Domestic low-cost carrier (LCC) industry is continuing a price competition despite massive liabilities. This seems to be due to the judgment that if they do not hold special deals, the number of empty seats will increase, leading to greater losses and a drop in market share. There are also concerns that if bloodletting competition continues under poor financial conditions, safety management may be neglected.
On the 6th, Eastar Jet announced that it will sell flights to Japan and Taiwan routes at up to a 99% discount starting that day. On the 7th, it will discount flights to Southeast Asia and Jeju. The prices for the Gimpo-Jeju route and Incheon-Osaka route will drop to 1000 won and 15,000 won, respectively, one way.
AIR BUSAN will also sell one-way tickets for eight routes to Japan at a minimum of 39,400 won for a week starting that day. T'way Air, which has been offering up to a 20% discount on tickets since the 4th, is set to begin its largest discount event of the year, 'Mega Early Bird', on the 11th. JIN AIR will offer up to 9% off domestic flights until the 10th.
Last month, Jeju Air, AIR PREMIA, AIR SEOUL, and Aero K conducted special promotions. Excluding Parata Air, which has yet to commence operations, all eight domestic LCCs have engaged in discounting.
The financial strength of LCCs is relatively weak. T'way Air, which has been most proactive in discount events, had a liability ratio reaching 4,353% in the first quarter of this year. The EBITDA ratio to financial expense was 0.1, indicating that revenue covered only about 10% of the financial expense. This level corresponds to that of a speculative grade according to domestic credit rating agencies.
Other LCCs are in a similar situation. Eastar Jet and Aero K were in a capital impairment state as of the end of last year. Jeju Air's liability ratio was recorded at 615% for the first quarter, worsening from 517% at the end of last year. Only JIN AIR and AIR BUSAN had relatively good figures with liability ratios of 337% and 445%, respectively, but JIN AIR is likely to shift to a loss in the second quarter compared to the same period last year. AIR BUSAN recorded an operating loss of 11.1 billion won in the second quarter.
Nevertheless, the reason the LCC industry continues the discount competition is to reduce fixed costs even slightly. An industry insider noted, "Many airlines have increased the number of seats, but the number of passengers has actually decreased," and added, "Departing with empty seats causes greater losses, so we are holding special deals." The industry believes that a plane must be over 80% full to generate revenue.
If one pulls out of the discount competition, it must accept a drop in market share. Another industry insider said, "Most LCC tickets are sold through online travel agency (OTA) platforms, and without promotions, they fall far behind in search rankings, reducing customer inflow," and emphasized, "Once one airline starts discounting, others have no choice but to follow, creating an atmosphere of constant special promotions."
From the consumer's perspective, as industry competition intensifies, airfare decreases, which is beneficial, but in the long term, safety and service quality may degrade. The Ministry of Land, Infrastructure and Transport issues orders for financial structure improvements to airlines that have been in a state of partial capital impairment of over 50% for more than a year or are completely capital impaired, against this background. Last month, the Ministry conducted a special safety inspection of Aero K, which has been in a complete capital impairment for four years.