China Eastern Airlines Corp will merge with Shanghai Airlines Co after joint losses of 16.5 billion yuan ($2.4 billion) last year prompted the government to bail out the two state-controlled carriers.

"We just got approval from the government" on June 6, Shanghai Airlines Vice President Feng Xin said late yesterday by phone from Kuala Lumpur.

The combined group would have 306 planes and more than 600 routes, giving it a 50 percent share of air travel in the nation's financial capital. Airlines worldwide may lose $9 billion this year as the recession and swine flu hurt travel demand, the International Air Transport Association forecast yesterday.

"It shows that the government wants to improve the performance of state-owned companies through consolidation," said Kelvin Lau, an analyst at Daiwa Institute of Research Ltd in Hong Kong. And, "since they have accepted money from the government there is no other choice for them" except to follow the government's plans.

Both carriers halted their shares from trading yesterday, pending announcements. China Eastern is listed in Shanghai and Hong Kong. Shanghai Airlines is only listed in Shanghai.

China Eastern's parent will get 17 percent of Shanghai Air as the first step in plans to merge the two carriers, Dow Jones said, citing an unidentified person familiar with the situation.

Jinjiang International Holdings Co will transfer shares to China Eastern Air Holding Co, according to the report carried on the Wall Street Journal Web site. The final size of China Eastern Air Holding's stake in Shanghai Air is yet to be determined, the report added.

Shanghai-based China Eastern Board Secretary Luo Zhuping said today that talks are open and terms have not been settled.

The central government is pushing for mergers across a range of industries to improve competitiveness. Carmakers and steelmakers are also being encouraged to combine as economic growth crimps profits on the mainland.

Shanghai Air was left independent in 2002, when China last consolidated airlines industry-wide. Travel is now dominated by the big three carriers - China Southern Airlines Co, Air China Ltd and China Eastern.

Terms of the Shanghai Air-China Eastern deal weren't immediately available. Shanghai Air has a 15 percent share of air travel in the city, while China Eastern has 35 percent, according to Feng.

China Eastern's state-controlled parent has secured capital injections totaling 9 billion yuan ($1.3 billion) from the central government since December. Of this, 7 billion yuan will be used to buy new shares in China Eastern.

Shanghai Airlines, controlled by the city government, announced a 1 billion yuan injection in February.

China Eastern has posted losses in three of the past four years, and forecast a loss for this year.

Bloomberg News

(HK Edition 06/09/2009 page4)