China Eastern, Shanghai Air May Merge: Report

Source: Reuters    Author: Fang Yan    07/23/2008

Subject Concerned: Government   Opinion   Airlines   

China's central government and the Shanghai city government are discussing merging Shanghai Airlines with China Eastern Airlines, major Chinese business magazine Caijing reported on its website on July 23.

High global oil prices and slowing growth in China's air passenger traffic have increased speculation the government may encourage restructuring in the industry.

"At present the discussion is between government agencies, and the two companies have not taken part," the magazine quoted an unnamed, senior source in Shanghai's aviation industry as saying.

Senior officials at both Shanghai-based airlines, contacted by Reuters, said they had not heard of such a plan and had not held talks. China Eastern will issue a statement soon to clarify the situation, said a senior executive at the airline, who declined to be identified.

Talk of a merger of China Eastern, controlled by the central government, and Shanghai Air, owned by the municipal authorities, has been swirling for more than five years, but neither wants to be the takeover target.

Shanghai Air chairman Zhou Chi said repeatedly his firm would stick to an independent path, denying speculation of a merger with bigger domestic peers, especially its larger hometown rival.

"Airlines are having a hard time now as fuel prices rise and passenger volume drops. They don't really have much choice if the government backs the deal," said Ma Ying, an industry analyst with Haitong Securities.

The report, combined with a further fall in oil prices from record highs, boosted the airlines' shares.

China Eastern's Hong Kong-listed shares surged 9.3 percent to HK$2.59 by late afternoon trade, while its Shanghai shares jumped 4.6 percent to 7.80 yuan. Shanghai Airlines, a much smaller carrier, was up 5.4 percent at 6.64 yuan in Shanghai, outperforming a flat overall market.

Competitive Threat

The management of China Eastern, the country's third-biggest carrier, has been seeking to sell a 24 percent stake to Singapore Airlines for US$920 million, but the Chinese carrier's minority shareholders voted down the proposal in January.

Although China Eastern's chairman has said he was still pursuing a deal with Singapore Air, many industry analysts believe a deal is unlikely because of price, the weak aviation market and opposition from flag carrier Air China.

A Singapore Air spokesman said the company was still talking with China Eastern, but the discussions were more about areas of cooperation than about buying shares.

Shanghai is the only city in China that houses two carriers and neither is strong enough to compete with global industry heavyweights such as Lufthansa and Continental Airlines, which are expanding aggressively in the country.

Carriers are also facing a dip in demand.

Chinese airlines' passenger numbers fell 3.8 percent in June from a year earlier as natural disasters discouraged air travel, extending a drop in May that broke the industry's steady record of monthly growth in China's economic boom.

A dull global economy and strict airport safety checks in the run-up to the Olympic Games in August have also been blamed for slowing air traffic growth.

Industry executives have said they expected a pick-up in air traffic again in September, when airport security checks return to normal.

Photograph: A Shanghai Airlines' Boeing 757 jet and a China Eastern Airlines' Airbus A320  aircraft. Photo contributed by CARNOC.com message board member.