China Eastern Airlines buys 10% stake in Air France-KLM

SHANGHAI, 28 July 2017: 

China Eastern Airlines Corp Ltd today said it is buying a 10% stake in Europe’s Air France KLM SA – in what will be the first investment by one of China’s three largest state-owned airlines in a Western carrier.

The deal is part of a broader plan between Delta Air Lines Inc, Virgin Atlantic and Air France-KLM that was announced yesterday to combine two overlapping transatlantic joint-ventures – supported by equity deals worth US$1 billion.

Delta, which holds a 3.2% stake in China Eastern, is also buying a 10% stake in Air France KLM.

China Eastern said its €375 million investment in Air France KLM was compatible with the government’s “Belt and Road” initiative which seeks to improve trade and transport links between Asia and Europe.

“The parties will work together to build the China-Europe main routes market,” China Eastern said.

China Eastern, along with rivals China Southern Airlines Co and Air China Ltd have been expanding their global route networks as Chinese outbound tourism and trade investment increases.

While HNA, the parent company of China’s largest private operator Hainan Airlines, has taken stakes in a number of Western airlines, none of China’s three largest state carriers have done so. Air China has a cross-shareholding with Hong Kong’s Cathay Pacific Airways Ltd.

“There has been interest from state-owned airlines to buy foreign airlines but those deals were never completed. So yes, this is the first,” said Will Horton, senior analyst at Australian aviation consultancy CAPA.

“China Eastern may be different since it is part of state owned enterprise reform,” he said, adding that Delta might have guided China Eastern on the equity investment.

Beijing has been advocating ownership reforms at its state-owned companies in a bid to revamp the country’s bloated state sector and help such firms to become more competitive globally.

Air France-KLM said in a statement the alliance would give it a European leadership position in Shanghai, the main business travel market in China.

The shake-up is designed to strengthen carriers on the lucrative North Atlantic, where low-cost entrants have shaken up the market, and comes as Britain negotiates to leave the EU – creating a tangle over Heathrow access.

The realignment coincides with a deal for Air France-KLM to deepen its commercial ties with China Eastern to build what it described as the European leg of a global network.

The new 15-year partnership combines existing joint-ventures between firstly Air France-KLM,Delta and Alitalia, and secondly between Delta and Virgin Atlantic, Air France-KLM said.

“What it does is brings together the missing piece of that triangle: the missing link between Air France-KLM and Virgin Atlantic,” Atmosphere Research Group analyst Henry Harteveldt said, noting Delta‘s existing ventures with both carriers.

Airlines have few options for traditional cross-border consolidation because of complex national ownership rules.

The role of Alitalia in the new alliance is dependent on what will happen in the months to come, with an administrator currently seeking offers for the struggling carrier.

Air France-KLM said one option could be for Alitalia to cooperate as an associate partner.

At the same time as forging the expanded alliance, Air France-KLM will buy 31% of Virgin Atlantic from Richard Branson’s Virgin Group for around £220 million.

– Reuters

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