South Korea’s biggest budget airline Jeju Air Co. admitted to liquidity woes as the coronavirus has devastated the travel business still reeling from a boycott in travels to Japan and put a damper on its plans to purchase smaller rival Eastar Jet Co.

In a meeting chaired by the transport minister with airline CEOs last week, Lee Seok-joo, chief executive of Jeju Air said even the industry leader would have to rely on debt to sustain its business from June if conditions do not improve.

CEOs of other budget carriers in a greater strain have reportedly asked for government support.

Shares of Jeju Air fell 2.84 percent Monday to close at 22,200 won ($18.8).

The local aviation industry suffered from a sharp drop in travel demand to Japan, the most popular travel destination among Koreans, amid a consumer boycott that erupted in August. Koreans boycotted all things Japanese after Tokyo curbed shipments of key materials that go into Korea’s main export items due to a dispute over historical issues.

This has led most carriers to report a wider deficit last year.

The COVID-19 epidemic has virtually killed the short-haul services that are the bread and butter of budget carriers. Jeju Air reported a debt ratio of 330 percent as of late September 2019. This is the third-highest after Air Busan Co.’s 524 percent and Eastar Jet’s 484 percent, both of which are in the midst of a sale process. The debt ratio for Jin Air Co., the second-largest budget name, is 201 percent and 295 percent for No. 3 T’way Air Co.

Some fear the liquidity squeeze could interrupt Jeju Air’s $59 million buyout of Eastar Jet. Late last year, it signed a preliminary deal to buy a 51 percent stake in the unlisted carrier, with an aim to complete the deal by the end of 2020.

An industry source said that for Jeju Air, “the longer the deal is put off, the better,” especially now as it is slashing flights to its major markets in China and Southeast Asia.

Jeju Air has already suspended the signing of the sales and purchase agreement (SPA) twice, and could delay it again, the source said. There is even the possibility that it could abandon the deal altogether, given its swing to operating loss in the fourth quarter.

A Jeju Air official, however, said the acquisition was being carried out as scheduled, and expected the SPA signing to take place this month.

Meanwhile its CEO Lee, in an internal mail sent out to employees last week, wrote that the company has stepped up from “emergency to crisis mode” and that the situation has deteriorated to a point where not just profitability but “its very survival is at risk.”

In response, Jeju Air executives agreed to return more than 30 percent of their wages and compensation. Employees are also being asked to take more than two weeks of unpaid leave from March to June.

Eastar Jet’s dubious financial standing is another potential setback. During the due diligence process, financial irregularities were discovered in Thai Eastar Jet, a joint venture between Eastar Holdings, Eastar Jet’s main shareholder, and a Thai company. It is suspected of being a shell company, as it owns only one jet with the lease backed by Eastar Jet.

By Song Gwang-sup, Choi Keun-do and Kim Hyo-jin

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