* Seeks to tap massive pool of yuan deposits in HK
* Free tickets, discounts to be offered to IPO investors-source (Adds comments, growth potential and fleet plans)
HONG KONG, Sept 5 (Reuters) - Regional carrier Hong Kong Airlines International Holdings Ltd filed on Friday for the city's first-ever dual currency initial public offering, looking to tap a massive pool of yuan deposits held in local banks.
The IPO represents a key milestone for Hong Kong, which is keen to bolster its position as a global hub for trading in the Chinese currency. It established a framework for shares to trade in yuan in addition to Hong Kong dollars in 2011.
The carrier could raise about $600 million to buy new aircraft, according to a source with direct knowledge of the plans. A bigger fleet is central to its ambitions to expand further into China as well as to taking on bigger rival Cathay Pacific Airways Ltd elsewhere in the region.
The draft prospectus contained no details on the deal size or number of shares on offer.
"There's a tremendous amount of yuan sitting idly, mainly being held by retail investors," said the source, who declined to be identified as details of the IPO have not been officially announced.
"For them, instead of putting the money in the bank and getting just 1 or 1.5 percent interest rates from banks...maybe they would rather get a better return instead."
Yuan deposits in the city, held mainly by Hong Kong residents, totaled about 937 billion yuan ($153 billion) at the end of July.
So far, only two other Hong Kong-listed companies have taken advantage of the dual currency framework, but they sold shares in yuan only.
A successful IPO for Hong Kong Airlines could encourage other companies to offer tranches in both currencies but they would most likely be firms appealing to retail investors, the source said. He added that institutional investors had more attractive options for investing with the Chinese currency such as yuan bonds.
REELING IN RETAIL INVESTORS
The airline, which operates 23 aircraft and flies to 26 cities around Asia, hired JPMorgan as sole sponsor of the IPO.
It is controlled by entrepreneurs Zhong Guosong, Mung Kin Keung and HKA Holdings, a holding company partly owned by the two and Chinese airline-to-logistics conglomerate HNA Group. HNA also owns mainland carrier Hainan Airlines and leasing firm Hong Kong Aviation Capital.
The airline will offer an incentive plan to lure retail investors, giving discounts or free tickets for IPO subscribers who keep their shares for a certain period of time, the source added.
The plan is similar to those of other airlines such as Malaysia's AirAsia X Bhd, which offered free tickets to retail investors who subscribed to a minimum of 10,000 shares in its IPO in 2013 and kept them for a least one year.
Hong Kong Airlines is the third biggest airline in Hong Kong. In terms of seat capacity, Cathay has about a one-third share, Cathay's low-budget carrier Dragonair has about 15 percent while Hong Kong Airlines has less than 10 percent.
With its budget carrier Hong Kong Express, Hong Kong Airlines plans to add 31 new aircraft and expand into 30 destinations in China, which observers say is ready for a boom in budget travel.
It also plans to fly to 10 new international destinations in Asia Pacific, including cities in India and Indonesia.
The planned new aircraft include 21 Airbus 320s, seven 330s and three A350s, according to the prospectus. The figures could change as the company is still in negotiations with suppliers for more than half of the jets.
Benefiting from growing traffic out of China and Hong Kong's prime location as a transfer hub, passenger volume at the city's international airport is forecast to expand to 74.1 million in 2017 from 59.9 million in 2013, the carrier said, citing estimates from consulting company ICF International.
(1 US dollar = 6.1443 Chinese yuan) (Reporting by Elzio Barreto. Additional reporting by Siva Govindasamy and Anshuman Daga.; Editing by Edwina Gibbs)