South Korean budget airline Jin Air has applied for a domestic initial public offering, joining a growing list of low-cost carriers (LCCs) in Korea and across the wider region, which are tapping the equity capital markets for fresh capital.
The country’s second-largest LCC by market share is targeting a market valuation around the W1 trillion ($892 million) mark according to sources familiar with the situation. The IPO could net about $250 million to $350 million assuming a 30% to 40% stake sale by parent Hanjin KAL.
Jin Air’s proposed IPO will mark Asia’s fourth LCC listing over the past two years. The flotation of South Korea’s largest LCC, Jeju Air, in late 2015, plus those of India’s IndiGo and Vietnam’s VietJet, have created a much larger pool of companies alongside the likes of AirAsia and Cebu Pacific.
The Korean skies are also becoming more crowded, with six major LCCs already in operation and a further two (Aero K and Fly Yangyang) planning to commence operations in early 2018. It makes the country Asia’s third most populous LCC base after China and Japan.
Jin Air’s IPO is also likely to be followed in short succession by the flotation of T’Way Air, a subsidiary of Kosdaq-listed YeaRimDang Publishing. The group, formerly known as Hansung Airlines, is planning an IPO in 2018 according to domestic analysts
Mirae Asset Daewoo is currently the sole bookrunner of Jin Air’s IPO.
Its planned capital raising represents an important step as the LCC tries to close the gap with Jeju Air, which had a 9.7% market share at the end of July compared to Jin Air’s 7.8%.
At the same time, the new funding could also help reduce Jin Air’s high gearing ratio of 288% as of December 2016. This has expanded in line with the LCC’s aggressive expansion plan since it was established in 2008.
Jin Air is the youngest major South Korean LCC and the most ambitious. Its strategy of focusing on international flights and rapid fleet expansion has helped it surpass Eastar Jet (2014) and Air Busan (2015) in terms of market share.
Jin Air has benefitted from its affiliation with Hanjin KAL, owner of South Korean flag carrier Korean Air compared to Jeju Air, which is independently owned. It has also entered into codeshare agreements with American Airlines, Jetstar and Island Air, allowing it to operate more long-haul flights than its competitors.
As of the end of July, Jin Air has 23 aircraft flying to 27 destinations across Asia, including long-haul routes between Seoul and Saipan, Guam, Honolulu and Cairns. That is not far off from Jeju Air, which flies 29 planes to 32 destinations.
Jin Air is best known for taking a more informal approach to service and marketing. The airline’s flight attendants wear polo shirts and jeans, while seats on its domestic flights are allocated on a first-come-first-serve basis.
Valuation concerns
Stock market investors are likely to push for a relatively inexpensive valuation given Jeju Air’s volatile performance since its IPO debut on November 6 2015.
On Monday, the stock closed at W38,000, up 26.66% above its W30,000 IPO price and 51.39% year-to-date.
However, it fell fairly consistently post IPO until hitting a W25,500 low in early March this year. It is currently trading around 12 times 2017 earnings according to Korea Investment & Securities’ estimates.
Jeju Air’s share price partly got hit because the LCC has a higher China exposure compared to the other low-cost carriers. In February, Beijing also rejected its application to operate charter flights between Seoul and four Chinese cities.
Prospective Jin Air investors are also likely focus on corporate governance given Jin Air’s affiliation with the troubled Hanjin Group.
In November last year, Korean Air came under fire after its chairman Cho Yang-ho decided to financially support group affiliate Hanjin Shipping just months after the shipping giant filed for bankruptcy protection. Cho is the chairman of Hanjin Group and his only son, Cho Won-tae, is currently co-CEO of Jin Air.
Nevertheless, local analysts have a positive view of the country’s LCC sector, which is eating into the market share of full-service carriers like Korean Air and Asiana Airlines. At the end of July, the former expanded their market share to 55.9% across domestic routes, up from 55.5% in June and to 41.4% across short-haul routes, up from 38.9% in June.
Korea Investment & Securities recently said it was overweight the sector because, “LCC’s are posting structural growth in terms of market share and earnings momentum should continue despite current oil prices and shares should climb despite the 1H2017 rally burden.”
