Asian carriers show market appeal

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The successful launch by Tiger Airways of its initial public offering and listing on the Singapore stock exchange could encourage other Asian carriers to consider similar moves.

Tiger raised $S248 million ($176 million) in the first IPO by an Asian airline in five years. Ninety-two percent of its offering was reserved for institutional investors through an international sale that was oversubscribed 4.5 times. The much smaller public offering to Singapore investors drew a more spirited response, being oversubscribed 21 times. When Tiger's shares started trading after the IPO, their price rose another 2%.

The offering's popularity surprised analysts, who were generally skeptical about Tiger, which is 49% owned by Singapore Airlines, 11% by Singapore government investment arm Temasek, 24% by private equity firm Indigo Partners, and 16% by RyanAsia. Speculation started as early as last July that SIA was losing enthusiasm for the airline and Tiger was looking for new investors. When SIA and Temasek announced they would not participate in the IPO, and that Indigo and RyanAsia both wanted to sell down their stakes, some analysts saw this as a sign Singapore's government was tired of putting money into Tiger, and its private equity investors wanted at least partially out.

Two weeks before filing its prospectus, Tiger revealed a net loss of $S51 million in the year to March 31 compared with a $S7.7 million profit a year earlier, and that its cash reserves had dropped almost 40%. In Australia, where Tiger admitted losing $S50 million, some observers doubted that it could ever make a profit.

Tiger Potential

Investors obviously ignored these concerns or were more attracted by Tiger's potential than its past performance. The airline has ambitious expansion plans in Australia and other unspecified "operating bases" in Asia. It has also started converting its A320 fleet from leased to owned aircraft.

Some of the enthusiasm for Tiger may reflect local trading conditions. Singapore-listed companies operating on a December financial year were starting to report their earnings, and the early indications were quite positive. Thanks to cost-cutting and a sharp local recovery, the head of Citigroup's Singapore research group expected "earnings results to be spectacular".

Investors may also have taken comfort that SIA and Temasek were sticking with Tiger. The two big investors did not put in more money, but staying with Tiger was an implicit vote of confidence. The Centre for Asia Pacific Aviation saw this "backing of the Singapore government, through a subsidiary of its investment arm, Temasek, and Singapore Airlines", as significant.

One factor favouring the market prospects of any Asian airline is the region's recovery pace. IATA reports that Asia this past yeareclipsed North America to become the world's largest aviation market. On the strength of this surge, Asian airline share prices gained 35% in 2009, well ahead of a 25% global average. As Credit Suisse notes, demand is recovering and load factors are up, creating "a sweet spot" for Asian airlines.

Malaysia Airlines and Thai Airways both plan to raise capital this year, but are steering clear of the markets. Shareholders at both have approved new issues, but they plan to buy all the new shares. This is partly to avoid dilution, but also reflects an on-going caution about equity markets.

China Eastern is only slightly less cautious. China's security regulatory commission has given it conditional approval to sell new shares, but only to Chinese government enterprises and the airline's holding company. Since this preliminary approval, Chinese markets have risen on news that China Eastern expects to report a 2009 profit. This may cause regulators to relax their final limits on the offering.

Garuda Indonesia would be the Asian airline most pleased with Tiger's success because of what it portends. The Indonesian flag carrier, which has struggled for years, is nearly through a debt restructuring designed to clean up its balance sheet ahead of a $300 million IPO by mid-year. Garuda expects to complete agreement with one final creditor by late February. It has persuaded some to swap debt for equity on the expectation that they can cash out their shares during or shortly after the IPO.

Other Asian airlines can take heart from Tiger's success. The reasons for that success vary, but the undisputed fact is that an airline with a less-than-perfect track record was able to tap equity markets, one of the last sources of capital to open up after a recession. Asia's five-year drought may be over.

Equity Offerings

Share offerings by airlines or their parents completed or announced in the past eight months.

This chart does not include convertible debt offerings except where they are combined with share offerings in unsegregated amounts.

Recently Completed

Tiger Airways Jan 10: $176 million IPO

United Oct 09: $138 million new share offer

Czech Airlines Oct 09: Sale canceled after offer rejected

American Sep 09: $830 million in combined share and convertible note offering

Virgin Blue Jul 09: $193 million new share offer

Planned or Possible

Garuda IPO planned mid-2010

China Eastern Institutional placement conditionally approved

Malaysia Airlines Rights issue approved

Thai Airways Rights issue approved

AirAsia IPOs under study in Thailand and Indonesia

GOL Offering planned

See how airlines turned to the capital markets last year