Korean low-cost carrier Jeju Air has formally applied to the Korea Exchange for a long-awaited initial public offering of shares as it looks to fund its expansion to take advantage of rising tourism and trade between China and Korea.
Plans to take the airline public have circulated since 2013 but the process stalled in early 2015 as discussions took place with Singapore Airlines for an equity investment in the company.
Singapore’s flag carrier had planned to acquire a stake in Jeju Air to expand its foothold in north Asia, where tourism has blossomed, partly due to the political uncertainties surrounding some Southeast Asian countries. The number of Chinese visitors to northeast Asia – Japan, Korea, and Taiwan – grew to 12.5 million in 2014 from 8.5 million in 2013, according to Center for Aviation, an aviation research organisation. By comparison 6.2 million Chinese tourists visited Southeast Asia in 2014, down from 6.4 million a year earlier.
However, Singapore Airlines said August 13 that it had scrapped the talks, without giving any reason.
A Singapore Airlines-Jeju Air partnership would have had limited network synergies as the two operate in different regions but the investment was viewed by some bankers and investors as a good tip-off for the Singapore carrier’s expansion outside Southeast Asia.
The collapse of the deal means Jeju Air has to re-focus its energies on seeking funding from public investors through an IPO.
According to local reports, the budget airlines is looking to sell a 20% to 30% stake. It is unknown at this stage whether existing investors like chemical and consumer conglomerate Aekyung Group and the Jeju provincial government will also dispose part of their holdings.
Jeju Air shares traded on the over-the-counter market ended at W44,500 Thursday, valuing the airline at about W979 billion ($824 million) or about 30.5 times its 2014 financial year earnings. It could raise about $250 million through the IPO assuming a 30% free float.
The OTC shares have risen 43.5% year-to-date.
While the global aviation industry has largely flourished as a result of lower jet fuel prices, Korean airlines appear to have been a notable exception due to the country's fatal outbreak of the Middle East Respiratory Syndrome in May, which caused a sharp decline in passenger volume.
Korean Air, for instance, turned in a loss in the second quarter as it suffered from both MERS and a weaker Korean won, with domestic traffic suffering a heavier decline of 9% compared with 3% for international routes. Korean Air's share price has lost 26.4% since May 20, the day when the first MERS case was confirmed.
Asiana Airlines, Korea’s second largest carrier by revenue, reported a deeper net loss of W85.4 billion in the second quarter, blaming a spike in cancellations by Chinese and Japanese tourists.
However, the passenger traffic of low-cost carriers have held up relatively better because of more flexible route adjustments, KDB Daewoo Securities analysts Jay JH Ryu and Choong-hyun Kim said in a note. In June, the traffic of low-cost carriers rose 5.6% from a year earlier and captured 22.6% of the overall traffic, up from 21.1% in May.
There are also signs of a rebound in the third quarter as the MERS crisis has faded. Analysts are also generally optimistic about an increase in passenger volume in the peak travel season towards the end of the year.
The southern Korean island of Jeju, well-known for its natural scenery and beaches, has been seen as a conduit between China and Korea amid increasing Chinese investment, particularly in the property business.
China's wealthy have invested heavily in properties in Jeju in order to gain permanent residency, while Korean won losses against the renminbi since 2011 have also sparked huge Chinese investment on the island.
According to data from the Jeju Special Self-Governing Provincial Tourism Association, the island in 2013 attracted 2.3 million tourists, of which 1.8 million were from China. In 2014, the number of Chinese visitors soared 58% to 2.9 million.
Jeju Air plans to use the IPO proceeds to double its fleet in three years to cater for the increasing tourist exchange between China and Korea. The low-cost carrier operates a fleet of 20 Boeing 737-800 aircraft and plans to expand that to 40 aircraft by 2018, chief executive officer Ken Choi said.
Jeju Air is the leading low-cost carrier in Korea with a 6.8% market share, according to KDB Daewoo Securities. However, Korean Air’s low-cost subsidiary Jin Air has been rapidly catching up since its establishment in 2008 and currently ranks second with a 3.4% share.
NH Investment has been appointed lead manager of the Jeju Air IPO.
While Jeju Air is looking to ride the growing wave of Chinese tourists in the short term, industry experts are casting doubt over the room for growth in the longer term.
That is partially due to the airline’s incapacity to expand into long haul routes, given the entire fleet of Boeing 737-800s are short-to-medium haul jet airliners. So the airline still needs to invest in new planes in order to fly to destinations outside Asia.
Lian Hoon Lim, managing director of US consulting firm AlixPartners, told FinanceAsia that Southeast Asian budget airlines have significant advantages when it comes to expanding to long-haul routes because they benefit from cheaper labour costs. They also pay lower airport fees and service costs.
Low-cost carriers in Northeast Asia do not have such cost advantages and face competitions from their Southeast Asian rivals, which generally have larger fleets.
Jeju Air is also operating in a competitive local market with the presence of a number of other carriers including Korean Air, Asiana Airlines, Jin Air, Air Busan, and Air Incheon.
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