A Spring Airlines employee stands next to an Airbus A320 aircraft at Hongqiao Airport in Shanghai, China. Reuters

Spring Airlines Co. is planning to raise about 2.53 billion yuan ($405 million) in an initial public offering ahead of a listing in Shanghai, as China's biggest budget carrier looks to expand its fleet to drive earnings growth.

The Shanghai-based low-cost carrier proposed to offer up to 100 million shares, or 25% its total capital after the IPO, according to a draft prospectus published Thursday by the China Securities Regulatory Commission.

The country's civil aviation market faces intensifying competition. The government has moved to liberalize the domestic airline market and, for the first time, promote the growth of budget airlines though air travel in China is booming.

The government in February unveiled long-awaited guidelines to jump-start the budget-airline market, including pledges of financial support, as well as measures to help existing budget carriers expand more quickly.

The measures follow a shift in the government's commercial-aviation policies, which for years had favored the three state airlines. In May last year, Beijing lifted a six-year ban on setting up new independent airlines.

Low-cost carriers now account for below 5% of China's aviation market by passenger capacity, far lower than the 50% market share budget carriers enjoy in Southeast Asia.

Analysts have said they believe Spring Airlines, which sells a large proportion of its tickets via the Internet, is among the biggest beneficiaries of the new regulatory environment.

For years, the aviation regulator's priority was boosting state-owned airlines, which have been criticized for their inefficiency and poor service. To protect them, the government in 2007 stopped accepting applications for new airlines after briefly experimenting with liberalization in the middle of the last decade. State-owned airlines, which remain dominated the domestic market, saw profits drop by more than a quarter in 2013 as intensifying competition weighed on ticket prices, despite growing demand for air travel.

Spring Airlines said the proceeds would be used to buy as many as nine Airbus A320 jets and three Airbus flight simulators, and to supplement working capital, the company said. It operates a fleet of 39 Airbus A320 jets and flies 64 routes across China and around Asia. The average passenger load factor, which measures the proportion of seats filled with paying passengers, is 94%.

The release of its draft IPO plan marks a step toward listing after years of waiting. The CSRC typically arranges the "preliminary disclosure" of a draft IPO plan after accepting a listing application, followed by several rounds of feedback and reviews before giving a go-ahead to the issuer.

Spring Airlines, which was created by Wang Zhenghua in 2004, has stuck with a low-cost structure, charging 30% less than competitors and remaining profitable. Its 2013 net profit was 732 million yuan, up 17% from 625 million yuan in 2012, while revenue rose 16.5% to 6.56 billion yuan from 5.63 billion yuan.

China hasn't seen any IPOs of airlines since 2006 when Air China raised 4.59 billion yuan ahead of a listing in Shanghai. Spring Airlines is set to become the country's sixth listed airline once the deal completed.

—Amy Li

Write to Jeffrey Ng at jeffrey.ng@wsj.com