China Eastern Airlines has formally offered to take over Shanghai Airlines in a 9 billion yuan ($1.3 billion) deal as it seeks to increase its market share, lower costs, and return to profitability.
The carrier says in a statement to the Hong Kong stock exchange that it plans sell 7 billion yuan worth of new shares to fund the acquisition. It will do this by selling 1.35 billion Shanghai-listed shares at 4.75 yuan apiece, and 490 million Hong Kong-listed shares for at least HK$1.40 apiece to its parent, China Eastern Air Holding.
The merger will increase China Eastern's market share in Shanghai, its base, to more than 50% and help it to move past Air China as the second-largest airline in the country by fleet size. Guangzhou-based China Southern Airlines, the third major carrier in China, has the country's largest fleet.
Trading in the shares of both airlines, which had been suspended since early June, resumed today. Shanghai Airlines will be de-listed after the merger, but it is likely to retain its brand name and remain an independent company with its own management.
The government, the majority shareholder in both airlines, has been pushing for the deal after they reported massive losses in 2008. China Eastern had a net loss of 15.3 billion yuan for 2008, versus a net profit of 378.6 million yuan in 2007. This was its biggest loss since it was listed more than 10 years ago. Shanghai Airlines booked a net loss of 1.24 billion yuan, compared with a loss of 435.1 million yuan in 2007.
Worsening economic conditions, rising costs, and a fall in demand meant that the airlines had to look to the government for help. China Eastern received a 9 billion yuan cash injection from the government in December, and Shanghai Airlines received 1 billion yuan in February.
China Eastern says that the merger will strengthen the company's competitiveness by increasing economies of scale and expand its market share in Shanghai, the country's main business hub.
It will "increase the number of joint flights, expand its market coverage and facilitate the realisation of the company's strategic objective of positioning itself as a hub-networking air transportation company", it adds.
Given that both carriers are based in Shanghai, they can reduce costs by overcoming any overlaps in the use of resources. "With the absorption, the two companies can attain synergy in their use of aircraft fuel, purchases of aircraft, aircraft repair and maintenance (and) flight equipment. In addition, they can realise the optimisation of the route plans and flight schedules, enhancement of route network structure and improvement of transport efficiency."
Finally, it will also help in the country's aim of making Shanghai and international air transportation hub. "A stronger based airline company can expedite the emergence of the Shanghai airport hub, which in turn will promote the evolution of Shanghai as an international air transportation centre."
"Clearly, the above benefits more than outweigh the impact from the recent loss-making financial position of Shanghai Airlines," says China Eastern, which expects the merger to go through within a year after getting shareholder approval.
Source: Air Transport Intelligence news
