Cash-strapped Korean LCCs to bolster capital: Jeju Air to raise $175 mn

Jeju Air Co., South Korea’s largest low-cost carrier (LCC), seeks to raise some $175 million in new shares to boost its capital base, raising expectations that its cash-strapped local competitors will do the same as the industry remains under pressure from COVID-19.

Jeju Air plans to sell new shares to raise 200 billion won ($174.5 million), according to a filing to a financial regulator on July 7. The shares will be issued after the airline cut its equity capital by five to one.

It will reduce the face value of its common shares to 1,000 won from 5,000 won without reducing the number of stocks, reducing its capital base to 38.5 billion won from 192.5 billion won, according to a separate filing. The capital reduction will take effect on Aug. 30.

The cut is meant “to preserve deficits and improve the financial structure,” Jeju Air said.

The LCC, along with domestic peers, is currently under impaired capital status – a balance sheet condition where a company’s total capital becomes less than the par value of its capital stock. It has a total capital of 137.2 billion won, below its capital base of 192.5 billion won as it has been posting losses since the second quarter of 2019.

Jeju Air is expected to keep reporting losses this year as COVID-19 continues to bite into air traffic. The LCC is at risk of a full-scale capital erosion as it is predicted to post a 240 billion won loss this year, according to the brokerage industry.

Its plan to issue new shares could be a move to avoid such a scenario, as it could be difficult to avert such erosion with only a capital reduction.

Other LCCs such as Jin Air, AirBusan, Air Seoul and Eastar Jet are expected to follow suit as they are facing similar capital issues as Jeju Air.