After an adverse year, equity markets may be receptive again to airlines that want to raise capital.
The most optimistic is Japan Airlines (JAL), which hopes to generate a whopping $12.6 billion through an initial public offering (IPO) by September. Thai AirAsia, Indonesia AirAsia and Hong Kong Airlines also have IPO plans and Indonesia's Lion Air is expected to announce similar plans soon.
Last year, most chief financial officers found share markets too volatile to use as a source of capital. They resorted instead to debt financing through bonds, notes, or debentures. That, of course, did not help their balance sheets.
AviancaTaca and Aeromexico were the only stars among airlines undertaking IPOs in 2011, raising $260 million and $330 million respectively. Spirit Airlines held the first IPO by a US airline since 2007, but only after trimming its offering by 37%. Garuda Indonesia was forced to halve its IPO before launching it. Airlines followed the pattern in other sectors, with offerings either shelved or reduced, leading analysts to conclude by the end of the year that 2011 had been "dismal" for IPOs.
Several signs suggest a possible comeback this year. Analysts point to a historic pattern of stocks doing well after a flat year. Some claim that the risks of a eurozone crash or a hard landing for China's economy have been exaggerated.
The prospect of revived investor interest is clearly a factor, but those airlines planning IPOs have their own reasons for returning to the share markets. Japan's Enterprise Turnaround Initiative Corporation (ETIC), the government-backed fund that holds about 97% of JAL's voting rights, must sell its stake no later than next January - three years after taking over the airline. As that deadline nears, ETIC is anxious to shed its stake while markets and JAL's performance are positive, thereby avoiding a last minute distress sale.
The IPOs planned by Thai AirAsia and Indonesia AirAsia are motivated by strong growth and favourable economies that offer a chance to boost working capital while conditions are right.
By contrast, the $300 million IPO planned by Hong Kong Airlines and the expected IPO by Lion Air are driven by a need to finance major fleet expansion. Hong Kong Airlines is expecting more than 50 new aircraft, including 10 Airbus A380s, over the next four years, while Lion Air placed a record $21.7 billion order last November for at least 230 Boeing 737s.
Aircraft financiers have been predicting more reliance on equity to help fund new aircraft. Boeing Capital's managing director of capital markets Kostya Zolotusky says other forms of finance must step up as European banks are forced by the plight of the euro and new banking rules to cut their lending.
So far, all the airline IPO news is coming from Asia, but carriers elsewhere, including Canada's Porter Airlines, hope to revive previously shelved IPO plans.