STOCKS: Spring Airlines Flies High on Budget Travel Craze

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Bottom line: Spring Airlines is richly valued at current levels, but could be a strong bet over the next decade as it builds an Asia-wide budget carrier run out of Shanghai.

Spring Air growth set to accelerate

I’m not usually a fan of airline stocks, though one notable exception is budget carriers that tend to be more nimble and cost conscious, and are often run by entrepreneurs rather faceless corporate types. As China’s oldest budget carrier, Spring Airlines (Shanghai: 601021) certainly fits that profile, which is why it’s one of my favorites among Chinese stocks listed both domestically and abroad.

Since making its long-delayed IPO in Shanghai last year, Spring’s stock has soared, more than doubling in price since it first started trading in January 2015. That’s quite remarkable when one considers that the benchmark Shanghai index is down 15 percent over the same period, as China’s stock markets undergo a major correction that dates back to last June.

I should begin by pointing out that despite my enthusiasm for Spring’s stock, I’m not a big fan of flying with the airline itself. My lone experience with Spring involved a round trip to Sichuan province 4 years ago, in which I was unimpressed by a 2 hour delay at the start of my trip and the extremely cramped seating and constant barrage of promotional activities throughout the flights.

But that said, the ticket itself was certainly quite cheap, and I clearly wasn’t the kind of bargain shopper that Spring targets as its main customer base. That kind of bargain hunter is quite common in China, including the older crowd that is constantly seeking out promotions in any shape and form, and also younger student and yuppie types living on modest budgets.

At the same time, Spring doesn’t have many competitors in the budget space, since China’s air industry is dominated by such big state-run behemoths as Air China (Shanghai: 601111; HKEx: 753), China Eastern (Shanghai: 600115; HKEx: 670) and China Southern (Shanghai: 600029; HKEx: 1055). Many predicted that Spring might even crash and burn after its launch in 2005, since it was at a huge disadvantage to the big state-run carriers that had more resources and better government connections.

Colorful Leader

But Spring’s low prices and scrappy ways, the product of entrepreneurial and outspoken Chairman Wang Zhenghua, have helped the company not only to survive but also thrive in China’s fast-growing aviation market. The company has also moved aggressively to offer flights abroad in the last few years. It now serves cities in most of Asia’s major travel destinations, after launching 24 international routes last year to destinations in markets like Japan, South Korea, Taiwan, Hong Kong and Singapore.

But the big growth could soon be still to come, as Spring gets set to embark on a similar model to some other budget carriers by opening joint ventures catering to individual Asian markets. The first of those, a Japanese joint venture, was approved 3 years ago and formally launched its first flights just last month. I expect Spring will spend some time to make sure the venture works well, and then probably expand it to other Asian markets over the next 5 years to take advantage of China’s booming market in international travel.

Financially speaking, Spring also looks quite solid. Early this year the company announced that its profit for 2015 would rise 50-60 percent from 2014. It’s worth noting that many airlines saw similar gains due to low oil prices, though Spring’s still look impressive since it is spending heavily under its aggressive expansion. Spring’s profit soared by an even larger 83 percent in the first three quarters of the year, though revenue grew at a more modest 13 percent.

Shareholders have already rewarded Spring for its strong execution, with its stock now trading at a richer valuation than most of its peers. The shares now trade at a lofty price to earnings (PE) ratio of 21, around double the level of China Southern and privately run Hainan Airlines (Shanghai: 600221), generally considered 2 of China’s best-run carriers. Even global heavyweight budget carriers like US-based Southwest (NYSE: LUV) and Europe’s Ryanair (London: RYA) trade at lower multiples of around 13.

At the end of the day, most of my good feelings about Spring Air really are just impressions, much of them based on the company’s ability to not only survive but also thrive in a sector dominated by big state-run competitors with even many advantages. I also like Wang Zhenghua, who is something of a business superstar here in my adopted hometown of Shanghai, and who seems to be setting Spring Air on a course that will keep it on a solid growth track for at least the next decade.

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