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South Korean airlines take pounding as China traffic sinks

Asiana cuts executive pay and furloughs staff in emergency response

Travelers in masks walk through Incheon International Airport near Seoul.   © Reuters

SEOUL -- A South Korean aviation industry in dire straits amid excess supply, a soft won and boycotts of Japan is proving hard-pressed to cope with the impact of the coronavirus outbreak on already weakening demand.

All of the country's six publicly listed airlines, except Korean Air Lines, reported operating losses for fiscal 2019. Carriers forced to drastically cut back service to China, a top destination, in addition to these struggles are resorting to desperate measures to stay afloat.

Asiana Airlines, the country's second-largest carrier, sent a letter on Feb. 18 to employees in President Han Chang-soo's name saying that the company was entering "emergency management" in response to losses caused by the coronavirus outbreak.

Han said he would return 40% of his annual salary, while executives will return 30% and division heads 20%. All of the carrier's 38 executives, including Han, have offered to resign, "putting their positions on the line to overcome this crisis," according to the letter.

The company is also asking all employees to take 10 days' unpaid leave, citing weak demand on its China routes.

Asiana has reduced service to and from China by 80% and Southeast Asia by nearly 30% compared with before the outbreak. Each market generates just under 20% of the airline's revenue, meaning that the cuts would slash its overall revenue by roughly a fifth. Market-leading rival Korean Air, by contrast, had been focusing more on European and American service.

Asiana's troubles began before the coronavirus outbreak. The airline reported a 672.7 billion won ($564 million) net loss for 2019, a sharp increase from the previous year's 96.3 billion won. With overall travel demand slumping since late January, the situation looks unlikely to improve.

Parent Kumho Asiana Group decided last April to sell the carrier to raise cash. It reached a 2.5 trillion won deal in December with a consortium including HDC Hyundai Development, slated for completion this April. But the downturn in the airline's earnings could throw a wrench in its turnaround efforts.

The industry's troubles are also weighing on low-cost carriers. Jeju Air CEO Lee Seok-joo issued a statement Feb. 12 saying that the budget airline was entering "crisis mode" and stating bluntly that its "survival is at risk."

Because South Korea is so small, low-cost carriers here rely on international rather than domestic service, particularly short-distance flights serving Japan and China. But the diplomatic friction between Seoul and Tokyo that flared up in July spurred a steep drop in passenger traffic to Japan, while the coronavirus outbreak has forced carriers to suspend many flights to China.

These compound the deeper structural issue of oversupply.

The South Korean market was once essentially controlled by the duopoly of Korean Air and Asiana before deregulation led to the 2005 creation of Jeju Air. More budget carriers have piled into the market since then, driving a price war.

The total number of South Korean carriers is set to swell to 11. Fly Gangwon, based in the country's northeast, began service this past November. Aero K Airlines and Air Premia -- which have Cheongju and Incheon airports, respectively, as their main hubs -- are due to launch this year.

Meanwhile, weak demand has driven fares even lower as airlines scramble for customers, sometimes at the expense of profits. A one-way ticket between Seoul and Tokyo or Osaka can be had for less than $10 before fees.

The South Korean government said on Feb. 17 it will provide 300 billion won in emergency relief to budget carriers. The announcement had only a limited impact on share prices, as investors see the move as a stopgap measure. Industry watchers worry that financially fragile low-cost airlines will go under before a real realignment can get underway.

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