Jeju Air Co., South Korea's largest low-cost carrier, said Thursday it has postponed the signing of a deal to acquire Eastar Jet as it takes more time to conduct due diligence on the smaller budget carrier.
Jeju Air was originally set to sign a share purchase agreement with Eastar Holdings within this year to take over a 51.17-percent stake in Eastar Jet for 69.5 billion won ($60 million).
"The company entered into due diligence of Eastar Jet and planned to complete it by Jan. 9. But the process will be extended to the end of January, along with the schedule for the signing," a company spokesman said over the phone.
Jeju Air (Yonhap)
The acquisition is aimed at realizing economies of scale, gaining a bigger market share and strengthening the company's competitiveness in global markets, Jeju Air said on Dec. 18 when
the two sides signed an initial pact for the acquisition. The planned acquisition will reorganize the local passenger-carrying market, with national flag carrier Korean Air, Asiana and Jeju Air plus Eastar Jet leading the market along with other LCCs competing in the highly-competitive market, analysts said.
With the acquisition, Jeju Air will be better positioned to compete with rivals helped by expanded fleet and routes. If the airline industry makes a turnaround in terms of business cycle, Jeju Air will benefit from having more planes and routes, Kim Young-ho, an analyst at Samsung Securities Co., said.
Kim expected local airlines to continue to suffer declines in earnings until the first half of 2020 due mainly to lower demand for travel to Japan amid political tensions between Seoul and Tokyo over the latter's export curbs since July.
In the January-September period, Jeju Air swung to a net loss of 17.5 billion won from a net profit of 84.9 billion won a year earlier. Other local air carriers also posted poor earnings results.
Its net profit plunged to 3.9 billion won in 2018 from the previous year's 32.2 billion won due to political tensions between Seoul and Beijing over the deployment of an advanced US missile defense system, called THAAD, in South Korea in 2017.
Eastar expects its earnings to fall further this year as it has suspended operation of two B737 MAXs delivered in December since March following two tragic accidents involving the plane.
Eastar operates 23 planes -- 19 B737-800s, two B737-900ERs and two B737 MAXs -- on four domestic and 34 international routes to China, Japan and Southeast Asia.
The two B737 MAXs have been grounded for months on safety concerns.
In March, Boeing promised a fix would be in place "in the coming weeks" after a B737 MAX operated by Ethiopian Airlines plunged to the ground killing 346 people. The same type of plane flown by Indonesia's Lion Air crashed in October 2018, with everyone on board perishing.
Boeing said earlier this month that it will temporarily suspend the production of the jets from January. It appears it will take some time for the US company to get approval from the Federal Aviation Administration (FAA) for the plane to fly again.
Other local airlines that have signed contracts to add the B737 Max 8 to their fleets said they won't operate the controversial plane until safety matters have been definitively resolved.
Korean Air has ordered 30 B737 Max 8 planes, with six of them scheduled to be delivered this year. T'way Air Co. had ordered four B737 Max 8s for delivery in 2019.
But Korean Air and T'way said the controversial planes won't be delivered until the FAA and the Seoul government give the green light for the plane to resume flights.
Meanwhile, Jeju Air has a fleet of 45 B737-800s -- 42 chartered and three purchased. The planes serve six domestic routes and 82 international routes, mainly to China, Japan and other Southeast Asian countries.
From January to September, Jeju Air shifted to a net loss of 17.5 billion won from a net profit of 84.9 billion won in the year-ago period.
The decline is mostly attributable to lower numbers of passengers on routes to Japan since July, when Tokyo tightened regulations on exports to South Korea of three high-tech materials crucial for the production of semiconductors and displays. In August, Japan officially removed South Korea from its list of countries given preferential treatment in trade procedures.
Japan's moves are seen as retaliatory measures against a Seoul court ruling that ordered Japanese companies to compensate South Korean workers forced into labor during World War II.
South Korea has two full-service carriers -- Korean Air and Asiana Airlines Inc. -- and seven low-cost carriers -- Jeju Air, Jin Air, Air Busan Co., Air Seoul Inc., Eastar Jet, T'way and Fly Gangwon.
Two more LCCs -- Air Premia Co. and Aero K Airlines Co. -- are expected to join the market next year, bringing the country's total number of LCCs to nine.
AK Holdings Inc., the holding firm of South Korean retail conglomerate Aekyung Group, holds a 59.93-percent stake Jeju Air. (Yonhap)