Airline targeted: China Southern had its eye on Qantas stake

China Southern considered buying a strategic stake in Qantas early this year as Asia's largest airline searched for ways to boost passengers from one of its most important international markets.

BusinessDay has learnt that the fast-growing Chinese airline made tentative steps towards acquiring a stake of 10 to 15 per cent in Qantas. This included moves to hire lawyers to act as legal advisers on a purchase.

The speculation about China Southern flirting with a plan to buy a cornerstone stake reached a height in March. China Southern has been the most aggressive of the big three Chinese airlines in its expansion on routes to Australia.

However, it is understood its interest waned after Qantas expanded its code-share alliance with China Eastern in April. Qantas has increasingly hitched itself to the Shanghai-based airline, which includes a co-investment in Jetstar Hong Kong.

Despite this, its interest in taking an equity stake in Australia's flag carrier underscores the long-term aspirations of the rapidly growing Chinese airlines. China Southern has 31 weekly return flights to Australia and plans to boost this to 55 services within two years.

Qantas has also been eager to boost the number of passengers from China, rather than rely on Australians as the core of its travellers. It has on its payroll as a consultant Geoff Raby, a former ambassador to China. While mostly focused on government relations, Mr Raby is understood to have talked to Chinese airlines on Qantas' behalf, including China Southern and China Eastern.

Laws on foreign ownership of Qantas would not be an insurmountable hurdle but the prospect of a state-backed Chinese airline buying a cornerstone stake would be politically sensitive.

Under the Qantas Sale Act, total ownership by foreign airlines is limited to 35 per cent of the flag carrier's shares. A purchase would require approval from the Foreign Investment Review Board, while the Australian Competition and Consumer Commission would need to consider competition concerns.

Qantas' status would also invite extra scrutiny from FIRB because the aviation industry is one of seven "prescribed sensitive sectors" under the Foreign Acquisition and Takeovers Act.

China Southern's interest in a stake of 10 to 15 per cent seemed designed to alleviate potential opposition from the government. Treasurer Wayne Swan limited state-owned Chinalco's stake in Rio Tinto at 14.99 per cent, preventing it from exercising any degree of control over the mining company.

China Southern declined to comment at the weekend.

Qantas said it did not comment "on speculation as to who potential investors could be" but pointed out that anyone was welcome to buy its shares within the limit of the law.

"A decision by a foreign airline to invest in Qantas would be a matter for that airline, particularly given the practical limits imposed by the Qantas Sale Act," a spokesman said. "Asia is clearly an important market to Qantas and we are in regular discussion with current and potential partners in the region. It's long been the case that we don't comment on speculation around discussions."

Last year China overtook Britain as Australia's second-largest source of foreign visitors, after New Zealand.

Qantas chief Alan Joyce was one of a number of high-profile Australian CEOs and chairmen to meet Chinese business leaders at a meeting on the sidelines of the Bo'ao Forum for Asia in April.

Analysts have described Asia as the "problem child" for Qantas after it allayed investor concerns about its performance on European routes by forging an alliance with Emirates.

Merrill Lynch analysts have estimated that Qantas' flying operations on routes to Asia are "break-even at best due to the competitive nature" of the industry.