Potential tie-up could signify SOE reform, parity with 2 top carriers

China Southern Airlines Co said it is in talks to sell a stake to American Airlines Group Inc, betting big on the forecast of massive demand for travel between the two countries.

The negotiations are over "a possible major strategic cooperation with American Airlines Inc involving, among others, proposed issue of shares of the company and other business cooperation," China Southern said in an exchange filing on Sunday.

Share price of China Southern Airlines, which resumed trading on Monday, remained flat to close at HK$5.48 (70 cents), after hitting a three-month high at midday.

Trading in the Guangzhou-based operator had been suspended since March 23 after Bloomberg News reported that Fort Worth, Texas-based American Airlines will likely make an investment of about $200 million in China Southern's Hong Kong-listed shares through a private placement. American Airlines would nominate an observer without voting rights to the Chinese company's board, according to people familiar with the matter.

The companies have not reached a binding or definitive agreement, and the cooperation may or may not proceed, China Southern said in its statement.

American Airlines spokeswoman Polly Tracey declined to comment.

For American Airlines, a deal would strengthen its presence in the Chinese market after rival Delta Air Lines Inc acquired a minority stake in China Eastern Airlines Corp in 2015.

China Southern would be the last of the nation's top three airlines to bring in a non-Chinese mainland strategic investor. Cathay Pacific Airways Ltd, which is based in Hong Kong, owns about 18 percent of flag carrier Air China Ltd.

Geoffrey Cheng, head of transportation and industrial research at BOCOM International Holdings in Hong Kong, said the collaboration talks come as no surprise.

"Basically, given there are no slots left under the current bilateral air traffic rights agreement between China and the US, the strategic cooperation could enable China Southern Airlines to reach out to more second-tier US cities that it has no available routes to," Cheng said.

Jacob Zhou, a Hong Kong-based analyst with one of the "Big Four" accounting firms, believed the tie-up talks mark a bold move from China Southern Airlines to push for the mixed-ownership reform, which is highlighted as a critical pillar of State-owned enterprises' reform efforts in 2017.

Bloomberg-China Daily