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Airline merger talk confirmed

By Wang Ying (China Daily)
Updated: 2009-06-10 10:14

Shanghai Airlines airplanes are parked at the Shanghai Pudong International Airport.[CFP]

China Eastern Airlines and Shanghai Airlines are planning a restructuring effort aimed at reducing their high debt-to-equity ratio, the two airlines told the Shanghai Stock Exchange in separate filings yesterday.

Last Friday, China Daily had reported that a merger deal was in the offing between these two airlines. A source close to China Eastern had told China Daily that Liu Shaoyong, chairman of China Eastern, had three main tasks on hand, and the first was to complete the merger with Shanghai Airlines. "The merger process will begin within a month," the source had said.

Although both companies denied any deal was on the cards, yesterday's announcement and the suspension of trading in shares in Shanghai and Hong Kong indicated the merger process had been in the pipeline for a long time.

Related readings:  China Eastern confirms merger plan with Shanghai Airlines  China Eastern, Shanghai Air get permission to combine  Rising crude prices brings some relief to China Eastern  Yunnan buries the hatchet with China Eastern

"In order to protect the interests of investors amid any possible price fluctuation, China Eastern Airlines was authorized to suspend trading since June 8," Liu Jiangbo, a spokesperson for China Eastern, told reporters.

As early as 2002, the Shanghai municipal government had broached the idea of combining the two city-based carriers to the central government. Due to complicated problems relating to equity structure and leadership, the merger was delayed.

But the ongoing global financial tsunami has wreaked havoc on both carriers. Falling demand, along with hefty losses on hedging contracts, led to China Eastern reporting a net loss of 13.93 billion yuan in 2008. Its debt-to-equity ratio hit 115.13 by the end of March.

Shanghai Airlines was in no better situation, with a net loss of 1.25 billion yuan last year. The carrier's debt-to-equity ratio touched 97.26 by March 31.

"We cannot dismiss the effect of the merger. In 2008, China Eastern held a 38 percent market share in Shanghai, while Shanghai Airlines controlled 18 percent. After the merger, the proportion will grow significantly," Zhang Xun, analyst from TX Investment Consulting, said.

"Also, thanks to the merger, China Eastern can spend more time to explore its overseas market," added Zhang.

Currently, financial details of the merger are not available. Information from diversified sources shows that after the merger, China Eastern will incorporate all assets and liabilities of Shanghai Airlines, and the latter will no longer exist as an independent entity.

Li Lei, analyst, CITIC China Securities, was circumspect about the prospects post the merger. "It cannot solve all the problems immediately; to enhance competitiveness requires more time. If they take full advantage of the integrated effect, they can pose a challenge to Air China and China Southern in the long run,"he said.