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 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 travellers 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 South-East Asia and North Asia,” said Mayur Patel, a regional sales director for OAG.
People pay tribute at a group memorial altar for victims of Flight 7C2216 at the Muan sport park.Credit: Getty Images
After an initial public offering in 2015, Jeju Air was on a fairly stable financial footing until the pandemic struck. Since 2020, it has been forced to raise capital on three separate occasions, totalling nearly $US500 million. In also received a government loan of $US29 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 $US165 million in short-term loans by the end of September. That already exceeded its cash and cash equivalent balance of nearly $US150 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.
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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 modernise 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.
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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.
