Transportation

Why American Airlines Paid $200 Million for a Small Stake in China Southern

Paul Ausick

Published: March 28, 2017 11:35 am

Last Updated: January 12, 2020 1:32 pm

American Airlines Group Inc. (NASDAQ: AAL) announced Tuesday morning that it has acquired a 2.68% stake in China Southern Airlines Co. (NYSE: ZNH) for $200 million. The equity investment follows a $450 million investment in 2015 by Delta Air Lines Co. (NYSE: DAL) in China Eastern Airlines Corp. (NYSE: CEA) for a 3.55% stake in the Chinese carrier.

While the small investments protect the companies on both sides of the deal from any interference in the management of the airlines, they do offer a chance for the Chinese carriers to gain wider access to U.S. markets and a similar chance for U.S. carriers to fly to more cities in China.

American currently flies routes from Chicago, Dallas-Fort Worth and Los Angeles to Beijing and Shanghai. According to the announcement, American will have access to nearly 40 Chinese destinations beyond Beijing and more than 30 beyond Shanghai.

China Southern with current routes into Los Angeles, San Francisco and New York, gains access to nearly 80 destinations in North and South America as part of the deal.

In the announcement, the new partners said that they “are planning to give travelers not only the amenities, features and the products that they want at different price points, but also a bigger network that serves the markets to which they want to travel.” These amenities and features are likely to include code-sharing agreements, staff exchanges and cooperation on loyalty and reward programs.

Much of the growth in air traffic between China and the United States is coming from China, where outbound traffic doubled between 2010 and 2015, according to a report in The New York Times. United Continental Holdings Inc. (NYSE: UAL), which has a long-standing partnership with Air China, has about 20% of the flight routes between China and the United States, while Delta and American claim about 8% each. Chinese carriers account for the rest. What American wants is at least to keep up with Delta, and both would like to boost their shares of the market.

American’s shares traded up about 0.5% Tuesday morning, at $41.92 in a 52-week range of $24.85 to $50.64. The stock’s 12-month consensus price target is $53.13.

China Southern’s shares traded down 3.5% at $34.43 in New York. The 52-week range is $25.60 to $36.95. Earlier this month Goldman Sachs lowered its rating on China Southern from Neutral to Sell. The shares are very lightly traded in New York, with a daily average volume of around 18,000.