China Eastern Sells 24 Percent Stake

By ELAINE KURTENBACH

SHANGHAI, China – Struggling after two years of losses, China Eastern agreed Sunday to sell a 24 percent stake to Singapore Airlines and Temasek Holdings, the Singaporean government’s investment arm, company officials said.

The $923 million deal has been long anticipated with trading in the two airlines’ shares suspended since late May.

The alliance will bring welcome cash and managerial expertise to the Shanghai-based carrier.

Singapore Airlines will pay $602 million for a 15.7 percent stake in China Eastern, while Temasek will pay $321 million for an 8.3 percent stake, officials said at a Sunday press conference.

China Eastern is the country’s third-biggest carrier. Like other state-owned airlines it has suffered from soaring jet fuel prices and intensifying competition.

The company reported net losses in 2005 and 2006.

“One thing for sure is that joining with Singapore Airlines will bring a lot of capital to China Eastern,” said Ma Yin, an analyst with Haitong Securities.

“But this is no guarantee that China Eastern will overcome its debt problems,” she said.

Like other major Chinese companies, airlines are seeking strategic investors to help build their cash bases and upgrade services.

China’s flagship Air China, based in Beijing, has cross-shareholdings and cooperative arrangements with Hong Kong carrier Cathay Pacific Airways. Speculation over more merger activity stepped up last week after Air China said the government was considering a restructuring of the civil aviation industry to boost efficiency.

“Airline companies in China do not perform very well,” said Deng Hongmei, an analyst with Essence Securities. “I’m sure the good service and management from Singapore Airlines will somehow have an impact on Eastern.”

But China limits foreign ownership in domestic airlines, given their strategic importance, to less than 50 percent. That could limit Singapore Airlines’ say.

“It’s a tough decision to go into a situation where you have less than 50 percent ownership – and no decision-making control – in a carrier like that,” said Richard Pinkham, a consultant in Singapore with the Sydney-based Center for Asia Pacific Aviation.

Still, with air traffic demand expected to grow 9 percent a year, all of China’s airlines are seeing strong increases in demand. China Eastern reported a 12 percent rise in passenger traffic in the January-June period to 26.5 million.

That potential is the attraction for Singapore Air, Pinkham said.

The Singapore carrier has seen disappointing results from its previous strategic investments. It held a 25 percent stake in Air New Zealand but lost millions of dollars when the New Zealand carrier came close to collapse in 2001. It has since sold off that stake.

Recently, Singapore Airlines Chief Executive Chew Choon Seng said returns on the company’s investment in Richard Branson’s Virgin Atlantic Airways had been disappointing following the Sept. 11, 2001, terror attacks.

With China’s market booming and next year’s Olympic Games in Beijing certain to boost demand further, China Eastern offers a fresh start.

“The biggest thing SIA gets out of this is a growth opportunity,” Pinkham said. “The Singaporean travel market has basically reached maturity and is unlikely to post much more than single-digit growth in any future year. China is where the future is.”

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Associated Press Writer Gillian Wong in Singapore contributed to this report.