China Eastern acquires Shanghai Airlines for $1.32 billion

China Eastern Airlines finalized a deal to acquire Shanghai Airlines for CNY9 billion ($1.32 billion) in an effort to gain control of the commercial air travel market in China's largest city.

CEA said in a statement released yesterday that it will conduct the acquisition through a share swap of 1.3 China Eastern shares for each Shanghai Airlines share, a transaction that still requires the approval of both a shareholders' conference and relevant government organs. Both carriers resumed trading yesterday. According to the statement, SAL will become a wholly owned subsidiary of CEA but will keep its brand in order to "maintain a stable operation" (ATWOnline, July 2).

China Eastern suffered a record net loss of CNY15.3 billion in 2008 owing to "falling market demand" and "drastic increases in capacity," while SAL reported a net loss of CNY1.24 billion.

A CEA spokesperson noted yesterday that the merger will help accelerate Shanghai's potential as an international aviation hub while producing synergies that will improve CEA's operating efficiency, profitability and cost structure. The state-orchestrated tie-up is expected to increase CEA's Shanghai market share to 50% from the current 35%. The merger process is expected to be concluded by year end.

CEA also plans to expand its Beijing market share to 20% from 13% over the next five years, Chairman Liu Shaoyong said last week. This month it launched its Beijing branch company, which is expected to operate nine A330s by year end. Air China plays a dominant role in the capital with a 45% market share, while China Southern Airlines occupies 16%.

"After the merger, CEA is interested in selling sell a stake to an Asian carrier that will be its strategic investor. Most likely, it will try to introduce Singapore Airlines again. Both carriers have started contact," an internal source told ATWOnline.

In addition, CEA plans to raise CNY7.02 billion by circulating new shares to both strengthen its balance sheet and reduce its liability ratio to 96.5% from 105% following last month's CNY7 billion cash injection from Beijing (ATWOnline, June 19).