Jin Air will become South Korea's largest low-cost carrier when it merges with Air Busan and Air Seoul on March 17 next year. Combined revenue will top 2.5 trillion won ($1.8 billion), and the fleet will expand to nearly 60 aircraft. Yet the three-way tie-up is not drawing unqualified optimism, because none of the three carriers is on solid financial footing. Jin Air's debt-to-equity ratio exceeds 600%, while Air Busan and Air Seoul are in worse shape at around 1,600% and 850%, respectively. That is why repairing the balance sheet is seen as a task at least as pressing as integrating the three organizations.
Jin Air had total assets of 1.31 trillion won and total liabilities of 1.13 trillion won as of the end of June, putting its debt-to-equity ratio at 636%, according to industry data released on the 29th. That is up 213 percentage points from 423% at the end of last year. Current assets of 616.8 billion won exceed current liabilities of 581.4 billion won, so immediate payment capacity is not yet a concern. But cash and cash equivalents stood at 44.9 billion won, a modest cushion against quarterly revenue in the 360 billion won range.
Weakening earnings are adding to the strain. Jin Air posted second-quarter revenue of 360.3 billion won, up 17.7%, but swung to an operating loss of 73.1 billion won. The reversal largely reflects the hit from high fuel prices and a weaker won following the outbreak of the U.S.-Iran war in late February. For the first half, revenue reached a record 783.3 billion won, yet the carrier still booked an operating loss of 15.5 billion won. Jin Air reported an operating loss of 19.2 billion won last year, its first loss in three years, and this year is shaping up to be another. The consensus estimate for Jin Air's full-year operating profit compiled by financial data provider FnGuide is a loss of 1.1 billion won.
Air Busan and Air Seoul, the two merger targets, will deepen Jin Air's financial burden. Air Busan's debt-to-equity ratio reached 1,647% as of the end of June, with total assets of 1.42 trillion won against liabilities of 1.34 trillion won. That is double the 801% recorded at the end of last year, after a net loss of 77.9 billion won in the first half cut total equity nearly in half to 161.2 billion won. Air Seoul, which is unlisted, had total assets of 302.3 billion won and total liabilities of 270.6 billion won at the end of last year, the most recent data available, for a debt-to-equity ratio of 854%. Combined, the three carriers carry 2.74 trillion won in liabilities and a debt-to-equity ratio of 942%. Air Busan posted a loss of 4.5 billion won last year and another 5.1 billion won in the first half of this year, while Air Seoul recorded an operating loss of 7.5 billion won last year.
Over the longer term, the merged Jin Air is expected to cut costs through economies of scale and improve service quality. Its passenger fleet will grow from 31 aircraft to 58, adding 21 from Air Busan and six from Air Seoul. That is nine more than Trinity Airways, currently the largest low-cost carrier by fleet size with 49 aircraft. Combined revenue for the three carriers came to 2.50 trillion won last year, well above Trinity Airways' 1.80 trillion won. In effect, a mega LCC is entering the Korean aviation market.
With business conditions deteriorating at home and abroad, risk management has become essential if the three merged carriers are to land softly. A prolonged Middle East conflict that keeps oil prices and the currency volatile would only widen earnings uncertainty. Costs arising from the integration itself are another pressure point. Money will be needed in many places, including merging computing and IT systems, unifying flight and maintenance infrastructure, building and promoting a new corporate identity, replacing cabin crew uniforms and repainting aircraft.
The cost increases have already begun. Jin Air recently signed a 694.3 billion won lease agreement with its parent, Korean Air, to secure aircraft — 10 new Airbus A321neo jets. The company describes the deal as part of a long-term fleet plan, but because Jin Air has operated a single-type Boeing fleet until now, the move appears to be made with the merger in mind. Airbus jets are the mainstay of the fleets operated by Air Busan and Air Seoul.
Lease payments on the new aircraft total 7.7 billion won a month. Deliveries will be phased in from November this year through December 2027, and once all the jets are in service they will add 92.5 billion won in annual fixed costs. The new aircraft will become a platform for merger synergies rather than a financial burden only if they generate returns that exceed those fixed costs.
