The carriers, both members of the Star Alliance, could announce the plans during German Chancellor Angela Merkel's visit to China this week.
An executive at the Chinese flag carrier cited rising competition from other airline alliances. A joint venture could boost their networks and capacity in the China-Europe market, while making flight times more efficient.
Lufthansa has said it is interested in forging accords beyond those it has in Japan and North America. Establishing such a pact in China has interested management for some time. The German carrier has revenue-sharing joint ventures with Air Canada, Japan's ANA Holdings Inc. and U.S.-based United Continental Holdings Inc.
A joint venture allows airlines to closely coordinate operations and pricing. On certain routes, the airlines can operate like a single carrier without violating antitrust rules. Such deals, which are subject to regulatory approval, provide far greater financial benefits than network alliances or code-sharing agreements, which allow partners to book customers on each other's flights, by helping to boost sales and curb costs.
Joint ventures increasingly are popular among airlines to boost returns in an industry that has large barriers to consolidation. Most countries limit foreign investments in their airlines, effectively blocking many cross-border mergers.
European carriers including Lufthansa, British Airways PLC and Air France-KLM SA are seeking stronger ties in growth markets such as China to offset shrinking European business. Strengthening direct ties into China also is seen as a way to keep passengers from defecting to fast-growing Persian Gulf carriers, such as Emirates Airline.
An agreement between Lufthansa and Air China would cement ties that date to 1989, when they established an aircraft-maintenance joint venture, Ameco Beijing. Air China airline holds a 60% stake in that venture and Lufthansa has the rest. The German and Chinese carriers first signed a code-sharing agreement in 2000.
Air China joined the Star Alliance in 2007. The alliance, the world's biggest, will have 27 members this month when Air India Ltd. joins carriers such as Singapore Airlines Ltd. and Air New Zealand Ltd.
Airline alliances benefit members through marketing campaigns and other forms of cooperation to lure customers. Member airlines also pool ticketing and airport resources to save on operating costs. Air China's state-run rivals China Southern Airlines Co. and China Eastern Airlines Corp. belong to SkyTeam alliance. Hong Kong's Cathay Pacific Airways Ltd. is part of the Oneworld alliance, which includes British Airways and American Airlines Group Inc.
Source: Wall Street Journal by Joanne Chiu and Robert Wall
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