CAAC being cleared for take-off

ChinaÆs Civil Aviation Authority (CAAC) is poised to decide whether to launch the countryÆs final international IPO of 2000.
Taking advantage of the last market window of the year after Thanksgiving this Thursday, the authority is said likely to proceed with its $150 million H share offering for Travelsky Technology Ltd (TTL). Despite turbulent market conditions, observers report positive market feed back for the Goldman Sachs-led deal and increasingly positive global sentiment towards the sector generally.

The 270.32 million share transaction is, however, set to differ markedly from the oil and telecommunications plays that have dominated international issuance from the PRC so far this year. Where both the latter sectors had the regulator and operator separated pre-IPO in the interests of creating nationally competitive companies able to withstand WTO membership, TTL operates as a monopoly under CAAC.

The authority owns both the back-end national computer ticketing system and front-end consumer portal in association with about 22 domestic airlines. Currently, enjoying a 99% domestic market share and 70% international market share, it has, to date, sanctioned no competition and moved aggressively to stamp out any perceived threats.

Unusually, while the issuance vehicle will be called Travelsky Technology, its assets will not comprise the portal, but only the back-end reservations system (GDS) used by the travel industry to channel bookings to airlines' own internal systems. The omission has puzzled some observers, who have put it down to the Mainland's current sensitivities on foreign ownership of internet stocks. Others, however, say that it is not been included because it is deemed less important than the GDS and will be injected at a later date for a nominal amount.

Post IPO, industry experts expect CAAC to hold about 34% of the company, with the airlines collectively maintaining a 46% stake and the remaining 20% in public hands. It has been reported that the international offering will also be anchored by a group of strategic investors from the global industry, including Galileo and Sabre of the US and Amadeus of Europe.

Most believe that the deal will be extremely well received. The participation of strategic investors, the company's monopoly position and its lucrative and growing franchise are expected to play well with international accounts that have seen the stock of global comparables continue to perform in the face of the overall technology and internet sell-off. Sabre, for example, is up from about $24 at the end of July to a current share price of $32.9375.

As JP Morgan’s New York based analyst Matthew Fassnacht puts it, “The sector really started to plummet with the internet sell-off of March/April, but has started to come back again over the last four months and particularly over the last month. Investors are beginning to see value in these companies and the gap is starting to close against industry peers in the transaction processing field such as First Data and Concord.”

Having traded down to firm value to EBITDA levels of about three to five times earnings, the sector is, consequently, back up to a five to seven level, though still down from last year’s highs of up to 11 times. In terms of price to earnings ratios, analysts comment that the three main global leaders range from seven times prospective 2001 earnings (Galileo), through 14 times (Sabre), to 25 times (Amadeus).

By contrast Travelsky is looking more modest in its ambitions, with analysts reporting a likely p/e ratio around the 10 times mark.  

Fassnacht also adds, “Technology is moving fast and the industry is becoming more complicated in the minds of investors, who are tending to move out of the high flying internet stocks and back into the sector’s legacy names. Sabre is favoured because it set up Travelocity, America’s leading travel portal and because it dominates 70% of corporate desktop market for electronic bookings.”

Initially, the industry was dominated by international airlines. Fearing that travel agents or technology companies might be able to dictate pricing in an increasingly electronic global travel market, they moved quickly to wrench control for themselves. Amadeus, for example, was founded by Air France, Lufthansa and Iberia, while American Airlines set up Galileo and Sabre was established by Aer Lingus, Air Canada, Alitalia, Austrian, BA, KLM, Olympus, Swiss, Tap Air, United and US Airways.

The three GDS systems in turn set up a number of front-end portals such as Sabre's Travelocity, which allows passengers to bypass travel agents and book directly on line. In Asia, too, Cathay Pacific is in the process of setting up a portal in association with Quantas, Singapore Airlines, Air New Zealand, Ansett and Thai.

In the US and Europe, however, most of the airlines have sold down their stakes over the past year, with Sabre and Galileo, now majority-owned by institutional investors. “They realize that it’s more important to spread the net as wide as possible and participate in many different sites, rather than just control their distribution costs,” Fassnacht explains. “In such a competitive industry, they want to get their inventory sold wherever they can.”

Ken Chad, ceo of Asia’s, which runs an on and offline travel company, is pursuing a similar strategy from his base in Hong Kong and Singapore. He says, “We see ourselves as being complementary to the airlines. We have inventory from a large number of carriers and play a supportive role in their efforts to extend distribution over the internet. We are one more hedge against a single operator gaining control of the entire market.”

China, by contrast, has done little to liberalise the industry. When, for example, China Southern tried to set up its own portal, last year, CAAC threatened to pull the carrier from the national GDS. So too, internet companies that have tried to break into the China market have found it an uphill struggle.

As one observer comments, “Travelsky has the only real-time access to Chinese airline inventory. set up and has links with CITS (China International Travel Service). But all a customer is doing when they make an online booking, is sending an email to a travel agent, who will then manually input it into the GDS.”

Another adds, “These systems have no leverage at the moment. Now that the airlines have been allowed to start discounting tickets, they will naturally feed them through their own site.”

To the end of the 1999 Financial Year, Travelsky reported an operating income of $25.1 million on $70 million turnover. In addition to its current PC-based internet access, the company is also said to be working with Microsoft and Motorola to roll out internet TV and cellular phone versions of its web site.
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