Bangkok--3 Sep--Centre for Asia Pacific Aviation Singapore Airlines (SIA) appears to have cut a very attractive deal to access China’s surging passenger market. SIA’s long-awaited agreement to acquire a strategic stake in China Eastern Airlines is priced at HKD3.80 per share, just a 1.9% premium to the Shanghai-based carrier’s last closing price back on 21-May-07. Since then, valuations of China Eastern’s rivals have soared, with Air China’s shares up 56% and China Southern’s more than doubling, up 121%. Barring unforeseen events, China Eastern’s shares could continue rising (after doubling in the 12 months prior to the May-07 suspension), as the carrier continues its financial turnaround. An unexpected first half profit should help China Eastern turn a full year net profit after deep losses in 2005 and 2006. China Eastern has gone through extensive domestic mergers and is highly leveraged. But if the worst of its integration problems are behind it, the Shanghai-based carrier would be well poised for growth and to maximise its strong network and dominant position in China’s economic boomtown. SIA and China Eastern offer complementary networks and a commercial agreement between the two could enable SIA to grow its services to China, currently at just under 70 services per week. Under SIA’s guidance, China Eastern is likely to focus on the premium end of the market, which should see it build its presence in Shanghai, as well as Beijing, Xiamen and Hong Kong, which will put increasing pressure on Air China and Cathay Pacific. The door has also been left open for China Eastern to adopt SIA’s global alliance linkages within the Star Alliance, although the Cathay Pacific-Air China “deal of the decade” shows that strategic partnerships in China can happily co-exist in separate global alliances, with Air China poised to join Star shortly. China Southern now remains the last of the “big three” airlines to team up with a foreign strategic partner, although a deal with Air France for a JV cargo operation could only be a matter of weeks away. With a big run-up in its share price, any investor(s) in China Southern’s passenger business will be paying a significant premium, which could deter any moves in the short term. This could make a “domestic solution” — a linkage with Air China — more likely. Copyright. Centre for Asia Pacific Aviation Note to editors:About Centre for Asia Pacific Aviation The Centre for Asia Pacific Aviation (CAPA) was founded in 1990 and has since built an international reputation as the leading specialist aviation consultancy in the Asia Pacific, the Indian Subcontinent and Middle East regions. CAPA Consulting’s strategic advisory services are supported by the extensive information and data services provided by the Centre’s Market Research Unit to aviation industry leaders every day. The Centre also holds regular Aviation Leadership Summits, which provide unique opportunities for the exchange of ideas and experiences. Head Office, Sydney: Derek Sadubin, Chief Operating Officer Aurora Place, Level 4, 88 Phillip St Sydney PO Box N777, Grosvenor Place Sydney, NSW Australia 2000 Email: [email protected] Southeast Asia Regional Office: Richard Pinkham, Regional Director, Southeast Asia Email: [email protected] Indian Subcontinent and Middle East Office: Kapil Kaul, CEO Indian Subcontinent & Middle East Email: [email protected] UK/Europe Office: David Bentley, UK Associate Email: [email protected] North America Regional Office: Martti Raito, Regional Director, North America Email: [email protected] North Asia Representatives: Korea: Kyung-sup Lee. Email: [email protected] Japan: Reiko Sonoyama. Email: [email protected] More information is available on the Centre’s website: www.centreforaviation.com