China Eastern, Shanghai on verge of merger

The government-prompted merger of China Eastern Airlines and Shanghai Airlines is expected to happen shortly as Beijing seeks to implement its long-term plan to position Shanghai as an international aviation hub.

Both CEA and SAL suspended trading Monday and are planning an important announcement, according to a statement released by the Shanghai Stock Exchange. SAL VP Feng Xin confirmed the trading suspension was related to the pending merger (ATWOnline, Dec. 15, 2008). "Yes, we are going to merge with CEA very soon," Feng told ATWOnline yesterday at the IATA annual general meeting in Kuala Lumpur, but he would not reveal any details on the process.

Another source close to the issue said the merger plan "has already been approved by China's State Council and most probably will be conducted through cross-shareholding." CEA currently codeshares with SAL on 88 flights across five domestic routes.

CEA GM Ma Xulun noted in April that the carrier plans to enhance its position in Shanghai. Ma said it holds just 32% of its home market, less than its "big three"' rivals command at their bases. China Southern Airlines' market share in Guangzhou exceeds 50% and Air China holds 45% of the Beijing market. As SAL takes up 18% of Shanghai market, the new CEA is expected to occupy about 50% when the merger is finished.

CEA and SAL each suffered big losses last year. CEA posted a record deficit of CN13.93 billion ($2.04 billion) while SAL reported a CNY1.25 billion net loss. In order to pave the way for the merger, the government already has made capital injections of CNY9 billion and CNY1 billion to CEA (ATWOnline, May 14) and SAL (ATWOnline, Feb. 27) respectively.

Industry analysts have said that that SAL may have to withdraw from Star Alliance since CEA is expected to sign a membership agreement with SkyTeam this month (ATWOnline, April 23).

Air China, China Southern and Shenzhen Airlines are supporting the merger publicly. "Let's wait and see and we will be happy to see they have a successful merger," CZ Chairman Si Xianmin told this website yesterday.