July 10, 2018 / 2:02 PM / a year ago

Juneyao Airlines invests $1.9 billion for China Eastern stake, shares rise

SINGAPORE/SHANGHAI (Reuters) - Juneyao Airlines (603885.SS) and its parent are investing $1.9 billion for a stake of around 5 percent in state-owned China Eastern Airlines (600115.SS), saying the investment is in line with Chinese policy and will boost Juneyao’s brand abroad.

FILE PHOTO: Passengers check in with China Eastern Airlines at Hong Kong Airport in Hong Kong, China April 4, 2018. REUTERS/Bobby Yip

The investment, which was unveiled as part of China Eastern’s up to $2.23 billion share sale announced on Tuesday, comes as the Chinese government has promised to open up more of its state-owned sectors to private investment as part of a wider effort to make its companies more globally competitive.

Shanghai-based Juneyao Airlines said the investment was meant to improve the strategic partnership between state-owned capital and private capital in line with Chinese policy and to help build up its brand internationally.

Juneyao’s shares climbed 2 percent in morning trade on Wednesday on news of the investment, which is subject to regulatory approval.

In contrast, shares of China Eastern (0670.HK), China Southern Airlines Co (600029.SS) and Air China Ltd (601111.SS) were down more than 5 percent as the yuan slid after the U.S. decided to impose extra tariffs on Chinese goods.

The Juneyao investment in China Eastern could allow the two Shanghai-based airlines to tighten their grip on the aviation market in China’s commercial capital where combined they control half of the seats, according to Corrine Png, CEO of Singapore-based transport research firm Crucial Perspective.

“This makes sense from China Eastern and Juneyao’s perspective but consumers may not like this,” she said. “Following Juneyao Group’s investment in China Eastern, competition between the two rivals is likely to ease and cooperation could ensue.”

Juneyao Airlines and its controlling shareholder Juneyao Group are expected to own more than 5 percent stake in China Eastern if they fulfil the upper limit of the proposed share subscriptions.

China Structural Reform Fund Corporation Ltd, whose mission includes the reform of state-owned companies, will also invest up to $301.6 million.

China Eastern said it will use the proceeds from the share sale to fund the purchase of 18 airplanes, 15 flight simulators and 20 backup engines as well as to boost working capital.

Juneyao first flew in 2006 and is one of China’s largest private carriers operating both domestic and international flights. It is a connecting partner with Star Alliance, whose members include Air China (601111.SS).

China Eastern is a member of the rival SkyTeam alliance. Delta Air Lines Inc (DAL.N), a founding member of SkyTeam, bought a 3.55 percent stake in China Eastern for $450 million in 2015 and has an observer seat on its board.

Reporting by Jamie Freed in Singapore, Brenda Goh in Shanghai, Min Zhang in Beijing, Meg Shen in Hong Kong and Shanghai newsroom; Editing by Louise Heavens and Muralikumar Anantharaman

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