Bid target China Eastern finds ally
China Southern deal seen hindering CNAC
China Eastern Airlines Corp and China Southern Airlines have announced an unexpected alliance that could complicate a bid by China National Aviation Corp (Group) (CNAC) to take a stake in China Eastern.
The two airlines signed an agreement in Shanghai on Tuesday to co-operate on ticket sales, aircraft and jet-fuel procurement, and ground handling.
The co-operation agreement, which involves no equity investment, comes just five days after CNAC, the parent of Air China, proposed buying a stake of up to 30 per cent in China Eastern.
Analysts said the agreement between China Southern and China Eastern would add more uncertainty to the CNAC proposal and change the competitive landscape among the mainland's Big Three airlines.
'This event indicates that China Southern is reluctant to be left alone in the restructuring, which brings uncertainties to Air China's stake purchase plan in China Eastern,' Ally Ma, a transport analyst for Citigroup, said in a report yesterday.
However, the managements of both companies tried to play down the impact of the agreement on any potential share sale in China Eastern.
China Eastern chairman Li Fenghua said at the signing ceremony that the agreement had minimal impact on any share sale.
His China Southern counterpart, Liu Shaoyong, said that the deal would not be a constraint on the airline.
'It is not an exclusive agreement. We cannot rule out forming an agreement with Air China or Shanghai Airlines in the future,' Mr Liu said at the signing ceremony, according to Shanghai Securities Journal.
Kelvin Lau, of Daiwa Institute of Research, said: 'It is just a commercial co-operation. It's far too early to tell about the future.'
Still, the stakes are high. Beijing-based Air China wants to expand its 12 per cent market share in Shanghai, which has the highest percentage of lucrative business and first-class travellers on the mainland.
China Eastern has said it wants to increase its market share in Shanghai to 50 per cent from the current 38 per cent.
Guangzhou-based China Southern wants to attract more passengers to its second hub, Beijing.
After the government liberalised domestic air routes last year, carriers are now free to increase capacity in any airport.
'Facing an unprecedented threat from Air China's and China Eastern's possible alliance, China Southern may press the government to participate in the restructuring of China Eastern by either sharing some stakes in China Eastern or to get more routes in Beijing and Shanghai,' Ms Ma said in the report.
Shares of China Eastern dropped 6.22 per cent to close at HK$5.58 yesterday while China Southern's shares finished with a loss of 1.04 per cent at HK$7.59.
However, Air China soared 10.64 per cent to HK$7.49 after plunging 31.5 per cent over the two previous trading sessions.
