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Korean LCC challenges could prompt consolidation
September 6th 2019
Besides dramatic Japan cuts, the won is down, Southeast Asia is congested and there are short-term impacts to Hong Kong and China. Read More »
A series of sudden developments in the Korean LCC market could pressure cash flow with only some relief in the short-term. That could make the sector consolidate, with one LCC understood to be receptive to a buyout. However, others caution most of the sector has been open to consolidation over the years.
The most recent development affecting Korea’s LCC sector is the Civil Aviation Administration of China’s (CAAC) decision to suddenly delay permission for new Korean flights until October 10. The services were to be launched in late August. A CAAC official told AIN online it was due to unspecified security and control matters. Yet with a clear new launch date, the issue is short-term.
Also expected to be short-term is a downturn in loads for Hong Kong flights due to protests in the city that have put off travellers. Aside from mainland China flights, Korean LCCs typically carry mostly outbound Koreans. Korean LCC exposure to Hong Kong is limited with at most two daily flights per airline.
A challenge taking on increased significance is the weakening Korean won, which has dropped 8% this year against the US dollar. Fuel, aircraft leases and insurance are typically US-denominated for Korean LCCs, according to MK News. Jeju Air’s interim report stated a 5% drop in the KRW would result in an additional annual cost of KRW26.5 billion (US$22 million).
The downturn in Korean travel to Japan is ongoing and taking a larger toll. At the extreme, T’way had a deficit of 15% in the second quarter. Expected to be worse for the Korean LCC sector is the third quarter, when seven out of 10 Korean LCC routes to Japan were either cancelled or had reduced frequencies. Observers estimate Japan accounted for 30% of Korean LCC revenue but 50% of profits.
The Japan downturn highlights how Korean LCCs are so reliant on Japan and have had difficulty in recent years diversifying markets due to limitations on traffic rights, slots and narrow body aircraft range. Korean LCCs are finding it challenging to grow in Southeast Asia. There is already congestion. Korean LCCs have 20 flights a day to Vietnam’s Danang.
