China Eastern Airlines has taken the initial steps towards a share listings on the New York and Hong Kong stock exchange, which will make it the first mainland Chinese carrier to undergo a public flotation.

The Shanghai-based airline has filed with the US Securities and Exchange Commission and released a prospectus, with the aim of going ahead in early February. China Eastern hopes to raise as much as $250 million through the listings, which will represent around 32% of the airline's shares.

The bulk of the shares, equivalent to around 29%of the airline, will be will traded in New York in blocks of 100, with an asking price likely to be in the range of $16-18 per share. Around half of the buyers are expected to be North American with Europe and Asian investors taking the rest. The remaining 3%of the flotation will be sold via Hong Kong.

China Eastern is one of the country's more profitable carriers, with Morgan Stanley, the lead underwriter for the offer, estimating that the airline made a 1996 net profit of around ´550 million ($66 million) on sales of ´7.22 billion.

That would mark a 13% fall from profits of ´634 million in 1995. The dip is largely due to higher fuel charges and a 20% increase in labour rates. The falling value of the Japanese yen has also had an impact on yields.

There is also concern over the airline's debt levels, although the debt-to-equity issue will drop back to 74% after the flotation. "It has a very high gearing compared to other Asia-Pacific airlines and that is of some concern," notes one aviation analyst.

The airline needs to raise an addition $1.1 billion for capital expenditure on new aircraft by 2000, of which $135 million will come from the share issue. It has outstanding orders on five more Airbus A340s and nine McDonnell Douglas MD-90s, the first three of which will be delivered this year. The airline has also made a $12.6 million provision for a A300-600R simulator and $80 million for new airport and maintenance spending.

Another area of concern is the degree of control Beijing stills holds over China Eastern. The Government will retain a 68.2% interest in the airline and will still be subject to changes in central policy, state-regulated airfares and fuel prices. As a result, the airline's growth in traffic has been erratic, dipping to 3% in 1994 and jumping 12% the following year.

"The fundamentals of the business are not as strong as other airlines in the region, but this may be overlooked because China has never been played before," says one financial analyst.

Source: Flight International