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Jeju Air warns to abort from deal if Eastar Jet fails to meet conditions

(Jeju Air)
(Jeju Air)

Casting more doubt over the controversy-ridden merger of two budget carriers, Jeju Air reiterated its warning on Tuesday that it will cancel its acquisition contract if Eastar Jet fails to meet prerequisites by July 15.

Jeju Air, South Korea’s largest low cost carrier by sales, released a statement that the company has “done its best” to close the acquisition deal since it signed the contract to acquire a 51.17 percent stake in rival LCC Eastar Jet for 54.5 billion won ($45 million) as part of its expansion strategy.

But Eastar Jet blaming Jeju Air for a delay in making payments for its employees and its claim that Jeju Air ordered a restructuring of Eastar Jet’s workforce have caused “deep worries whether the stable business management is possible,” Jeju Air said. 

“For Eastar Jet, which has suffered capital shortage, Jeju Air has lent 10 billion won at a low interest rate of 1.3 percent and also agreed to inject 10 billion won from the contract deposit amount of 11.95 billion won into Eastar Jet’s convertible bond,” Jeju Air said.

The air carrier said following approval from Vietnamese aviation authorities of Jeju Air’s planned takeover of Eastar Jet, the company has achieved all prerequisites for closing the deal. 

Jeju Air argued that Eastar Jet has “not been diligent” in executing prerequisites such as resolving payment guarantees for Thai Eastar Jet‘s renting of aircraft and clearing its debt worth some 80 billion won.

As the tit-for-tat escalated between the two firms, Eastar Jet Founder Lee Sang-jik, who is also a member of the ruling Democratic Party of Korea, had decided on June 29 to return all shares of the ownership family in parent company Eastar Holdings to Eastar Jet to “save the company.” 

Easter Jet had contended that it could resolve the outstanding unpaid wages to close the deal. 

But Jeju Air argued that the shares held by Eastar Holdings already include the contract fee and loan worth 22.5 billion won paid by Jeju Air under the right to pledge, and that Eastar therefore does not have a right to unilaterally declare its return of shares. It also contended that even with the return of the shares, the amount that will eventually fall on Eastar Jet would reach around 8 billion won, “far short of resolving the overdue wages.”

Regarding Eastar Jet’s claims that Jeju Air ordered a shutdown of the company and that Jeju Air send a finance manager to intervene in Eastar Jet’s management, Jeju Air said its former CEO only “gave advice” to suspend the company amid a snowballing deficit following the closure of international routes. 

It added that the M&A contract states that an approval is needed from the finance manager when the acquired firm needs to lend above 10 billion won. 

Since the outbreak of the novel coronavirus, Eastar Jet suspended all of its flights in March and its 1,700 employees went on paid leave. 

Eastar Jet claimed that Jeju Air had said it would guarantee wages for Eastar employees after the signing, but they changed their words in May as the COVID-19 spread worsened. Unpaid wages for Eastar Jet workers total about 24 billion won, according to the air carrier. 

But Jeju Air refuted the statement and said it was Eastar Jet’s management that has delayed payments to its subcontracted companies and oil refiners.
Eastar Jet has been unable to pay wages to its employees since February. It posted an operating loss of 35.9 billion won in the first quarter compared to an operating profit of 11.9 billion won a year ago.

By Kim Da-sol (