China Eastern buying 10 percent Air France KLM stake as part of airline JVs' rejig

SINGAPORE/SHANGHAI (Reuters) - China Eastern Airlines Corp Ltd said on Friday it is buying a 10 percent stake in Europe’s Air France KLM SA, in what will be the first investment by one of China’s three largest state-owned airlines in a Western carrier.

People walk past a booth of China Eastern Airline at an air show, the China International Aviation and Aerospace Exhibition, in Zhuhai, Guangdong Province, China, November 3, 2016. REUTERS/Brenda Goh

The deal is part of a broader plan between Delta Air Lines Inc, Virgin Atlantic and Air France-KLM that was announced on Thursday to combine two overlapping transatlantic joint-ventures, supported by equity deals worth $1 billion.

Delta, which holds a 3.2 percent stake in China Eastern, is also buying a 10 percent stake in Air France KLM.

China Eastern said its 375 million euro ($438 million) investment in Air France KLM was compatible with the government’s “Belt and Road” initiative which seeks to improve trade and transport links between Asia and Europe.

“The parties will work together to build the China-Europe main routes market,” China Eastern said.

China Eastern, along with rivals China Southern Airlines Co and Air China Ltd have been expanding their global route networks as Chinese outbound tourism and trade investment increases.

While HNA, the parent company of China’s largest private operator Hainan Airlines, has taken stakes in a number of Western airlines, none of China’s three largest state carriers have done so. Air China has a cross-shareholding with Hong Kong’s Cathay Pacific Airways Ltd.

“There has been interest from state-owned airlines to buy foreign airlines but those deals were never completed. So yes, this is the first,” said Will Horton, senior analyst at Australian aviation consultancy CAPA.

“China Eastern may be different since it is part of state owned enterprise reform,” he said, adding that Delta might have guided China Eastern on the equity investment.

Beijing has been advocating ownership reforms at its state-owned companies in a bid to revamp the country’s bloated state sector and help such firms to become more competitive globally.

Air France KLM said in a statement that the alliance would give it a European leadership position in Shanghai, the main business travel market in China.

Reporting by Jamie Freed in SINGAPORE and Brenda Goh in SHANGHAI; Editing by Richard Pullin and Muralikumar Anantharaman