CAL's upcoming share sale may flop

Analysts said yesterday that a government plan to start reselling shares of state-run carrier China Airlines Co (華航) in July this year is a poorly timed decision.

"Now, because of SARS, market prices for most Asian airlines are at their worst ever," said Nicholas Ionides, Asia editor for Flight International magazine in Singapore.

He added that SARS is a very recent phenomenon and it will be several months before the market knows whether there will be a huge, long-term impact.

"Obviously airlines are facing a severe crisis ... right now they have to focus on making sure they can survive the crisis," he said. "Any plan such as privatization should be considered secondary," Ionides said.

He made the remarks yesterday after Lin Ling-san (林陵三), minister of transportation and communications and chairman of China Aviation Development Foundation (航發會) said that the government plans to sell its remaining 71 percent stake in China Airlines by the end of 2005.

The foundation is the majority shareholder of China Airlines.

As early as 1998, the government moved to privatize China Airlines, but the plan was postponed several times because of sluggish stock prices following several fatal crashes.

The carrier has reported 10 fatal accidents since 1970, the most recent being the May 2002 mid-air explosion of a passenger plane on route to Hong Kong, killing all on board.

Phase one of the two-stage share release plan is expected to sell 36 percent, or 915 million, of China Airlines' shares to strategic investors such as international airlines by the end of this year.

"In an effort to upgrade China Airlines' operational efficiency, companies with strong management skills will be ideal investors," said Lin Chun-Cheng (林純正), chief secretary of the government-funded foundation, the largest shareholder of the carrier.

The foundation is currently talking with four domestic and international underwriters and will select one to manage the share sale by the end of the month.

"We hope the first phase auction will proceed as early as July," Lin said.

The second-phase of the plan will release another 35 percent, or 899 million shares, to individual investors and to China Airlines' employees. That sale is expected to be completed by 2005.

Based on the carrier's net-asset value of NT$18 per share, the share auction is anticipated to contribute NT$33 billion to government coffers.

"The selling price is set based on China Airlines' net worth, which is NT$18 per share," Lin said.

He said that the foundation doesn't plan to sell shares below that price.

Another market watcher, however, said the foundation is being unrealistic.

"They will definitely have difficulty getting the price they want," said Peter Tseng (曾耀德), an aviation industry analyst at Polaris Securities Co (寶來證券).

He added that in addition to the SARS impact, China Airlines' bad reputation has undermined its market value.

"Because of its poor flight-safety record, China Airline's negative brand image has scared investors away," Tseng said.

Foreign investors lack confidence and interest in the carrier, with only 1.35 percent of China Airlines shares currently held by foreigners, while foreign investors hold a 12-percent stake in rival EVA Airlines (長榮航空).

"I will not be surprised if the government postpones the share sale again," Ionides said.