Eastar Jet poised to file for bankruptcy protection

Cash-strapped South Korean budget carrier Eastar Jet Co Ltd is preparing to file for bankruptcy after the collapse of its takeover deal by Jeju Air Co Ltd, industry sources said on Wednesday (August 5). 

The move comes after Kim Hyun-mee, the minister of Land, Infrastructure and Transport, testified on July 29 before the Land, Infrastructure and Transport Committee of the National Assembly that Eastar Jet is likely to enter bankruptcy protection.

Some analysts think that the trading value of Eastar Jet will hardly exceed its liquidation value, because the carrier has had almost no operations since it suspended domestic and international flights at the onset of the Covid-19 pandemic early this year, and it is uncertain when flights can resume.

Even if Eastar Jet begins a court-administered liquidation process, there will continue to be uncertainty because no domestic airline company has previously been liquidated in South Korea, industry watchers said.

“It is difficult to estimate Eastar Jet’s liquidation value because there is no such precedent in the domestic airline industry,” a source said.

Some industry watchers are using the liquidation of Hanjin Shipping in 2017 as a reference in estimating the liquidation value of Eastar Jet, noting that airline and shipping companies have many things in common. They both purchase key assets through financial leases – aircraft and ships – and their operations depend on licenses for routes.

Hanjin Shipping filed for bankruptcy protection in 2016 and its liquidation value was estimated at around 1.07 trillion won ($901 million) by the then court-appointed administrator Samil PwC. During the liquidation process, the shipper’s Asia-North America shipping route was acquired by SM Group, and a 54% stake in the port terminal in Long Beach, California, was sold to Swiss-based Mediterranean Shipping Company.

However, unlike shippers, airline companies do not own flight routes but receive operating rights from the government. If a carrier ends its flight routes, the government can withdraw those rights from the carrier under the Aviation Business Act. Eastar Jet had the rights for 29 international routes and three domestic routes at the end of 2019, but they were all taken back by the government after it stopped using them.

There is also another crucial difference: unlike Hanjin Shipping, which raised money through the sale of its port terminal operations, Eastar Jet relies entirely on air services to generate revenue.

“Given its latest financial statements and business portfolio, I’m afraid there are few assets Eastar Jet can sell off,” another source said. “Creditors could end up not receiving much of their money.” (Reporting by Byung-yoon Kim)