Delta Airlines is seeking for investment opportunities and has decided to buy a 3.55% stake in SkyTeam carrier China Eastern Airlines which is based in Shanghai.
The 3.55% stake is valued at a volume of 450 Mio US$ and will give Delta an observer seat on China Eastern Airlines board.
In China the two big carriers Air China and China Eastern dominate a good amount of the market even though smaller airlines increasingly operate more domestic routes and Hainan Airlines added many overseas destinations.
The Wall Street Journal (access here) reported about Delta step to invest in the Chinese carrier.
Delta Air Lines Inc. is spending $450 million for 3.55% of China Eastern Airlines Corp. , extending the U.S. company’s strategy of taking minority stakes in overseas carriers to strengthen its international business.
Delta previously had invested in three foreign airlines since 2011 to build or enhance its partnerships with them. It already partners with Shanghai-based China Eastern and its Shanghai Airlines unit, code-sharing and trading passengers on U.S. and Chinese domestic routes and on seven trans-Pacific routes between the two nations.
China Eastern is a member of the SkyTeam global marketing alliance, which includes other Delta partners Air France-KLM SA, and Aerovias de Mexico SA, or AeroMéxico.
Under the deal announced Monday, which requires approval by both company’s boards, Delta would invest in China Eastern’s Hong Kong-traded H shares, and receive a so-called observer seat on the Chinese carrier’s board. …
Delta and other carriers pursue international partnerships because a web of bilateral air treaties limits their ability to fly on their own within foreign countries. The deals range from basic code-sharing pacts—where airlines list each other’s flights on their reservation systems—to full-scale joint ventures that have antitrust immunity, so the partners can jointly set prices and schedules and share revenue.
Foreign investment in Chinese companies is possible however ownership is restricted and foreign companies always require a local joint venture for their enterprises. Obviously in this case Delta just acquires only a minority stake of 3.55% so all too strict limitations won’t apply.
The strategy to enhance partnerships by strategic investments into foreign companies such as China Eastern is an interesting concept and Delta had a few very healthy years so there is a good cash reserve.
The China market still has huge growth potential especially when at some point more airspace is opened up for civil aviation. Right now the military controls the airspace and restricts large parts of it for military purposes.
This investment will strengthen ties between Delta and China Eastern which could also lead to favorable relations with local regulators if strings need to be pulled in terms of slots/flight rights plus the benefits of further code sharing.