[PE Now] Why VIG, After Investing 210 Billion Won in Eastar Jet, Seeks to Acquire Air Premia

LCCs Lose Ground Amid Industry Restructuring
For VIG, Survival Takes Precedence Over Expansion
Protecting Existing Asset Value and Considering Exit Strategies

The move by VIG Partners, a domestic private equity fund (PEF) manager, to acquire Air Premia is being interpreted as a survival strategy in response to the ongoing restructuring of the airline industry. As full-service carriers (FSCs) and low-cost carriers (LCCs), led by Korean Air, simultaneously scale up, it is believed that Eastar Jet would find it increasingly difficult to secure long-term competitiveness on its own. For VIG, the top priority has become establishing a foundation for its airline investments to remain competitive in the restructured market, even ahead of recovering its investment funds.

According to the investment banking (IB) industry, VIG is in negotiations with AP Holdings and Tire Bank regarding the acquisition of a controlling stake in Air Premia. The stake involved in the deal is approximately 70% held by both parties, and the transaction price is reported to be in the 300 billion won range. Should the deal be finalized, VIG will own a second airline following its acquisition of Eastar Jet in 2023.

VIG is one of the rare Korean PEs to invest in airline management rights. The airline industry requires massive capital investments but offers relatively low profitability, with considerable performance volatility due to variables such as fuel prices and exchange rates. There is also a significant burden from fixed costs including aircraft lease fees and maintenance expenses. This makes it difficult to guarantee profitability even when passenger demand increases. For PEs, which must increase corporate value and recover investments within a certain timeframe, the industry is a complex one for making investment decisions.

Nevertheless, VIG acquired Eastar Jet in 2023 and has since injected capital to support its normalization. The cumulative investment, including the acquisition and subsequent capital injections, totals approximately 210 billion won. With the normalization of Eastar Jet now underway, VIG also faces the challenge of maintaining competitiveness in a newly restructured airline market.

Restructuring on the Horizon...Limits to Standalone Eastar Jet Growth

The recent wave of consolidation in the airline industry centering on Korean Air is seen by many as inevitable. Following the merger of Korean Air and Asiana Airlines, there are ongoing efforts to unify their affiliate LCCs—Jin Air, Air Busan, and Air Seoul—into a single entity. Not only among large carriers but also in the LCC market, where Eastar Jet competes directly, larger and more formidable competitors are emerging.

The scale of an airline directly affects various competitive factors such as its route network, frequency of flights, and bargaining power in procurement. A carrier with a diverse set of routes and time slots can offer customers greater choices, and leveraging procurement and operational scale can improve cost efficiency. If integrated airlines secure these advantages, it becomes difficult for smaller LCCs to narrow the gap simply by gradually adding aircraft and routes. The financial capacity to weather price competition or surging fuel costs also becomes increasingly important.

VIG’s investment in Eastar Jet is not immune to this competitive environment. To raise corporate value and recoup its investments, VIG must demonstrate not only current results but also future competitiveness. One IB industry source noted, “If the scale and business foundations of competitors continue to grow faster during Eastar Jet’s normalization and the capital injections supporting it, the chances of recovering the investment deteriorate. In this context, VIG’s move to acquire additional airlines is very much about protecting the value of its existing assets.”

VIG’s continued monitoring of M&A opportunities within the airline industry is also rooted in this sense of crisis. A representative example is the previous attempt to acquire Asiana Airlines' cargo business. The effort to expand beyond passenger transport and into cargo can be interpreted as a strategy to secure a foundation to respond to ongoing market restructuring.

Combining Short-Medium Haul and Long-Haul Routes...Rising Synergy Expectations

Air Premia is an acquisition target that can complement Eastar Jet’s existing route portfolio. While Eastar Jet is focused on short- and medium-haul routes such as Japan, China, and Southeast Asia, Air Premia operates long-haul routes to destinations like North America. If VIG owns both companies, it can simultaneously expand its customer base and route network. However, the actual benefits depend on how efficiently it can leverage the routes and sales networks of both airlines and improve operational efficiency.

Scaling up brings additional financial burdens. Beyond the acquisition cost, significant investments may be required for aircraft operations, maintenance, and business expansion. Simply owning both airlines does not guarantee improved profitability, so the ability to generate cash flow commensurate with additional investment is crucial. For VIG, it is a deal where the effects of safeguarding the competitiveness of its existing investments must be weighed against the scale of new capital required.

As the domestic airline industry enters an era of substantial restructuring, the burden on LCCs lacking both a sturdy business foundation and adequate capital to withstand external shocks is steadily increasing. A PE industry insider commented, “T’way Air has also been scaling up, and had VIG failed to secure another acquisition target, Eastar Jet’s prospects for survival would have become increasingly uncertain. Although selling Eastar Jet was an option, holding on to Air Premia probably seemed a better way to secure control over their exit strategy.”

This content was produced with the assistance of AI translation services.