SEOUL/SINGAPORE (Reuters) - Singapore Airlines Ltd (SIAL.SI) is in talks to buy a stake in South Korea’s largest low-cost carrier Jeju Air Co Ltd, a deal that would be the flag carrier’s first foray into North Asia where rising demand from Chinese passengers is fuelling growth.
Singapore Airlines (SIA) and Jeju Air said on Tuesday they were in talks about a possible investment, but that nothing had been decided.
A deal with Jeju would fit SIA’s push to diversify away from its mainstay full-service business and increase exposure to high growth regions, after two consecutive years of falling profits amid high oil prices and intense competition.
Jeju aims to roughly triple sales to 1.5 trillion won ($1.3 billion) by 2020, driven by demand from Northeast Asia including China. The airline is currently valued at about 700 billion won in over-the counter-trading and plans to launch an initial public offering in the fourth quarter.
“Jeju Air’s outlook is positive considering regional air travel demand continues to increase,” said Yong Jun, analyst at Hyundai Securities. “The potential partnership could benefit both Singapore Airlines and Jeju Air in cutting costs, expanding coverage and keeping competitors at bay.”
Singapore Airlines has been broadsided by competition from low-cost carriers in Southeast Asia as well as full-service Asian and Gulf airlines such as Hong Kong’s Cathay Pacific Airways Ltd (0293.HK), Emirates [EMIRA.UL] and Qatar Airways.
While Southeast Asia’s budget travel market is highly competitive, industry experts say the potential for low-cost carriers in northeast Asia is vast, as full service carriers still dominate in China, Japan and South Korea.
Since Goh Choon Phong became SIA chief executive in 2011, it launched Singapore-based long-haul low-cost carrier Scoot, which then set up an affiliate in Thailand, as well as Vistara, an Indian full-service airline with conglomerate Tata Sons.
SIA also increased its stake in Australian full-service carrier Virgin Australia Holdings (VAH.AX) and troubled short-haul low-cost carrier Tiger Airways, a key defense against Southeast Asian rivals such as AirAsia (AIRA.KL) and Qantas Airways Ltd (QAN.AX) affiliate Jetstar Asia.
Singapore Airlines, Jeju Air and Jeju parent Aekyung Group have been in talks since late last year over a possible stake sale, a Jeju Air spokesman said.
Jeju Air is seeking capital to help expand its routes to China and other northeast Asian destinations and strengthen tie-ins with businesses such as auto rental or hospitality. It also wants to cut costs by buying equipment it currently leases.
The carrier is South Korea’s third-biggest airline overall. In over-the-counter trade, its share price more than tripled to 31,000 won on Tuesday from around 10,000 won in August.
($1 = 1,130.4000 won)
Additional reporting by Anshuman Daga in SINGAPORE; Editing by Edwina Gibbs, Miral Fahmy and Tony Munroe