The notorious coronavirus disease (COVID-19) pandemic has affected yet another domestic industry, this time the airline industry. Airline companies faced heavy competition in the sector, even before the virus struck the world. Unable to survive on their own, many companies entered into mergers and acquisition (M&A) talks, hoping that other companies were willing to take over. However, the dismal financial situation created by COVID-19 is now affecting M&A discussions, with companies hesitant to take on the immense financial burden that is only expected to grow. This includes talks involving Asiana Airlines and Eastar Jet, whose ongoing M&A deals have collapsed.

On July 23, Jeju Air officially declared the end of a Share Purchase Agreement (SPA) with Eastar Jet, citing the end of an M&A negotiation dating back to 2019. Jeju Air explained, “We had to conclude that the M&A would be overly burdensome for us to take on, due to the heavy burden and uncertainty.” Similarly, on September 11, Hyundai Development Co. (HDC) reported that it had received a notice of contract termination from Asiana Airlines and Kumho Asiana Group. According to the notice, the reason for termination was HDC’s failure to complete the contract, which HDC vehemently denied.

Mass Layoffs at Eastar Jet Following the M&A Breakdown

Due to the COVID-19 pandemic that broke out during the M & A negotiations, Eastar Jet faced the prospect of the rapid liquidation of its assets. This put Jeju Air in a precarious position because it was expected to be burdened by 25 billion won in debt if the M&A took place, causing it to terminate the deal. After the M&A breakdown, Eastar Jet reached a point where internal recovery was impossible. On September 27, it laid off 600 employees as a part of its emergency plan to conduct mass layoffs in order to survive.

According to Professor Hurr Heeyoung (Department of Finance, Korea Aerospace University), a legal dispute is brewing between Eastar Jet and Jeju Air over who is to blame for the breakdown. Suspicion was raised that the owners of Eastar Jet had illicitly acquired the stocks of its carrier company, Eastar Holdings. Professor Hurr explained that Eastar Jet would have to dispel this suspicion and cover the 25 billion won in accounts payable accumulated since February.

Asiana Airlines Facing a Gloomy Future

The demise of the promising M&A deal that initiated last December between Asiana Airlines and HDC can be attributable to the dispute over the calls for a reevaluation of Asiana Air. HDC pointed out that the financial status of Asiana Air had changed considerably since December, citing the detrimental effects of the raging COVID-19 on the airline sector. Asiana Airlines originally had a debt ratio of 1387 percent last year, but it sharply rose to 2291 percent this June after six months of severe hardship. However, Asiana Airlines and Kumho Asiana Group repeatedly avoided the reevaluation, escalating the conflict in the negotiation process.

The two companies may not walk away unscathed from the negotiating table, with legal challenges now taking place. Experts state that the legal suits pertain to the 250 billion won performance deposit that HDC paid to Asiana Airlines at the beginning of the M&A contract. HDC want this returned, arguing that the M&A negotiations had broken down and were nullified. HDC personnel also mentioned that the most important factor leading to the breakdown was Asiana Airlines’ failure to meet the prerequisite conditions that were critical to the negotiation.

HDC revealed on September 15 that it would file a lawsuit against Asiana Airlines and Kumho Asiana Group, both of which were responsible for the breakdown. On the other hand, Asiana Airlines and Kumho Asiana Group may argue that the constant push for reevaluation was the crucial factor that led to the breakdown, blaming HDC for its alleged attempt to nullify the negotiations. The outcome of this lawsuit remains unclear because there have been similar cases that have led to different rulings in the past.

Future Projections

On what would happen after the M&A breakdowns, Professor Hurr noted that, due to the rigorous restructuring of Eastar Jet, there would be more layoffs, leaving only a group of essential workers at the company. “Even if Eastar Jet is now continuing with its sellout, it is difficult to be optimistic about the results. If the sellout fails, the firm would have to undergo dissolution following the necessary liquidation procedures,” he explained.

Asiana Airlines, which is predicted to be taken over by its creditors, would also have to undergo harsh restructuring to recover. “If the current management system is maintained without essential downsizing of the giant insolvent company,” Professor Hurr argued, “its recovery becomes harder, and it could eventually turn into a giant zombie company just like Daewoo Shipbuilding & Marine Engineering Co. (DSME).”

The breakdown in the M&A talks and the ensuing legal disputes seem to have reached a total stalemate. As a way to end it, some have suggested that the government financially assist the firms to aid in their recovery. However, issues of fairness would arise if the government has to compensate for the failed management of the owners over the past few years. It is true that COVID-19 has created hardship, but the accumulated internal management problems at Eastar Jet and Asiana Airlines have rendered them more vulnerable to the crisis. Therefore, those responsible for the insolvency of the firms should take bold steps to correct the wrongdoings while the government should come up with necessary measures to minimize the layoffs and protect the remaining jobs within the boundaries of fair and equal assistance.