, according to OAG, a global air travel data provider. The carrier operated 4 per cent fewer flights in 2024 than in 2019.

The crash came after the completion of Korean Air’s acquisition of a majority stake in Asiana Airlines last month. The merger — a $1.05 billion deal agreed upon four years ago — will eventually create a single national carrier. As part of that deal, three budget carriers operated by the two companies will be brought under one brand that will surpass Jeju Air as South Korea’s largest low-cost offering.

Two decades ago, Jeju Air became the country’s first upstart budget airline with the aim of challenging the duopoly of Korean Air and Asiana. Jeju Air would fly the busy tourist route between Seoul and Jeju, a scenic island off the southern coast of South Korea. The airline is majority-owned by AK Holdings, a conglomerate best known for selling laundry detergent and toothpaste. Jeju Air’s second-biggest shareholder is Jeju’s provincial government.

Jeju Air emerged from a jumble of other small airlines to become the country’s leading low-cost carrier. It added routes across Asia, including stops outside of the traditional travel hubs, to serve increasingly wealthy South Koreans looking to vacation abroad. As measured by the number of available seats, it added capacity of 20 per cent a year on average over the past 12 years, OAG said.

Like many budget airlines, Jeju Air kept a tight rein on costs, put new technology in place and squeezed travelers for even small perks. It focused on short regional flights served by the same model of airplane, the single-aisle Boeing 737-800.

“It’s a reliable low-cost carrier with good reach into Southeast Asia and north Asia,” said Mayur Patel, a regional sales director for OAG.

After an initial public offering in 2015, Jeju Air was on fairly stable financial footing until the pandemic struck. Since 2020, it has been forced to raise capital on three separate occasions, totaling nearly $500 million. In also received a government loan of $29 million on the condition that it maintain 90 per cent of its workforce.

Even after travel restrictions were lifted and Jeju Air was awash in pent-up demand, its debt problems persisted because its costs were going up just as fast as its revenue.

In corporate filings, Jeju Air said it must repay roughly $165 million in short-term loans by the end of September. That already exceeded its cash and cash equivalent balance of nearly $150 million. And this was before the run on cancellations that is expected to further crimp its cash balance.

But analysts said liquidity concerns are common for low-cost airlines.

“Most of these airlines, if you look at their financial position, you would think a lot of them are financially vulnerable, but airlines have a way to survive these things more so than other companies,” said Brendan Sobie, an independent aviation consultant and analyst. He explained that companies in airline supply chains have a strong incentive to help airlines that experience trouble.

On Thursday, a Jeju Air executive dismissed liquidity concerns, saying the company was proceeding with expansion plans, including a deal to purchase up to 40 new planes from Boeing in the coming years.

The company wants to modernize its fleet to take advantage of a South Korean government plan to support low-cost airlines as a counter to the monopoly risk posed by the union of Korean Air and Asiana. The government said it planned to give priority to budget airlines in awarding new international routes from South Korea to Europe and Asia.

But now, some of the operating practices that helped Jeju Air keep its costs low are under a microscope.

Jeju Air flew its fleet of Boeing 737-800 planes more frequently than its competitors. In the first 11 months of 2024, Jeju Air flew its planes 14.1 hours on average per day, according to South Korea’s Ministry of Land, Infrastructure and Transport. This compared with 8.6 hours for Korean Air and 11.4 hours for its low-cost carrier, Jin Air, according to the ministry.

Under normal circumstances, the difference in plane use would be held up as a sign of Jeju Air’s efficiency, an important consideration for low-cost carriers working on thin margins. But through the lens of a deadly crash, the discrepancy raised concerns.

Analysts who follow the aviation industry said flying planes more often would have no impact on a carrier’s safety as long as regulators maintained strict oversight of how many hours its pilots fly and its standards for maintaining its fleet.

At a media briefing on Tuesday, Jeju Air was barraged with questions about maintenance, including its practice of outsourcing maintenance to overseas specialists. Unlike Korean Air or Asiana, which have greater facilities and personnel to handle more of their own maintenance, Jeju Air and the country’s other independent low-cost carriers rely mostly on sending work outside the country.

This practice has also helped Jeju Air keep maintenance costs down even as its other major expenses have risen.

In 2023, Jeju Air’s revenue more than doubled from the previous year. It spent twice as much on fuel and airport costs to keep up with the surge in traffic, but maintenance costs, a more fixed expense, did not increase at a similar rate.

Jonathan Berger, a managing director at Alton Aviation Consultancy, said some outsourcing of maintenance is common in the industry. Maintenance work is highly regulated and audited regardless of whether it is outsourced or where it is done, he said.

“Jeju Air is not unique,” said Berger. “All airlines outsource a significant amount of maintenance.”

For now, Jeju Air said it would focus on repairing its reputation and supporting the victims and their families. The company said the aircraft involved in the crash was covered by an insurance policy of up to $1 billion that will ensure that the families receive the necessary aid.