China Southern Airlines is seeking a financial tie-up with American Airlines, with American Airlines buying a stake in the state-owned China Southern Airlines. If it pushes through, American Airlines will become the second U.S. carrier to have a stake in a Chinese airline. Regarding passenger numbers, China Southern Airlines is the largest in China.
American Airlines is looking to invest around $200 million to purchase shares of China Southern Airlines. If the deal materializes, the stock of American Airlines will get a boost from its current struggles like the Winter Storm Stella. In the last three months, its stock has declined 12.44% while the industry has gained 1.65% over the three months.
In 2016, Delta Air Lines Inc. spent $450 million to own 3.55% of China Eastern Airlines Corp. Delta also has an observer seat in China Eastern board. It cooperated with China Eastern on areas such as frequent flyer plans and improvement of lounges.
The tie-up would involve share issue and other programs of cooperation. The benefits of this partnership would give consumers more flights overseas and allow them to pool resources and share flights particularly in second-tier cities in China and the United States.
Geoffrey Cheng, head of transportation and industrial research at Bocom International in Hong Kong, said, “The share purchase is cosmetic in a way because the whole thing is about code sharing and putting passengers from China onto the U.S. aircraft.”
This tie-up is being sought by China Southern Airlines as the Beijing wants to improve the efficiency and competitiveness of its state-owned assets by pursuing mixed-ownership reforms and the introduction of private capital in its assets.
According to Corrine Png, a transport analyst in Singapore, Chinese airlines make up for more than 60% of the flight routes between America and China. American Airlines has a route share of 8% while United Airlines has a route share of about 20% due to its partnership with Air China.
Traffic from China to U.S. has more than doubled between 2010 and 2015. As such, it would make sense for American Airlines to invest in China Southern Airlines as the Chinese airlines are in a good position to take advantage of this trend. Cheng said, “The point is there are more Chinese travelers heading to the U.S. than in the U.S. and heading to China.”
This deal would help American Airlines compete better with Delta. China Southern flies to New York, Boston, and Chicago from Guangzhou. China Southern also does code-sharing with Virgin America and Delta. As for China Southern, partnering with American Airlines will help it catch up with its local rivals like Air China and China Eastern, both of which have bigger earnings from overseas routes.
Numbers by the U.S. government show that Chinese visitor arrivals to the United States are forecasted to more than double by 2021. By then, China would be the third largest overseas market for America.