American-China Southern: That is the way to do it – if there is no other choice

American Airlines is seeking to increase its footprint in the China/USA market at the fastest possible speed with the lowest possible risk as it looks to close out a US$200m investment in China Southern Airlines to purchase around a 2% stake in the Chinese carrier, which will include a non-voting seat on the board of China Southern Airlines. This deal, is successful, will create a powerful alliance if it leads to a codeshare agreement between the two.

American is following in the footsteps of Delta Air Lines and China Eastern Airlines’ 2015 deal where Delta paid US$450m for a 3.55% stake. That deal has been beneficial to Delta thus far, but let us not be in any doubt whatsoever, both the Delta move and the American move this week were brought about because Chinese authorities have been somewhat protectionist in their allocation of slots to US airlines. American, after being awarded a non-stop route from Los Angeles International Airport to China by the U.S. Department of Transportation, spent a great deal of time and money lobbying Chinese authorities for slots at Beijing Capital International. That was met by indifference by the Chinese - Beijing offered terms that were commercially non-viable, before withdrawing that offer after President Trump won the election. On the September 16, 2017 the right to run the slots will be withdrawn from American by the US Department of Transport.

Chinese authorities seem to have denied American slots in an effort to protect Air China's non-stop monopoly on the same route. Maybe it is the case that Capitol Hill need to look again at how the bilateral flight access agreements with China are working and if they are in any way fairly balanced, or indeed if they are being misused by Chinese authorities. Such an investigation would fit well with the Tump administration’s remit and may well be expected.

Some will argue that by investing in airlines that are in effect Chinese government-owned, which in recent years have been propped-up by the central government, US carriers are taking-on some risk in a world where the US could very easily be at political loggerheads with China. But both the management team at American and Delta before them are spending very little in return for access to China and as such it is a good option in the short term which shareholders will no doubt commend.

If this deal closes and American invests in China Southern, the latter’s SkyTeam membership must be questioned as it will not sit with American’s OneWorld loyalty program and no doubt Delta will have something to say on the matter.

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