Mar 28, 2017 11:51 AM EDT
American Airlines is set to become the second biggest carrier in the United States after it closes its deal with China Southern.
The American carrier plans on buying $200 million worth of shares in China Southern to tap into the growing aviation market in China.
On Tuesday, China Southern confirms reports it has reached a deal with American Airlines as it moves with strategic cooperation. The deal ties American Airlines, one of the three big carriers in the US, with one of China's big three state-run airlines. The sale involves a 2.76-percent stake to American Airlines.
China Southern said in a stock filing in Hong Kong that the agreement is subject to regulatory approvals. Details of the business cooperation with American Airlines are yet to be finalized but China Southern claims that it would likely include code-sharing, staff exchanges and collaboration on sales and passenger loyalty programs. Foreign carriers are closely looking into Chinese airlines to gain a bigger share of China's travel market. In return, Chinese airlines get to experience the management skills of foreign airlines.
Forecasts predict that China will overtake North America over the next two decades as the biggest air travel market. In fact, Chinese airlines account more than 60 percent of the routes between China and the US. Growth in the travel market can be steadily seen in China where traffic doubled between 2010 and 2015, according to official statistics. Chinese airlines are at an advantage because of their deep networks.
American carriers, on the other hand, have struggled to add new routes to China because of constraints in capacity. Traffic at airports in some cities in China is rising fast and it might take years before the government adds new runways and terminals to ease air traffic and increase landing slots. One analyst notes that a deal with American Airlines is the perfect opportunity as it could take advantage of China Southern's base in Guangzhou that does not have the same capacity constraints as Beijing.
The American Airlines deal is the second agreement between major airlines in China and US. Delta Air Lines struck a deal in 2015 with China Eastern Airlines to pay $450 million for a 3.55 percent stake.
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