LCCs to undergo drastic restructuring

Domestic low-cost carriers (LCCs) are feared to undergo drastic restructuring one after another starting later this year, as losses from currency exchange, declines in the number of passengers to Japan and soaring oil prices threaten their feasibility, industry officials said Thursday.

They said many firms will likely follow in the footsteps of Eastar Jet, which began downsizing its workforce recently, and stressed that the government’s excessive issuing of LCC licenses has left carriers vulnerable to such difficulties.

According to Eastar Jet, CEO Choi Jong-gu issued a statement to employees recently saying the company was dealing with “an emergency” and thus required plans to overcome the crisis.

“We have accumulated tens of billions of won in losses and the company’s survival will be threatened if the current crisis continues,” Choi said in the statement.

“As of Sept. 16, the company is under emergency status and will set up taskforces to come up with plans to tackle each of the crises we are facing.”

Following the statement, Eastar Jet said it began receiving applications for three-month unpaid leave from cabin crew.

Eastar Jet does not unveil earnings because it is not subject to regulatory filings, but it is assumed to have posted massive operating losses, given its larger peers including Jeju Air, Jin Air, T’way Air and Air Busan each logged operating losses of at least 22 billion won ($18.46 million) in the second quarter.

Domestic LCCs have been suffering this year due to a decline in the number of passengers heading for Japanese cities, the revenue from which accounts for an average 30 percent of LCCs’ sales.

The number of passengers traveling between Korea and Japan stood at 1.99 million in March this year, according to the Ministry of Land, Infrastructure and Transport, but the number backpedaled to 1.76 million in April before slowly recovering to 1.84 million in June.

However, as Seoul-Tokyo ties worsened and Koreans launched a massive boycott on Japanese products beginning in July, the number declined to 1.74 million that month and ended up falling to 1.53 million in August. Last month’s figure was down 20.3 percent from the 1.92 million a year earlier.

As air ticket sales decline, carriers halted routes to Japanese cities, which led to the idling of part of their workforces.

Analysts also attributed the weak value of the won to the LCCs’ slump because carriers mostly pay for fuel and other costs in dollars.

“As the value of the local currency remains weak, it is quite certain that LCCs will suffer a negative impact on their earnings in the third quarter, which is the peak season for them,” Mirae Asset Daewoo analyst Ryu Jae-hyun said.

“After the current downturn, the gap between the leading players and others will widen and those with weaker finances will start significant restructuring at the end of the year.”

Oil price hikes were also mentioned as a trigger for the restructuring. Crude oil prices have spiked so far this week, following attacks on Saudi Arabian oil facilities, Saturday. Western Texas Intermediate crude rose 14.7 percent Monday while Brent crude jumped 19.5 percent.

“The three most important indicators for a carrier’s business are passengers, oil prices and foreign exchange rates, and all of those are unfavorable these days,” a senior official at a domestic carrier said.

“To overcome these problems, a carrier has to have the financial capacity to withstand them, but Korean LCCs do not as they were already in a cutthroat competition after the government issued too many licenses.”