When Jeju Air's status as South Korea's largest low-cost carrier appeared threatened by the merger of the country's two largest airlines last year, the company's CEO assured employees that the company would “actively respond,” possibly by taking over smaller rivals to take.
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 raided the company's offices on Thursday and imposed a travel ban on Kim E-bae, its CEO, as part of the investigation into the country's worst air disaster in nearly three decades. Passengers are canceling bookings, which puts further pressure on the balance sheet with a lot of debt. And Jeju Air's share price, already at near record levels, has fallen 10 percent since the disaster.
Earlier this week, Mr. Kim said Jeju Air would cut 15 percent of its flights through March to “enhance operational stability.”
As investigators investigate what caused Jeju Air Flight 7C2216 to crash, the airline is under intense government and public scrutiny over the way it operates. Some of its operating practices are being challenged, including how the company flies its planes more often than competitors and how it outsources its maintenance abroad.
At a news conference at Muan International Airport on the day of the crash, Mr 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 everyone affected by the crash and was “fully cooperating” with investigations into its cause. There was no immediate response to a call seeking comment.
Jeju Air's business prospects were already uncertain. Over the past two years, the company, like other airlines, has struggled with higher costs due to inflation and higher interest rates. According to OAG, a global air travel data provider, Jeju Air's flight capacity had not yet fully returned to 2019 levels. The airline operated 4 percent fewer flights in 2024 than before the Covid pandemic in 2019.
The crash occurred after Korean Air acquired a majority stake in Asiana Airlines last month. The merger – a $1.05 billion deal agreed four years ago – will ultimately create a single national airline. As part of that deal, three budget airlines from the two companies will be brought under one brand, which will surpass Jeju Air as South Korea's largest low-cost offering.
Twenty years 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 detergent and toothpaste. Jeju Air's second largest shareholder is the Jeju provincial government.
Jeju Air emerged from a tangle of other small airlines to become the country's largest low-cost carrier. It added routes across Asia, including stops outside traditional travel hubs, to serve increasingly wealthy South Koreans looking to vacation abroad. Measured by the number of available seats, capacity has increased by an average of 20 percent per year over the past twelve years, OAG said.
Like many budget airlines, Jeju Air kept a tight rein on costs, introduced new technology and even forced travelers to pay for small perks. It focused on short regional flights operated by the same aircraft model, the single-aisle Boeing 737-800.
“It is a reliable low-cost carrier with a good reach in Southeast Asia and North Asia,” said Mayur Patel, regional sales director for OAG.
After an initial public offering in 2015, Jeju Air was on fairly stable financial footing until the pandemic hit. Since 2020, it has been forced to raise capital three times, totaling almost $500 million. In also received a $29 million government loan on the condition that it retain 90 percent of its workforce.
Even after travel restrictions were lifted and Jeju Air was swamped by pent-up demand, debt problems persisted as costs rose as quickly as revenues.
In company filings, Jeju Air said it must repay about $165 million in short-term loans by the end of September. That already exceeded the balance of nearly $150 million in cash and cash equivalents. And this was before the run on cancellations that are expected to further shrink its cash balance.
But analysts say liquidity problems are common among low-cost airlines.
“If you look at their financial position, you would think that most of these airlines are financially vulnerable, but airlines have a way of surviving these things better 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 experiencing problems.
On Thursday, a Jeju Air executive dismissed liquidity concerns and said the company was pressing ahead with expansion plans, including a deal to buy up to 40 new planes from Boeing in the coming years.
The company wants to modernize its fleet to take advantage of a plan by the South Korean government to support low-cost airlines to counter the monopoly risk posed by the union of Korean Air and Asiana. The government said it planned to prioritize budget airlines in awarding new international routes from South Korea to Europe and Asia.
But now some of the operational practices that have helped Jeju Air keep costs down are under scrutiny.
Jeju Air flew its fleet of Boeing 737-800 aircraft more often than its competitors. According to the South Korean Ministry of Land, Infrastructure and Transport, Jeju Air flew its aircraft an average of 14.1 hours per day in the first eleven months of 2024. This compared with 8.6 hours for Korean Air and 11.4 hours for low-cost carrier Jin Air, the ministry said.
Under normal circumstances, the difference in aircraft utilization would be seen as a sign of Jeju Air's efficiency, an important consideration for low-cost airlines operating on thin margins. But through the lens of a fatal crash, the discrepancy raised concerns.
Analysts who follow the airline industry say flying planes more often would not impact an airline's safety as long as regulators keep strict tabs on the hours pilots fly and fleet maintenance standards.
At a media briefing on Tuesday, Jeju Air was bombarded with questions about maintenance, including the practice of outsourcing maintenance to foreign specialists. Unlike Korean Air or Asiana, which have more facilities and personnel to perform more of their own maintenance, Jeju Air and the country's other independent low-cost airlines rely primarily on sending work to abroad.
This practice has also helped Jeju Air keep maintenance costs low even as its other major expenses have increased.
In 2023, Jeju Air's revenues more than doubled from the previous year. Twice as much was spent on fuel and airport costs to keep up with the increase in traffic, but maintenance costs, a more fixed expense, did not rise at the same pace.
Jonathan Berger, managing director at Alton Aviation Consultancy, said maintenance outsourcing is common in the industry. Maintenance work is highly regulated and monitored, regardless of whether it is outsourced or where it is done, he said.
“Jeju Air is not unique,” Mr Berger said. “All airlines outsource a significant amount of maintenance.”
For now, Jeju Air said it would focus on rebuilding its reputation and supporting the victims and their families. The company said the plane involved in the crash is covered by an insurance policy of up to $1 billion that will ensure the families receive necessary assistance.
Jin Yu Young reporting contributed.
