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. It 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 in Qantas reached a height in March. China Southern, which is based in China's third-largest city, Guangzhou, has been the most aggressive of the big three Chinese airlines in its expansion on routes to Australia.
However, it is understood the airline's interest waned after Qantas expanded its code-share alliance with China Eastern in early 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 it 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, to smooth relations in the world's second-largest economy.
While mostly focused on government relations, Mr Raby is understood to have talked to various 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 fleeting 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 giant.
China Southern declined to comment at the weekend.
Qantas said it did not comment "on speculation as to who potential investors could be" but a spokesman pointed out that anyone was welcome to buy its shares within the limitations of the law.
"Asia is clearly an important market to Qantas and we are in regular discussion with current and potential partners in the region."
Last year China overtook the UK as Australia's second-largest source of foreign visitors, after New Zealand.
Qantas chief executive 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".