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China budget carrier Spring eyes $3 billion A320 order

An employee walks past an A320 plane under construction at the final assembly line of Airbus factory in Tianjin municipality, June 13, 2012.
An employee walks past an A320 plane under construction at the final assembly line of Airbus factory in Tianjin municipality, June 13, 2012.

By Siva Govindasamy

SINGAPORE (Reuters) - Chinese low-cost carrier Spring Airlines is set to make an order for up to 30 Airbus A320 aircraft worth $3 billion at list prices, the company's chairman told Reuters, amid an expected surge in budget flights in China.

The airline hopes to divide the order between the current model of the Airbus A320 and the re-engined A320neo, Wang Zhenghua said in an interview on the sidelines of a regional low-cost airlines conference in Singapore.

Shanghai-based Spring, which has a fleet of 40 A320s, is the largest dedicated budget carrier in China. Its success, and a relaxation of airline regulations by the Civil Aviation Administration of China (CAAC) in 2013, have paved the way for competitors to enter the low-cost market in the country.

Spring wants to start taking deliveries from the new order from 2015. The new aircraft will replace existing planes and add capacity in the Chinese domestic market.

"We are looking to make a large purchase," said Wang. "Now is the time for additional growth."

China's airline market, which is dominated by state-owned carriers like Air China<601111.SS>, China Eastern Airlines <600115.SS> and China Southern Airlines<600029.SS>, is seen as being on the brink of a low-cost travel boom.

This is due to the large number of airports that are being developed to connect hundreds of its cities, and the growing demand for air travel within the country for both leisure and business.

Spring had been prevented from ordering new aircraft in 2012 and 2013 by the CAAC, which was concerned about over-capacity and competition in the Chinese domestic market. Those restrictions were lifted in late 2013, said Wang.

The CAAC has also rescinded a rule that prevented airlines from offering discounted fares, allowing the airline to offer even cheaper fares to stimulate the market, he added.

This has resulted in several new entrants coming into the low-cost market. China Eastern is converting its Beijing-based subsidiary China United Airlines into a low-cost carrier, while the HNA Group, which owns Hainan Airlines <600221.SS> and Hong Kong Airlines, is converting Chongqing-based subsidiary West Air into a low-cost carrier (LCC).

"We believe that by early 2015, there will be four to five LCCs in China. There will be a lot of competition and we must be prepared for that," Wang said.

"The regulatory authorities will be monitoring the entry of the new players, but I think there will be a big impact on the airline industry. Without a doubt, there will be a price war."

LISTING ON THE CARDS

Spring, which Wang says is "extremely profitable", hopes to finally list on the Shanghai stock exchange this year. This had been delayed after the Chinese government froze new IPOs.

The proceeds from the IPO will help pay for the aircraft, and Wang says that "a lot of bankers have also been approaching" the airline saying that they are willing to finance the purchase.

Spring has also been trying for several years to set up an airline in Japan. Wang says that this new airline, which aims to start with two leased Boeing 737-800s, could finally begin operations in May "if everything goes well".

The airline is also eventually keen to set up joint ventures in Taiwan, South Korea and Hong Kong, said Wang.

Northeast Asia has lagged behind Southeast Asia in the low-cost market segment, with only a handful of small carriers operating in Japan and South Korea. These include Jetstar Japan, a joint venture between Japan Airlines <9201.T> and Qantas, All Nippon Airways <9292.T> subsidiaries Peach and Vanilla Air, and South Korea's Jeju Air and Korean Air <003490.KS> subsidiary Jin Air.

Tiger Airways, in which Singapore Airlines has a stake, has applied to set up a the first low-cost airline in Taiwan in a joint venture with the country's flag carrier China Airlines<2610.TW>, while Qantas and China Eastern are still waiting for the approval of the joint venture Jetstar Hong Kong.

(Reporting by Siva Govindasamy Editing by Jeremy Laurence)

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