Chinese airlines flex their muscles Ready for takeoff: Passengers watch a China Southern Airlines plane take off at Shanghai's Hongqiao International Airport last year. Singapore Airline's second-in-charge, Mak Swee Wah, summed up what looms on the horizon from China. "Chinese airlines' ambition is a reflection of the country's ambition," he said during a visit to Australia two weeks ago. It is taken as a given that they will be growing aggressively. There is no doubt China's airlines are beginning to flex their muscles. In the case of China Southern, its tentative interest in a strategic stake in Qantas is reflective of a wider foray overseas by Chinese enterprises. Beijing has been encouraging cashed-up Chinese companies to acquire stakes in foreign targets in the last few years under the so-called "go-abroad" policy. Chinese appetite for raw materials has already fuelled many acquisitions in Australia's resources sector including significant stakes in iron ore majors such as Rio Tinto and Fortescue Metals. However, Canberra has indicated its preference for Chinese companies, especially state-owned giants, to take only minority shareholding in blue-chip Australian companies. The interest in a small stake in Qantas reflects the increased savviness of Chinese investors to avoid political backlash, making it easier for the federal Treasurer to sign off on it. China Southern 'ambitious outfit' China Southern, one of the country's big three, has been aggressive in its expansion on routes to Australia on routes to Australia. The rationale behind buying a strategic stake would be to gain greater access into the Australian market - and the flying kangaroo's 9 million frequent-flyer members. While it is struggling internationally, the Qantas domestic business is still one of the most profitable airline operations in the world. "That kind of thing would be within their playbook," a China-based source said of China Southern. They are an ambitious organisation with a leadership that thinks outside the box. China Southern has the majority of capacity of the Chinese airlines on routes between China and Australia. The Civil Aviation Administration of China decides who flies where, and it is a political fight internally between the Chinese airlines to bid for that capacity. But the way it is allocated to China Southern is not transparent. Even if there is a bilateral air-services agreement between China and Australia, the Chinese airlines have to go to the CAAC to win approval to fly their own planes on the routes. Chinese play different game Over the past decade, Chinese state-owned enterprises have pursued different strategies to Western companies when they consider overseas investments, partly because they are newer to the game. Whereas a British or American company would hire investment banks and legal advisers in the country where they intended to buy, Chinese companies have been less willing to do so in the past. This might explain why their track record in success is not as good as their Western counterparts. However, it is now becoming more common for state-owned Chinese enterprises to hire local lawyers and investment bankers to act as their advisers on a deal. The rapid expansion of the Chinese airlines is regularly a topic at strategy sessions of their local peers. Australian airline executives are under no illusions that Chinese airlines will be the biggest threat to the incumbent operators in the longer term, especially when they work out how to cater to Westerners. Virgin Australia might not harbour ambitions to fly to China but is conscious of how the Chinese airlines might align themselves with its key Australian competitor. On this point, China Southern has been top of mind. Virgin has had talks with China Southern over the last year but a potential tie up has become harder since alliance partner Singapore Airlines boosted its stake to 20 per cent. Virgin would have to convince Singapore Airlines before it could allow China Southern into the tent. The question for Virgin has been whether there is a risk of Qantas snaring China Southern. Virgin appears to have formed the view in recent months that Qantas has hitched itself to closely to Shanghai-based China Eastern to do an about-face and opt for China Southern as a bedfellow. Besides, Qantas boss Alan Joyce and his senior executives have invested considerable time in strengthening their relationships with their counterparts at China Eastern. That being said, China Eastern's code-share deal with Qantas would not be as big a stumbling block to China Southern taking a stake as it might appear. That's because a code share is not a marriage. While an important tool in the airline business, a code-share alliance is a disposable commodity. Even a deeper revenue-sharing agreement can be terminated for a better offer. Take Qantas' decision to terminate its close alliance with British Airways for Emirates. Stumbling blocks On the local front, there is little doubt that it would be a battle convincing the Australian public to allow a state-backed Chinese airline to take an equity position in the national flag carrier. It is also important to remember that the Foreign Investment Review Board treats aviation as one of the most sensitive sectors in its policy guidelines. Aviation is a strategic industry, and Qantas has often been called upon to fly Australians out of trouble spots overseas. However, some airline veterans do not believe the prospect of a Chinese airline taking a cornerstone stake would be as politically fraught as it may seem at first blush. They point to Etihad, Singapore Airlines and Air New Zealand each taking significant stakes in Virgin. In this case of China Southern, the horse may have bolted when it comes to its interest in Qantas. But it is important to realise that the Chinese airlines are playing a long game.