February 01, 2020 08:29
The call centers of Korea's six budget airlines were inundated with calls on Thursday from customers canceling their bookings to China, as they had been for days. The coronavirus outbreak has plunged Korean low-cost carriers into the worst crisis since they started business here 15 years ago.
Budget carriers had already been reeling from the boycott of Japan which started in July last year, but the coronavirus panic has made matters infinitely worse.
Most of them rely on short-haul flights to Japan and China for the bulk of their revenues. On top of that, the government has issued licenses to three new budget airlines to create more jobs and spur growth in provincial economies, resulting in intensifying competition.
Huh Hee-young at Korea Aerospace University said, "This is the first time so many negative factors have converged at once. This could accelerate restructuring of the whole aviation industry."
A growing number of budget carriers are halting flights to China altogether. Jeju Air is grounding six out of 12 flights to China, Jin Air and Air Seoul both of theirs, T'way Air three out of six, Air Busan five out of nine and Eastar Jet four out of seven. That translates into 58 percent of all budget flights to China.
Budget flyer numbers to Japan dropped 11.6 percent last year, while the number of low-cost flights to the island country has halved since the boycott. Instead, the airlines tried to generate revenues by offering more flights to Southeast Asia and Guam, but intense competition ate into margins.
Five of them -- Jeju Air, T'way Air, Air Busan, Eastar Jet and Air Seoul -- bet everything on flights to China after winning new licenses to operate more flights to Chinese cities. According to the Ministry of Land, Infrastructure and Transport, passenger numbers on flights to China jumped 14.4 percent last year, providing a much-needed cushion for the industry.
But now things have changed drastically. One executive at a low-cost carrier said, "We've been offering tickets to Southeast Asia and Guam at a loss to make up for lost passengers to Japan, and to make matters worse, we are now forced to reduce flights to China almost by half due to the coronavirus outbreak. I wonder if we can survive this."
But the airlines have also come under fire for being too aggressive in their expansion. When tourism to Japan surged before the boycott, they bought 19 airplanes in a single year to offer more flights. And the government's short-sighted policy led to more licenses than the market could bear.
Fly Gangwon was cleared for business in March last year and started flying in November, while Aero-K will be launched in March this year and Air Premia in September, bringing the total to nine.
The entire U.S. has as many budget airlines as much smaller Korea, while China only has eight and Japan six.
In the second and third quarters of 2019, all budget carriers here suffered between W10 billion and W20 billion in losses, and fourth-quarter earnings are also estimated in the red (US$1=W1,188). Only three months into business Fly Gangwon is already suffering losses because it has so far only managed to fill 40 to 60 percent of its seats.
With coronavirus making matters worse, Jeju Air will start taking applications for unpaid leave from staff in March. It agreed to buy Eastar Jet last year but has yet to sign the final contract, prompting concerns that the deal may turn sour.
Industry watchers say the sector needs to be streamlined. Kim Byung-jae at Sangmyung University said, "There is too much supply in the airline industry even without all these crises. The situation is very serious."
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