China Eastern, Shanghai Air Form Merger Task Force

China Eastern Airlines has set up a joint task force with smaller rival Shanghai Airlines to proceed with a merger, a senior executive said, paving the way for further consolidation of the country's fiercely-competitive aviation market.

"The two airlines have started discussing and working on the restructuring," Liu Jiangbo, vice president of China Eastern's parent said on Thursday.

China Eastern's Chairman Liu Shaoyong is the head of the joint task force, she said.

Analysts are positive about the merger as it will give the combined carrier more than half of the market share in Shanghai, an aviation hub much sought after by both domestic and foreign carriers.

"The move is long overdue as Shanghai is the only major city in China that houses two carriers," said Li Lei, an analyst with China Securities.

The two carriers both suspended trading of their shares earlier this week because of major restructuring moves.

Anticipation of the merger helped push up Shanghai Air's shares by 35.2 percent this year to close at 5.92 yuan on Friday when it last traded. China Eastern's domestically traded A shares rose 29.1 percent this year to close at 5.33 yuan.

GOVERNMENT-BACKED MERGER

After years of double-digit growth, China's airlines are facing strong headwinds as the global financial crisis strikes home.

Its top three carriers, Air China, China Southern Airlines and China Eastern lost more than USD$4 billion in 2008.

Shanghai Air, which has been in the red for two straight years since 2007, will be delisted if it fails to turn around this year, according to China's securities rules.

Sources familiar with the situation said in October that the government was discussing the possibility of brokering a merger of China Eastern and Shanghai Air to create a dominant player with more than 50 percent share of domestic flights in China's financial hub.

Conflict of interest between different government bodies and rejection from Shanghai Air had postponed the deal, but talks began to speed up after the debt-ridden carriers got financial aid from the government, an industry source said.

China Eastern's parent group has secured CNY9 billion yuan ($USD1.32 billion) in funds from the central government and has agreed to inject CNY7 billion to the carrier through a share placement deal.

Shanghai Airlines, controlled by the city government, said in February it received a cash injection of CNY1 billion.

To help nurse its ailing airlines back to health, Beijing also encouraged Chinese carriers to cancel aircraft orders or postpone deliveries due in 2009 and stopped approving new airlines before 2010.

"The government has done a lot already. A state-backed merger is perhaps the last thing it can do especially for China Eastern, the weakest of the big three," said China Securities' Li.