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Eastar Jet's uncertain future
July 24th 2020
South Korean low-cost carrier (LCC), Eastar Jet, faces an uncertain future after a proposed takeover by Jeju Air collapsed this week. Read More »
Jeju Air said in a regulatory filing to the Korea Stock Exchange it was walking away from the deal due to violations in the purchase contract and the impact of the coronavirus pandemic.
The deal was regarded as critical to Eastar Jet's survival in the market, given the airline's financial position.
The South Korea Fair Trade Commission (FTC), which oversees competition issues, said when it approved the proposed tie-up in April that it would be difficult for Eastar Jet to repay outstanding debts at the end of March 2020 of some 115.2 billion won (US$96 million). The financial commitments included aircraft lease fees, airport charges, fuel costs and wages, among other liabilities, local media reported.
The commission said Eastar Jet's tangible assets were 45 billion won at the end of 2019. The proposed takeover was announced last December when Jeju Air signed a Memorandum of Understanding to acquire 51% of Eastar Jet for 69.5 billion won (US$58 million). The price was lowered to 54.5 billion won in March.
The buy-in was supported by the South Korean government, with the state-run Korea Development Bank (KDB) and Export-Import Bank of Korea said to have offered loans to Jeju Air to help complete the transaction. Those offers have now been withdrawn following the termination of the proposed purchase, local media reported this week.
By March, the impact of the coronavirus pandemic was starting to be felt around the world. South Korea, in particular, suffered badly from COVID-19 at the beginning of the outbreak, with Korean Air president, Woo Kee-hong, declaring in March the impact of the virus could be so great that the survival of the airline may not be guaranteed.
Eastar Jet suspended all domestic and international flights in March and Jeju Air significantly scaled back its network in response to falling demand.
The deal looked to be on shaky ground in June as the two carriers argued about who would pay the wages of Eastar Jet's 1,700 employees, who have been on leave since the airline grounded its fleet.
It was reported in March Eastar Jet had paid staff 40% of their previous month's salary with the remainder to be paid at a later date.
Eastar Jet, which commenced operations in 2007, said Jeju Air had provided undertakings to guarantee the staff wages.
However, Jeju Air refuted those claims and in early July called on Eastar Jet to settle outstanding debts such as staff wages and payments to suppliers by July 15.
Eastar Jet refused, arguing this was not part of the terms of the acquisition.
Less than two weeks later, the deal was off, with Jeju Air telling local media the decision not to proceed was inevitable given the uncertainty caused by COVID-19 and the possible impact on shareholder value.
Eastar Jet called on Jeju Air to proceed with the transaction, with senior vice president, Kim You-sang, telling the Yonhap News Agency that the airline would "seek every possible measure to make Jeju take responsibility for the deal's collapse".
Jeju Air's decision to walk away from Eastar Jet has shone the spotlight on a separate transaction involving another debt-laden South Korean carrier at a time when the country had fallen into recession.
It was reported in June that Hyundai Development Company (HDC) had called for the terms of its proposed acquisition of Asiana Airlines to be renegotiated to reflect current market conditions and the company's current financial status.
Since a consortium led by HDC and Mirae Asset Daewoo was announced as the preferred bidder to take over Asiana in late 2019, the airline has been battered by the pandemic and has received financial support from the Korea Development Bank and Export-Import Bank of Korea.
The deadline for completion of the 2 trillion won deal was June 27. However, this could be pushed back up to six months, media reports at the time said.
