SIA may expand routes to China

Singapore Airlines Shares Gain on China Eastern Talks (Update2)
By Chan Sue Ling and Chua Kong Ho

May 23 (Bloomberg) -- Shares of Singapore Airlines Ltd., Asia's most profitable airline, rose on speculation it's close to buying a stake in China Eastern Airlines Corp. to expand its reach in the world's fastest-growing major economy.

Singapore Airlines is in ``advanced'' talks for a potential investment, it said late yesterday, without elaborating. China Eastern today said it's preparing to disclose ``important matters.'' China's third-largest airline said on May 14 it had begun government-level talks about selling a stake.

The investment would give Singapore Airlines more access to passengers and cargo in an air travel market forecast to grow fivefold by 2025. China Eastern, the nation's only unprofitable carrier last year, would reduce debt and gain a partner to help fend off competition from Cathay Pacific Airways Ltd. and Air China Ltd. in its Shanghai base.

``Getting that foothold is important,'' said Christopher Wong, who helps manage $25 billion at Aberdeen Asset Management in Singapore, including shares of Singapore Airlines. ``Shanghai is an important hub and having a foothold can bring the wider operations of Singapore Airlines to a different level.''

Shares of Singapore Airlines added 20 cents, or 1.1 percent, to S$18.60 as of the 12:30 p.m. trading break in Singapore.
Singapore Airlines, which made a record S$2.12 billion ($1.39 billion) profit last fiscal year, can buy a maximum 25 percent stake in a Chinese carrier, according to China's rules.

A quarter of China Eastern will cost HK$9.55 billion ($1.22 billion), based on the company's current market capitalization.

``Hidden Gem''
The purchase will help Singapore Airlines build on its 104 flights a week to Chinese cities including Beijing and Shanghai. It may also complement the cargo operations.

``Cargo is the hidden gem in this deal,'' said James Chua, who helps manage about $200 million at Phillip Capital Management in Singapore, including shares of Singapore Airlines. ``If you want to ship goods from one part of China to another, you have to use a Chinese airline.''

Singapore Airlines' cargo unit, the state-owned investment company Temasek Holdings Pte, and China Great Wall Industry Corp. in 2005 announced a joint venture cargo carrier in China.

``The domestic aviation market in China is restricted and there's no way foreign airline can get routes unless they pair up with a local player,'' said James.

Shares of China Eastern, the nation's third-largest carrier, have more than doubled in Hong Kong this year, raising its market capitalization to $4.88 billion, according to data compiled by Bloomberg. The stock rose 7.8 percent to HK$3.73 in Hong Kong Monday and gained 3.6 percent to 9.59 yuan in Shanghai.

Competition
China Eastern shares will resume trading after the announcement. The carrier expects to post a first-half loss because of debts and more competition, it said on April 27. The airline is facing increasing competition from Cathay Pacific and other carriers in Shanghai, China Eastern's home market.

``Nothing has been finalized,'' Luo Zhuping, China Eastern's board secretary said by telephone today. The carrier has no timetable set to make an announcement, he said.

Any agreement ``is subject to official approval,'' Singapore Airlines said in its statement yesterday.

The purchase may help the Singapore carrier to compete with Hong Kong's Cathay Pacific in the north Asian market.

Cathay Pacific, Hong Kong's largest airline, has built a 17.5 percent stake in Air China, the nation's largest international carrier. Air China controls a similar-sized stake in Cathay Pacific following a wider deal last year, centered on Cathay Pacific's takeover of Hong Kong Dragon Airlines Ltd.

Qantas, British Airways
Qantas Airways Ltd., Australia's largest airline, last month agreed to buy 30 percent of Vietnam's Pacific Airlines. British Airways Plc said yesterday it plans to support private- equity investor TPG Inc.'s bid for Iberia Lineas Aereas de Espana SA to protect the U.K. airline's stake in the carrier.

Singapore Airlines hasn't taken a stake in another passenger carrier since Chief Executive Officer Chew Choon Seng took office in June 2003.

``This is a clear message that SIA wants a deal that makes sense,'' Peter Negline and Winnifred Heap, analysts at JP Morgan Securities Ltd., which has a ``neutral'' rating for shares of Singapore Airlines, or SIA, wrote in a note yesterday.

``If anything, we see this as a point scored for SIA's CEO, who has clearly indicated that he will not do just any deal.''

Under his predecessor, Cheong Choong Kong, the carrier bought 49 percent of Virgin Atlantic Airways Ltd. and a 25 percent stake in Air New Zealand Ltd. This was written off in 2002 when the New Zealand government bailed out the carrier.

Singapore Airlines history dates back to 1947 when Malayan Airways Ltd. Airspeed Consul started, according to its Web site. The carrier was known as Malaysian Airways Ltd. in 1963, when Singapore and Malaysia were united under a federation, and was renamed Malaysia-Singapore Airlines three years later.

The airline split into Singapore Airlines Ltd. and Malaysian Airline System Bhd. in 1972.