Delta Air Lines Inc said on Monday it is acquiring a 3.55 percent stake in China Eastern Airlines Co Ltd for $450 million, as part of the efforts by the two carriers to further consolidate their relationship.
This is the first time that the US carrier is becoming a shareholder in one of the big three carriers in China, although the deal still needs to be approved by the boards of the two companies and the Chinese authorities.
Delta agreed to subscribe for nearly 466 million shares of China Eastern at the price of HK$7.49 ($0.97) per share, according to the statement from China Eastern. "The carrier intends to utilize the net proceeds for working capital and other general corporate purposes," said the statement.
China Eastern had earlier said its net profit during the first six months would be 3.5 billion yuan to 3.7 billion yuan ($596 million) and indicated that it was on the lookout for a strategic partner, rather than just an investor.
The strategic partnership with Delta is an important step by China Eastern to optimize its shareholding structure and promote international development, said Liu Shaoyong, chairman of China Eastern.
The two airlines will cooperate on networks, slots, marketing, distribution channels and consumer resources based on the agreement.
China Eastern also expects its US shareholder to "improve its international brand recognition", the carrier said in its statement.
According to the agreement, Delta shall be entitled to nominate an observer on the board of China Eastern, who will be allowed to participate in all meetings of the board, but without voting rights.
It is not the first time that China Eastern has looked for a foreign shareholder, after an earlier investment plan with Singapore Airlines fell through in 2008.
However, news of the investment failed to have an impact on the company's share prices. China Eastern shares closed at 11.54 yuan per share in Shanghai trading, a 3.75 percent drop from when the shares were last traded on Thursday.
Some analysts attributed the price decline to the share market correction, as the Shanghai Composite Index plunged 8.5 percent on Monday and continued to drop 1.68 percent on Tuesday.
The booming Sino-US air traffic market and importance of the Shanghai hub are possible reasons for the strategic partnership, industry experts said.
Statistics from the Civil Aviation Administration of China show that the air passenger number between China and the US was 6.13 million person-trips in 2014 and the number will grow by 15 percent every year subsequently.
Boeing Co also forecast that by 2021, passenger flows on the Sino-US routes will be triple that of the number seen in 2014.
Richard Anderson, CEO of Delta, said: "Delta's investment in China Eastern shares is an investment into the promising future of the partnership. China is the second-largest travel market for the US and it will be the largest one in few years."
Delta and China Eastern already operate 30 domestic routes in the US, 43 domestic routes in China and seven cross-Pacific routes through a code-sharing arrangement, at present.
The strategic cooperation between the two carriers will allow them to further connect to each other's network.
The two airlines together hold about 26 percent of the capacity share in the Sino-US air traffic market, just behind United Airlines' with a 29 percent stake, said a report published by Sinolink Securities.
On the other hand, the cooperation can also help Delta strengthen its position in Shanghai, which may replace the carrier's other hubs in Asia in the future. Anderson told Bloomberg in April that the carrier plans to build a hub in Shanghai.
Delta has already moved to Terminal 1 at the Shanghai Pudong International Airport, where China Eastern is located, and it will be more convenient for passengers to transfer between the two carriers.
