China Eastern Confirms Airbus Buy As Merger Nears

China Eastern Airlines said on Thursday it would stick with a plan to buy 20 Airbus aircraft in coming years, worth USD$1.45 billion at list prices, after postponing or canceling half of the deliveries it had expected this year in the face of a severe industry downturn.

The purchase of the A320 aircraft by China Eastern was part of a bulk order of 150 aircraft placed with Airbus by the Chinese government in November 2007.

After racking up big losses last year, China Eastern is currently discussing a merger with rival Shanghai Airlines that would bolster its position in China's financial hub. An update on the merger plan is due in about two weeks.

"The 20 A320 planes will put the new enlarged carrier in a better position to cope with domestic air travel demand which has been picking up since the start of the year," said Li Lei, an industry analyst with China Securities.

Airbus and rival Boeing have been struggling as travel demand dries up in the global economic downturn, prompting several airlines to cancel or defer orders.

Airbus said earlier this month it was sticking to its 2009 sales target of 300 gross orders, but it was becoming more difficult to accomplish. The China Eastern order does not count towards Airbus's 2009 target.

CHINA AIRLINES STRUGGLING

After years of double-digit growth, China's airlines were hit badly last year as the global financial crisis struck home.

Its top three players, which also include Air China and China Southern Airlines, lost more than USD$4 billion in 2008.

To pull itself out of the red, China Eastern previously announced drastic cost-cutting initiatives, including postponing or canceling half of the 29 plane deliveries it had expected to receive this year.

No Chinese carriers had so far cancelled any orders for deliveries due further out, an Airbus spokesman in China said.

But neither had the European aircraft maker -- scheduled to celebrate the delivery of its first A320 plane assembled at its China plant next week -- managed to get any new Chinese orders since late 2007, the spokesman said.

In a statement, China Eastern said the 20 aircraft will be delivered between 2011 and 2013, pending regulatory approval. It did not disclose the actual amount it would pay for the aircraft, but said it would be less than the list price. The airline recently received CNY7 billion yuan in cash aid from the government.

The single-aisle jets will help improve its competitiveness in the short-to-medium range routes, China Eastern said.

The deal, which will be funded mostly by bank loans, will increase China Eastern's debt ratio in the short term but will not affect its daily cash flow or operations, it added.