The tragedy at Muan International Airport concerning Jeju Air has highlighted the fact that domestic low-cost carriers (LCCs) spend less on maintenance expenses compared to full-service carriers (FSCs). While it has not yet been confirmed whether the maintenance issues were due to Jeju Air, reports that LCCs are spending less on maintenance are leading to a phenomenon called 'LCC phobia.'
LCCs argue that having lower maintenance expenses does not mean they are neglecting maintenance. However, the data shows that LCCs are indeed spending less on maintenance. In this context, some analysts speculate that the introduction of the 'International Financial Reporting Standards (IFRS) 16' in 2019 prompted LCCs to actively manage their costs. Coincidentally, the COVID-19 pandemic broke out just as IFRS 16 was implemented, which may have led LCCs to reduce maintenance expenses in order to manage their liability ratios.
According to the aviation information portal system on the 6th, Jin Air has been identified as the airline that reduced maintenance expenses per aircraft the most since 2019, just before the COVID-19 pandemic. The costs decreased from 4 billion won in 2019 to 2.6 billion won last year, a 35% reduction. T’way Air also reduced its costs from 3.345 billion won in 2019 to 2.8 billion won last year. This expenditure represents the maintenance, repair, and modification costs divided by the current number of aircraft reported by each airline.
In the case of Jeju Air, maintenance expenses per aircraft decreased from 2.823 billion won in 2019 to 2.273 billion won in 2021, before rising again to 5.0448 billion won in 2023. Maintenance expenses also increased slightly to 5.3 billion won in 2024. Although it appears that maintenance expenditure has increased, it is still true that this is less than what larger airlines spend. The maintenance expenses per aircraft for Korean Air and Asiana Airlines are 11.6 billion won and 12.4 billion won, respectively.
Another notable point regarding Jeju Air is the number of maintenance personnel. The Ministry of Land, Infrastructure and Transport recommends a minimum of 12 maintenance staff per aircraft; Jeju Air complied with this in 2019 with an average of 12.04 staff but has failed to meet this since 2020. The numbers in 2020, 2021, and 2022 were 11.39, 11.92, and 11.65, respectively.
The COVID-19 pandemic that swept the globe in 2020 dealt a severe blow to LCCs. Furthermore, the timing of the pandemic coincided with the introduction of IFRS 16 in 2019, which has led to interpretations that LCCs intensified their cost control efforts.
IFRS 16 is characterized by recognizing both financial leases and operating leases as liabilities. In the past, operating leases did not need to be recorded as liabilities and could simply be treated as expenses, but with IFRS 16, they must also be recorded as liabilities, increasing the burden on LCCs. Operating leases involve paying monthly fees without ownership, while financial leases involve acquiring ownership after a period of installment payments. For example, a financial lease involves taking out a loan to buy a car, while an operating lease involves renting a vehicle from a rental car company that has a '허' license plate.
For LCCs with a high proportion of aircraft leasing, the liabilities on their balance sheets have surged. Initially, during the COVID-19 outbreak when there were no passengers, they were able to avoid this issue by returning leased aircraft; however, as passenger demand recovered after 2023, managing liability ratios has become a pressing challenge. An industry insider noted, 'Under the previous accounting regulations, operating leases were treated as expenses rather than liabilities, so leasing an aircraft did not significantly impact financial stability. However, under the new accounting standards, the rising liability ratios appear to indicate a deterioration in financial structures, prompting LCCs, whether intentionally or unintentionally, to save on various expenses.'
In the case of Jeju Air, the liability ratio was 170% in 2018, but it skyrocketed to 439% and 588% in 2020 and 2021, respectively, after COVID-19. As of the end of September last year, the liability ratio had reached 391.2%.
Among domestic LCCs, Jeju Air, which has the highest lease liability (approximately 425.9 billion won), reported interest expenses of 26.4 billion won as of the end of September last year. Considering that the actual cash outflow due to leases amounts to 138.7 billion won, it means that liabilities recognized on the financial statements are roughly three times the actual expenses.
The largest discrepancy between cash outflows due to leases and accounted liabilities is at AIR BUSAN. AIR BUSAN's lease liabilities amount to 667.2 billion won, but the actual cash requirement is only 84.4 billion won, resulting in an approximately eight-fold difference. T’way Air has lease liabilities of 411.5 billion won and a cash outflow of 114.1 billion won, while Jin Air's figures are 333.9 billion won and 86.5 billion won. The liabilities incurred from leased aircraft are estimated to be about 100 billion won per large aircraft, such as the B787.
However, there is also substantial rebuttal saying this is merely an excuse. An industry insider stated, 'It is true that concerns arose at the beginning of the new system's implementation, but since 2023, with the recovery of international travelers, LCCs have transitioned to profitability, indicating that there are no significant financial issues.' Another accountant noted, 'The pressure for cost control is intense not only in the airline industry but across all sectors. I have heard claims that accounting standards are leading to reductions in maintenance costs, but these are simply excessive excuses.'
All four LCCs recorded their highest sales ever in 2023. They also achieved profitability for the first time in five years since 2018, successfully overcoming the downturn caused by the COVID-19 pandemic. The LCC sector is expanding its fleet and securing new routes to continue this upward trend.
Meanwhile, Jeju Air has been increasing the proportion of purchase aircraft instead of leased ones to secure cost competitiveness since the arrival of Kim Yee-bae, a ‘financial expert’ from Asiana Airlines. On Nov. 5 last year, it transitioned one of its traditionally leased Boeing 737-800 passenger aircraft to a purchase model. T’way Air, the second-largest in the industry, is also promoting external growth by introducing new aircraft. However, unlike Jeju Air, T’way Air has decided to cover leasing costs with its own funds.