Jeju Air (7C, Jeju) revealed on July 23 that it had scrapped its deal, previously agreed in principle, to take over its smaller low-cost peer Eastar Jet (ESR, Seoul Gimpo). Debt-ridden Eastar may face bankruptcy as a result, sources told the Yonhap News Agency.

Jeju said it had taken the decision due to unnamed "key violations" of undisclosed preconditions and also because of rising pandemic-related uncertainties, it said in a statement.

As previously reported, it agreed in March to acquire 51% of Eastar for KRW54.5 billion won (USD45.5 million), a price it had revised down from a preliminary agreement in December to pay KRW69.5 billion (USD58 million).

Despite a government pledge to financially support the deal, the two sides were unable to narrow differences on the terms of the contract. On July 1, Jeju Air sent an ultimatum telling Eastar Jet to pay off all of its debts, estimated to be around KRW170 billion (USD142 million), by July 15, but Eastar could not comply.

"It is regrettable that we have decided to scrap the deal despite the government's intention to support it. But the decision was inevitable due to uncertainties amid the pandemic and the possible impact on shareholder value," Jeju Air said in its statement.

Eastar Jet responded by arguing that it was Jeju that had violated the terms of the deal.

"We urge Jeju Air to proceed with the deal, or we will seek every possible measure to make Jeju take responsibility for the deal's collapse," Eastar senior vice president Kim You-sang told Yonhap.

Industry insiders told Yonhap that Eastar Jet will inevitably go bankrupt if no viable investors appear, with Shinyoung Securities analyst Um Kyung-a saying: "Eastar's capital erosion and snowballing debts appear to be a stumbling block."

Korea's Ministry of Land, Infrastructure, and Transport advised Eastar, which has about 1,500 employees, to come up with a Plan B, adding that if it did so it would "extend a helping hand" to the carrier to avoid large-scale job losses.

The carrier may also be able to secure funds from the government-owned Industrial Bank of Korea, or the bank may take control of the airline for corporate restructuring, local media speculated.