China's two internationally quoted airlines are looking closer to home for further equity and consolidation, as the China National Aviation Corporation's initial public offering moves a step closer to reality.

China Eastern and China Southern Airlines both plan to tap the emerging domestic capital markets following their successful IPOs in Hong Kong and abroad. Sources indicate that China Southern has received regulatory approval and was planning a share offering to local investors in Shanghai before the end of October. China Eastern has not revealed a date for its proposed offering, but aims to raise about US$135 million with the placement of 6.5 per cent of its equity.

The two domestic offerings are being driven by two factors. First, both carriers have reached their 35 per cent foreign ownership limit - this level remains at 25 per cent for all other Chinese airlines but the government gave China Eastern and Southern special dispensation for their overseas placements.

Secondly, confidence is high in the domestic market after Beijing acted to calm worried investors. The authorities announced in September that the planned reform of basketcase state enterprises will now take place in the form of mergers and bankruptcies rather than through a flood of questionable IPOs. Relieved investors promptly drove Chinese share prices up 6.5 per cent.

Indeed, the first indications of such consolidation are emerging in the airline sector. China Southern is taking the lead by unveiling initial proposals to absorb a number of unprofitable domestic carriers. Local analysts say the move will win China Southern the praise of the Civil Aviation Administration of China, which has pushed for consolidation among China's numerous airlines for more than two years.

The carrier's vice-chairman Yan Zhiqing confirms approaches had been made by a number of unnamed airlines. He concedes that CAAC's policy of encouraging takeovers is 'creating opportunities' for his carrier, which reported half year results to 30 June, showing an impressive 35 per cent jump in net profits to US$52.5 million on a 20 per cent rise in revenues to US$798.7 million.

Meanwhile, the long-delayed IPO by China National Aviation Corporation (CNAC) is back on track with trading set to start in Hong Kong on 7 November. The Beijing-based parent has set up a special purpose company, confusingly called China National Aviation Company (CNA Co), for the listing. The sale of 30 per cent of the stock is expected to raise some $155 million. CNAC will retain a 70 per cent holding.

A report by one of the IPO's co-sponsors, Hong Kong-based BZW Asia, says CNAC will sell CNA Co its 51 per cent stake in Air Macau after the flotation. It had been initially thought the Air Macau stake would remain under CNAC's direct control. But the main jewel in CNA Co's crown will be the 43 per cent stake in Dragonair, which will also be transferred from CNAC.

BZW Asia says CNA Co will also buy CNAC's 40 per cent interest in Hong Kong-based maintenance operation China Aircraft Services - a joint venture with United Airlines and British Airways and one of three franchisees cleared to offer aircraft maintenance services at Hong Kong's new Chek Lap Kok airport. Also in line for transfer to CNA Co after the IPO are a 16 per cent stake in LSG Lufthansa Service Hong Kong and a 10 per cent holding in Hong Kong Air Cargo Terminals.

Source: Airline Business