FOCUS-Chinese low-cost carrier Spring soars amid COVID downturn

* Domestic share doubled as it redirects capacity from intl mkts

* Share price has outperformed full-service peers

* Fares on some routes are near last year's levels-chairman

By Stella Qiu and Jamie Freed

BEIJING, Oct 23 (Reuters) - Chinese budget carrier Spring Airlines is leveraging its low-cost position to attract customers with cheap fares as the country's domestic aviation market recovers, pursuing an aggressive expansion strategy that could soon turn profitable.

Domestic capacity at Shanghai-based Spring rose over 50% in September compared with a year earlier, while passenger traffic was up 47% and the airline's load factor, or percentage of seats filled, neared 90% as it redirected planes from closed international markets. Spring's market share has doubled from 2% a year ago to 4%, according to broker Jefferies.

The private airline's success in the Chinese market, traditionally dominated by full-service state-owned carriers, could herald a wider global trend.

Investors expect low-cost, domestic-focused carriers will be the first to recover from the pandemic as leisure travellers focus on value and corporate travel takes longer to recover.

Japan Airlines Co Ltd has said it plans to bolster its low-cost operations, including its Japanese joint venture with Spring, while sources said ANA Holdings Inc is weighing whether to use budget carrier Peach for more flights.

"We do see low-cost carriers (LCCs) rebounding the fastest out of all airlines across most regions, not just China," BOCOM International analyst Luya You said. "The reasons are that LCCs can offer lower prices due to lower costs as well as fill their planes more efficiently than full-service carriers."

Low-cost carriers held just a 10% market share in the domestic Chinese market, and 17% in Japan in 2018, compared with a majority share in South Korea, India, Malaysia and Vietnam, according to CAPA Centre for Aviation data.

During the COVID-related downturn, Chinese budget operators like Spring and Air China Ltd subsidiary Shenzhen Airlines have been expanding relative to rivals.

Spring's shares have rebounded to pre-COVID levels, compared with declines of up to 25% at the state-owned big three airlines, as investors bet on China's only listed budget carrier.

"Full-service carriers will mimic the low-cost carrier model over the next few years, which could pressure established low-cost carriers like Spring over time," BOCOM's You said. "But right now their clear advantage is still solid."

SPRING IN ITS STEP

Spring charges customers for extras like priority check-in, meals and using airport lounges, allowing it to offer fares as much as 30% below rivals on some routes while still taking aim at price-conscious business travellers.

"We can see Spring's offerings for a lot of their domestic routes are even lower than fares on high-speed railway trains," Chinese aviation expert Li Xiaojin said. "Flying with them is faster and cheaper, which helped bring in a lot of customers."

Since May, Spring has added more than 60 domestic routes, and will add another 20 in the winter/spring flight season, saving on costs by having a single-type fleet of 103 Airbus SE A320 family narrowbodies.

The aggressive expansion has helped Spring outperform its peers, with fares on some domestic routes almost reaching last year's levels, Spring Airlines Chairman Wang Yu told Reuters.

Chinese brokerage CICC expects Spring to swing to a profit of 150 million yuan ($22.51 million) in the third quarter, barring an one-off capital injection into its Japanese joint venture.

Spring, which mostly focuses on Asian markets, is also well-positioned to recover in a post-COVID global aviation world, given travel bubbles between nations are likely before a full reopening of international travel.

"Compared with Europe and the United States, Asia-Pacific countries have largely managed to keep COVID under control, and are gradually easing travel restrictions. This is a good trend," Wang said.

"Possibly, the Asia-Pacific region will recover first and we'll first restore capacity supply to these target markets and resume flights as soon as possible."

Spring received its first A321neo in September as part of plans to introduce seven planes in the second half of the year, Wang said, adding that the company had ruled out the purchase of widebodies.

In contrast, the state-owned carriers are pushing back deliveries.

($1 = 6.6638 Chinese yuan renminbi) (Reporting by Stella Qiu in Beijing and Jamie Freed in Sydney. Editing by Gerry Doyle)