American Airlines buys stake in China Southern for $200m

Technicians take part in a plane repair contest at the China Southern Airlines' maintenance and engineering base in Shenyang, Liaoning province. [Photo/Xinhua]

China Southern Airlines Co signed an agreement on Tuesday to sell a minority stake to American Airlines Group Inc for $200 million, in a deal which links top carriers in the Asian and US markets.

China Southern will issue 270.61 million Hong Kong-listed H shares at HK$5.74 (74 cents) per share, or 2.68 percent of the enlarged share capital of the airline, to American Airlines. The price represents a 4.6 percent premium on the previous trading day's closing price.

The deal also means China's three biggest carriers have all tied up with overseas airlines, with Delta Air Lines Inc buying 3.55 percent of China Eastern Airlines Corp in 2015 and mutual stakes bought between Hong Kong's Cathay Pacific Airways and Air China Ltd in 2006.

China Southern in a regulatory filing on Tuesday said that the two companies "may seek to increase cooperation in code sharing", as well as sales, passenger loyalty programs and airport facilities.

The agreement means cooperation between the two major economies in the aviation sector, linking up the world's largest aviation markets, said Wang Changshun, chairman of China Southern.

He said it was set to bring deep changes to the global aviation market.

Having American Airlines as a strategic investor would help meet China Southern's need for globalization and for exploring mixed ownership as a State-owned enterprise, he added.

American Airlines President Robert Isom said: "China Southern's extensive network within China touches the developing and thriving markets that only a Chinese carrier can reach.

"Those coming from China will get access to American Airlines' network of cities across the US. The customers flying from the US to China will be able to access 40 destinations beyond Beijing and more than 30 destinations beyond Shanghai."

Currently the fifth-largest source of foreign travelers to the United States, China is projected to become the third-largest after Canada and Mexico in 2021, said Wang Zhiqing, deputy director of the Civil Aviation Administration of China.

The International Air Transport Association predicts China will surpass the US to become the biggest aviation market in terms of passengers by 2024.

"As global airlines operate on a slim profit margin, they need to maintain revenue and minimize costs through mergers and acquisitions," said Li Xiaojin, a professor of aviation economics at the Civil Aviation University of China in Tianjin.

Daiwa Capital Markets analyst Michelle Wang said the partnership was part of China Southern's strategy to expand overseas, but she had reservations about the deal.

"If the deal completes successfully, American Airlines only has 2.68 percent shares of China Southern and that will not have much impact on China Southern," she said.