Spring Airlines wins early interest among new listing hopefuls

Subsidies boost the appeal of the low-cost mainland carrier that aims to raise 2.5b yuan

PUBLISHED : Monday, 28 April, 2014, 4:43am
UPDATED : Monday, 28 April, 2014, 4:54am

Predictions that the reopening of the mainland's IPO market would lead to a bigger representation in the global listing market look to be coming true. The China Securities Regulatory Commission unveiled 97 firms' preliminary listing documents between April 18 and 24, with more than 600 initial public offering hopefuls queueing for a go-ahead.

One of them, Spring Airlines, China's largest budget carrier, is looking to raise 2.53 billion yuan (HK$3.18 billion) in a Shanghai float that appears favourable in terms of market valuation.

On the surface, the Shanghai-based carrier does not look any different than its peers, but it benefits from government support and has higher than industry average returns.

The mainland's civil aviation business is dominated by four state-owned carriers, including Air China and China Southern Airlines, as well as foreign heavyweights including Singapore Airlines and Cathay Pacific Airways. However, profit of the existing operators has dropped substantially due to price competition. That creates a timely opportunity for the 10-year-old Shanghai venture to offer market-beating prices to frequent travellers and backpackers.

Spring Airlines has airfares ranging between 99 and 299 yuan.

Unlike conventional airlines, which offer "free" meals and drinks, IPO Watch remembers a trip several years ago with Spring Airlines, which offered virtually no services. It even charged five yuan for a cup of water during a one-hour delay on the tarmac.

These days, government subsidies - mainly from local governments and airports - have represented more than 90 per cent of the airline's operating income for the past three years, or an average 75 per cent of its overall revenue for the same period.

The firm received total subsidies of 522.16 million yuan last year from governments and airport operators, accounting for 52.9 per cent of its overall profits, according to its IPO document.

The airline said it remained in talks with the Hebei provincial government and airport operator about the new subsidy agreement after the past contract finished in March.

The firm's gross profit margin and return on equity, a measure of profitability, are well above its industry's peers, probably due to its stringent cost controls.

The firm, controlled businessman Wang Zhenhua, proposed to offer up to 100 million shares, or 25 per cent of its total capital, in the IPO.