Qatar Airways Buys Into Fast-Growing Chinese Market, With One Eye On The Future

Qatar Airways has taken a 5% stake in China Southern Airlines, the largest airline in China, in a potentially significant new development for the Gulf airline’s global investment strategy.

The Qatari carrier announced the purchase on January 2, saying it had bought the shares just before the turn of the year. The deal gives it a useful foot-hold in what is expected to become the largest aviation market in the world in the coming decade. The International Air Transport Association (IATA), a trade body for the world’s airlines, predicts 1 billion more Chinese passengers will be taking to the skies by 2037.

The Qatari flag-carrier is now better positioned to take advantage of that growth. Alongside the surge in domestic air travel, there is also strong demand for international flights from Chinese consumers and Qatar Airways is no doubt hoping more of them will come through its Doha hub.

“Not only are incomes rising with an emerging middle class, but also Chinese tourists are eager to travel abroad,” says Michael Stanat, director of global operations at SIS International Research.

A Qatar Airways plane and a China Southern Airlines jet on the tarmac at Toulouse-Blagnac airport in France, on October 15, 2011. (Photo: PASCAL PAVANI/AFP/Getty Images)Getty

Qatar Airways already owns stakes in a number of other airlines around the world. Its portfolio includes 20% of International Airlines Group – the holding company of British Airways, Iberia and others – as well as 49% of Air Italy, 10% of Hong Kong-based Cathay Pacific and 10% of South America’s Latam Airlines.

“Qatar Airways goes for goldsmiths not scrap-metal merchants,” says John Strickland, founder of aviation consultancy firm JLS Consulting. “This represents another quality investment. It makes sense.”

In the past, Qatar Airways has tended to characterize its purchases as little more than investments in well-managed businesses. However, this time its rhetoric has stepped up a gear.

Announcing the deal, chief executive officer Akbar Al Baker said there was “massive potential for cooperation in the future” between his airline and its new Chinese partner. “Given the complementary strengths and resources of each of China Southern Airlines and Qatar Airways, there are opportunities for us to work together and build a long term relationship,” he added.

At this stage it is not clear what sort of collaboration Al Baker has in mind. Introducing some code-sharing on flights is an obvious place to start, but there could be other options too. “It may include codeshares, skills transfer and other areas of mutual co-operation such as ground handling and catering,” says John Grant, a senior analyst at research firm OAG.

Qatar Airways has helped some of its smaller partner airlines such as Air Italy acquire new planes. China Southern is too big to require help in that area – it has more than 800 aircraft in operation and another 200 or so on order – but it may be able to learn something about service quality from its new shareholder. “Qatar might use some of its expertise in terms of service,” says Strickland. “It can bring something significant to the table.”

There are some potential complications with the new investment though, in particular the possible overlap with its existing stake in Cathay Pacific. China Southern’s main hub is Guangzhou Baiyun International airport, just 135km from the Hong Kong base of Cathay Pacific.

Executives at Cathay Pacific may be wondering what the latest deal could mean for Qatar Airways’ attitude to their airline, which is in the middle of a turnaround plan designed to cut losses.

Some analysts say there is little to worry about. Stanat points out that the two carriers focus on different markets. “Cathay Pacific tends to serve more business travelers, travelers via the Hong Kong hub and travelers to other Asian markets,” he says. “China Southern serves the large domestic Chinese market, and long-haul flights to China. If anything, it is complementary.”

In the short-term at least, the speed at which demand for flights is growing in the region means there should be enough traffic to go around. “The fact that the two airlines are very close is interesting but the Greater Bay region is the largest market in the world so there is plenty of demand for all carriers at the moment,” says Grant.

For Qatar Airways itself, the deal with China Southern does not just offer a way to expand its route network around Asia via code-sharing. Having a stake in a mainland Chinese carrier could also help it as it seeks to expand its own services into China. Being a key investor in a large domestic carrier will certainly do Qatar no harm as it looks for more landing slots and to develop its air services agreement with Beijing.

Long-term threat

In the longer-term, the major Chinese carriers represent a competitive threat to the big three Gulf carriers of Qatar Airways, Etihad and Emirates.

The large Chinese airlines have been keen to develop their long-haul networks and could yet become significant rivals for the Gulf carriers in terms of connecting Australia and Asia with Europe and Africa – although that depends to some extent on the willingness of the authorities in Beijing to relax their visa policies in the future.

“The competitive threat is there,” says Stanat. “One major challenge is that China still has strict visa laws for Americans and Europeans, unlike Qatar. That makes it harder for China to be a hub for international travelers, though new transit visas have been launched in the past few years. So if China relaxes that, then it could pose a threat to regional Gulf airlines.”

The latest investment by Qatar Airways could act as a sort of insurance policy against such competition, if and when it emerges.

In the meantime, China Southern has been changing its approach to how it cooperates with other carriers around the world. In December, it announced it was pulling out of the SkyTeam airline alliance as of January 1 this year, saying it wanted to develop bilateral relations with American Airlines “and other leading global airlines” instead.

[“source-forbes”]