The Qatari flag carrier has purchased a 5% stake in one of China’s Big Three airlines – China Southern. With its strategy to invest into “strongest airlines”, why was Qatar Airways' move met with surprise?

The deal was reached on December 28, 2018, according to the Gulf carrier, but was made public on January 2, 2019, when both companies announced it in separate releases.

According to the Chinese carrier, “this change in equity will not cause the company's controlling shareholder and actual controller to change”.

In search of new friends

The fact that China Southern is looking for partners has been known for a while. On January 1, 2019, the Chinese carrier officially left SkyTeam alliance. When announcing the decision in November 2018, it also revealed it was seeking partnership with “advanced airlines” outside the alliance, and an extended codeshare agreement with American Airlines, an interest expressed by the carrier the same month.

For Qatar Airways the acquisition is also in line with its strategy to invest into “strongest” airlines as the airline points out in a statement. While its 49% investment into the loss-making, freshly re-branded Air Italy can hardly be called “the strongest”, the Gulf airline also holds 20% stake in International Airlines Group (IAG), 10% stake in Chile’s LATAM Airlines Group and 9,99% stake in Cathay Pacific.

The latter airline is based in Hong Kong, which is only 119 kilometers away from China Southern’s hub in Guangzhou. Thus, Qatar Airways' second investment in Asia is taken as a sign of its strong interest in Greater China - a statement expressed by Qatar’s CEO Akbar Al Baker himself.

“China Southern Airlines is one of the most prestigious airlines in the Chinese domestic market and an important market player in the world, with massive potential for cooperation in the future,” Al Baker is quoted as saying in the statement. “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 in ways that would bring benefits to customers of both airlines [...]".

In June 2017, four neighbor countries of Qatar – the United Arab Emirates (UAE), Bahrain and Egypt with Saudi Arabia at the helm – cut diplomatic ties and announced a land, sea and airspace ban, affecting Qatar Airways deeply: not only was the carrier banned from the airspace of the four countries, forcing it to reroute a number of flights, the ban also halted its flights to 18 destinations across the region.

In September 2018, the carrier posted a $69.2 million net loss for the 2017-2018 financial year ending March 31, 2018, calling it the most “challenging” year in the airline’s history. Qatar Airways is responding to political pressure by adding new flights and services.

Qatar Airways' latest manifest of defiance – revealing the large cost of the blockade on its annual earnings and how the company manages to alleviate the financial toll.

Face-off with American Airlines

Back in 2017, a 2.68% stake in China Southern was already purchased by another major airline - the U.S. legacy carrier American Airlines. Back then, the deal was valued at HK$1.55 billion (approximately $200 million), giving somewhat of a clue at a price Qatar could potentially have paid for its shares.  

China Southern and American Airlines’ relationship did not stop here, as the two announced a codeshare agreement in 2018, and then took it a step further as recently as the end of November same year.

“China Southern is a terrific partner to American and we commend its innovative leadership team,” a statement by American read in November 2018. “We are very pleased with the progress we have made so far in our newly formed relationship, including the launch of a reciprocal codeshare agreement earlier this year. This news presents a great opportunity for us to continue to expand our relationship with the largest airline in China.”

“With the opening of Beijing Daxing International Airport in 2019 and the ability to cooperate fully with China Southern, we are excited about our future in the Chinese market,” the statement ends.

While China Southern and American Airlines might be fond of each other, the relationship between Qatar and American is known for the exact opposite. American Airlines, together with Delta and United, have been accusing Gulf carriers Emirates, Etihad and Qatar Airways of receiving illegal government subsidies for years. The Qatari airline has always denied these accusations.

In March 2018, American Airlines cut codeshare agreement with Qatar and Etihad, claiming it “no longer makes sense” for the U.S. legacy carrier. In October 2018, Qatar striked back, threatening to leave OneWorld alliance due to continuing accusations and lack of good faith by American as well as Australian carrier Qantas.

Qatar Airways CEO AL Baker threatens to withdraw from the OneWorld alliance due to a trade dispute between the state-owned carrier and its archrival and alliance member American Airlines.