Juneyao stake sale to help fund expansion

Shanghai
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Shanghai-based airline group Juneyao Airlines plans to sell a 20-25% stake to strategic investors this year and sell a further stake to the public next year.

Citigroup is the financial advisor to Juneyao Airlines and the “target is to close the [private placement] deal by the end of this year and we are confident” of achieving that, Huang Hui, the CEO of the airline’s parent company, Juneyao Group, told ATI in Shanghai.

Juneyao Group is a diversified conglomerate with businesses in real estate development and dairy products, and since 1991 it has been chartering aircraft from Chinese airlines.

In 2005, it established Shanghai-based Juneyao Airlines, which today operates Airbus A320-family aircraft and is positioned as a premium-service carrier. It mostly caters to businesspeople and on 15 August plans to launch a loyalty programme allowing frequent travellers to earn points towards free flights.

Juneyao Group also owns 71% of Okay Airways, which is based in Beijing’s port city of Tianjin and has two main businesses - a low-cost scheduled passenger operation that operates Boeing 737s and a dedicated cargo business that operates three 737-300Fs on behalf of FedEx.

The private placement sale and next year’s initial public offering will cover Juneyao Group’s airline charter business, Juneyao Airlines and the 71% stake in Okay Airways.

Huang says for the private placement the company is speaking to overseas private equity firms that have experience managing airlines.

“They are from the airline industry… They are quite focused on airlines and their understanding of airlines is quite good,” he says.

“We are not just looking for the money. We’re looking to gain know-how and looking at their portfolio of investments” and whether this can provide a competitive advantage.

The private placement will cover the sale of a 20-25% stake to one or more private investors, he adds.

Juneyao Airlines currently only operates domestically but plans to launch short-haul international services next year using A320s.

Huang says destinations it is eyeing are Hong Kong and points in Japan and South Korea.

“The private placement will help us increase our fleet size more quickly, broaden the geography of our operation, make improvements and invest in information technology,” he says.

This means once the private placement is completed, the airline group will place a large order for A320-family aircraft plus it has ambitions to operate widebodies on medium and long-haul international routes, he says.

Huang declines to give a timeframe for the launch of medium and long-haul international services, saying the first priority is expanding the domestic network and launching short-haul international services.

“For the IPO” at the end of 2008 there “is no specific plan yet” on how much will be sold but if it is in Hong Kong there is a regulatory requirement that it be at least 25%.

“Hong Kong is a very good market,” says Huang, adding that the IPO is unlikely to be on a mainland Chinese stock exchange.

“The regulations for listing domestically [are such that] you need quite a long time compared to Hong Kong,” he adds.

“We can list in Hong Kong at the end of 2008 but” Juneyao Airlines only started in 2005’s second half and “we need a three-year track record to list in China and you don’t know if the regulations in China will change or not”.

Juneyao Group also has a small equity stake in United Eagle Airlines, a privately owned Chinese carrier based in the southwest Chinese city of Chengdu. But it is unclear if this equity stake will be part of the private placement and IPO.

Huang says Juneyao is still talking to United Eagle to see how the Chengdu-based carrier in future will co-operate with Juneyao Airlines and other carriers in the group.

He says Juneyao Group’s strategy is to have an “aviation business portfolio which gives us ‘economies of scale’ and good strategic locations”.

Okay Airways was appealing because its base is in northern China and United Eagle was appealing because its base is in the southwest.

“In the next three to five years there will be some further consolidation” in China, says Huang.

He says some of the private players that went ahead and launched airlines in China have underestimated the amount of capital required and lack the ‘economies of scale’, management know-how and international experience.

These factors coupled with the fact that “the cost pressures of airlines are pretty big” means there will be consolidation, he says.

Huang says that when taking into account Okay Airways, the Juneyao Airlines group is already the largest private airline player in China. He says the strategy is to let each airline maintain its unique brand identity but Juneyao Group will drive efficiencies and achieve economies of scale by merging back-office operations such as maintenance and training.

Economies of scale will also be achieved by growing the fleet.

This year Juneyao Airlines plans to increase its A320 fleet to six aircraft from four, Okay Airways will increase its 737 passenger fleet to five from three and the dedicated 737 freighter operation will increase to six or seven aircraft from three, says Huang.

Okay Airways chairman Liu Jieyin told ATI this week that the airline has signed an agreement to lease 10 Xian Aircraft MA60 aircraft with the first two to be delivered this year. But Huang says only a memorandum of understanding has been signed and the group is still assessing whether to go ahead with the deal.

The MA60 is a Chinese-built 60-seat turboprop that other airlines in China have stopped operating. Huang says he is trying to determine whether a domestic regional operation using MA60s will be financially viable. Okay also plans to have some MA60s as dedicated freighters.

“We’re still not sure whether the business model will be successful or not so we don’t have a timeframe right now” for getting the MA60s, according to Huang.