Delta invests in China Eastern

Delta is on a shopping spree, using some of its spare cash ($1bn+ quarterly net income is nice) to invest in other airlines around the globe. This week’s target is China Eastern, a fellow SkyTeam member and one of the three largest airlines in China. Delta is investing $450mm which buys it a 3.55% stake in the carrier. China Eastern is the fourth airline in which Delta has taken an equity stake; Virgin Atlantic, GOL and AeroMexico are the others.

The move comes as the US and China move (incredibly slowly) towards an Open Skies arrangement. Lacking such a bilateral agreement there are significant limits on the level of cooperation and coordination between the airlines in each country. Getting this partnership in place today, before Open Skies happens, means Delta and China Eastern will be well positioned to establish a joint venture operation once that treaty is signed.

Some have suggested that Delta’s investment spree is a precursor to launching a Delta alliance akin to the Etihad Equity Partners group. That seems unlikely, at least for now. Thus far all the partners, save Virgin Atlantic, are members of the SkyTeam alliance and there is no reason for them to build a separate agreement outside of that. Virgin Atlantic and GOL are outside the SkyTeam alliance while AeroMexico is in the group. But there’s also the part where most don’t touch the others outside of Delta.

And then there’s a report from the CAPA Centre for Aviation released just a couple months ago talking about the move towards Open Skies and what that means. Among the bits identified in the report are levels of subsidies each of the major Chinese airlines receives from the Chinese government. It is not hard to find this data; they all declare that they are receiving it. And for China Eastern it was $589mm in 2014; the carrier was the most heavily subsidized in China. The subsidies generally come in the form of grants to launch new routes or to maintain underperforming ones, offers which are similarly made around the global aviation industry somewhat regularly. Still, with Delta’s hardline stance against subsidies with its Open Skies partners this is the sort of situation which gives pause, to say the least.

Last, but not least, it will be interesting to see if China Eastern chooses to pursue a different in-flight connectivity solution from the current state. Right now the company has the Panasonic Avionics Ku-band satellite connection under contract for 27 long-haul aircraft. All of Delta’s other equity partners (along with Delta itself) have chosen the Gogo 2Ku solution to power their in-flight connectivity going forward. Winning a switch would be a huge score for Gogo, though that seems quite a stretch given the current regulatory climate surrounding China and satellite communications; Panasonic has a significant advantage there.

At least for now it remains unlikely that we’ll see a Widget on the side of a China Eastern aircraft.

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