Air China has blocked SIA's buy-in of China Eastern in a political manoeuvre that has also led to a shake-up at the CAAC
An extraordinary game of politics has hit China's civil aviation sector, with Air China successfully derailing a deal for Singapore Airlines to buy into China Eastern Airlines and setting itself up for a rival bid of its own, possibly with Cathay Pacific Airways.
Air China's parent China National Aviation first tried in September to make a play for Shanghai-based China Eastern but it was blocked by Chinese government officials, who that same month had approved a proposed 24% buy-in by SIA and Singapore government investment arm Temasek Holdings. But Beijing-based Air China did not give up and skilfully worked the halls of powers for political support. By late December it had succeeded in securing enough allies and this became clear when its chairman, Li Jiaxiang, was appointed to head up the Civil Aviation Administration of China.
The speculation is that Li successfully convinced government decision-makers that then-CAAC minister Yang Yuanyuan was not doing enough to protect the country's carriers from foreign competitors and that it would be better to have Air China as China Eastern's partner. Yang had been clear that he felt there was no need for further consolidation among China's airlines and having a major carrier for each of the three hubs, Beijing, Guangzhou and Shanghai, was the right policy.
Days after Li's appointment, CNAC went public with its opposition to the SIA and Temasek buy-in and in an unprecedented move announced that if minority shareholders rejected it at an extraordinary general meeting on 8 January, it would make an offer of its own priced at least one third higher. Minority shareholders overwhelmingly voted against the SIA and Temasek bid.
The big question now is what happens next? China Eastern originally said it had no interest in partnering with Air China and still hoped for a tie-up with SIA, but it then softened its stance and said it would consider an Air China partnership.
Most observers saw China Eastern's sought-after deal with SIA as a defensive one to make it more difficult for another Chinese carrier to take it over. It initially insisted that a partnership with financially stronger Air China would not give it the funds it needs to improve its balance sheet or the international expertise it needs to help it develop.
SIA says it still hopes to develop a partnership of some sort with China Eastern, although most analysts believe it could be out of the running unless it makes a higher offer. The Chinese government has been uncharacteristically silent of late, raising questions about whether China Eastern still has any political support left that could prevent Air China and its parent from swooping in.
For its part, Air China is now seeking to assure China Eastern that it has no plans to take it over. CNAC said recently through state-run media that it "will seek a partnership, rather than a merger", and "the two central government-owned airlines could still maintain independent operations and their own brands".
Hong Kong's Cathay Pacific, meanwhile, which has cross-shareholding ties with Air China, says it will "seriously consider" taking part in a bid for China Eastern. However, China Eastern indicated it may be difficult for it to even consider a bid from another party for many months as a result of a lock-up clause in the SIA and Temasek agreement - meaning the high-stakes game of aviation politics will be playing out in China for some time to come.
Source: Airline Business
