Shares in China Eastern Airlines were suspended on December 25 due to a government capital infusion plan. According to an informed source, China Eastern's request for a bail-out has won the government's 'conditional approval'. The capital injection may exceed 10 billion yuan (US$1.46 billion). A company bulletin said a major modification to its financing plan is about to be made.

Capital injection to facilitate restructuring

An anonymous source within China Eastern's senior management revealed that the company is expected to receive another capital injection exceeding 4 billion yuan (US$584.93 million) following an earlier 3 billion yuan (US$438.70 million) injection from the State-Owned Assets Supervision and Administration (SASAC). The government move should prevent the airline company from having to go into special treatment (ST).

This injection should also facilitate the restructuring of China Eastern Airlines and Shanghai Airlines by means of intersecting holdings. Shanghai Airlines is also seeking a capital injection, from the Shanghai municipal government.

"If the government has the determination, restructuring the equity of the two companies won't face any technical problems," said the China Eastern source. Both based in Shanghai, the two airline operators compete with each other fiercely on overlapping routes, and a merger of the two rivals should bring benefits to both sides.

According to another top airline official, China Eastern Airline's huge debt may undermine the merger. The global economic crisis and the soaring oil price earlier this year have hit all domestic airlines. China Eastern's debt ratio in the first three quarters reached 98.49% while Shanghai Airline's operating costs went up 17% over the same period. Moreover, Shanghai Airlines registered a net loss of 437 million yuan (US$63.90 million)

Shanghai Airlines' general manager Fan Hongxi will retire in next August, but neither the company nor government departments have appointed his successor, contrary to normal practice. This is an additional sign that a merger of the two companies is approaching.

An analyst with China International Trust and Investment Company (CITIC) thinks that "the negotiations between the central SASAC and the Shanghai SASAC are the key to the two companies' merger. The two administrations are respectively the largest share holders of China Eastern and Shanghai Airlines. "

(China.org.cn by Maverick Chen December 26, 2008)