China Eastern AirlinesCorp, the nation's third-largest carrier, won preliminary approval to sell a stake to Singapore Airlines Ltd, which is seeking better access to the world's second-largest aviation market.
Singapore Airlines and parent Temasek Holdings Pte plan to buy about 25 percent of China Eastern, Li Fenghua, the Chinese carrier's chairman, said at a shareholders' meeting in Shanghai today. Final details of the plan are now under discussion after the State Administration of State-Owned Assets Commission approved the deal, he added.
The Shanghai-based carrier also expects to post its first annual profit in three years, as China's economic growth boosts travel demand, Li said. Singapore Airlines plans to invest in China Eastern to add flights in a market expected to grow fivefold by 2025.
"Singapore Airlines is buying market access in China rather than just taking a stake in an airline," said Steven Lim, who helps manage about $300 million at Daiwa SB Investments in Singapore. "The potential in the medium-to-longer term is huge."
China Eastern expects to complete the sale soon, Li said, without giving a time frame. He didn't say how much the Singaporean companies would pay. Singapore Airlines will invest about $600 million and Temasek about $330 million, four people involved in the talks said on May 28.
The approval procedure will probably take at least another two weeks to complete, as the deal needs to be sanctioned by at least five departments under the State Council, said Lei Li, an analyst at China Securities Co.
"We have not reached an agreement as to the purchase of a stake in China Eastern Airlines," Stephen Forshaw, a spokesman for Singapore Airlines said in an e-mail.
China Eastern wants to attract an overseas investor as it has struggled to turn rising travel demand into profit. It posted a loss of 3.31 billion yuan ($435 million) last year, making it China's only unprofitable publicly traded carrier.
Selling a stake would enable the carrier to benefit from Singapore Airlines' management expertise, Chairman Li said.
The airline will probably return to profit in the first half of this year and post full-year net income of at least 200 million yuan, Li said. The carrier has benefited from more efficient operations and an improved "outside environment," he added.
Singapore Airlines made a record S$2.12 billion ($1.38 billion) profit last fiscal year. A stake in China Eastern would enable the carrier to build on its more than 100 weekly flights to Chinese cities including Beijing and Shanghai.
China's economy has grown at least 10 percent in each of the past four years, making travel affordable to more people. Chinese carriers flew 160 million passengers last year, 15 percent more than a year earlier, according to the General Administration of Civil Aviation of China.