Share Fall Stirs Talk of Airline Merger

A steep slide in share prices has revived talk of a possible stake sale by China Eastern Airlines to Singapore Airlines, even though shareholders of China Eastern have already rejected the deal once.

Also potentially increasing prospects for a deal are recent government efforts to broker a merger between China Eastern and Shanghai Airlines, which would create a dominant carrier with a 60 percent share of domestic flights in Shanghai, the financial hub of mainland China.

Singapore Airlines and its majority owner, Temasek Holdings, offered last November to buy a 24 percent stake in China Eastern at 3.80 Hong Kong dollars a share, or 48 U.S. cents, valuing the deal at about $920 million. The offered share price was about half the price of the shares at the time.

The plan was vetoed in January by minority shareholders of China Eastern, with many harshly criticizing the carrier for agreeing to sell the stake at too low a price.

China Eastern’s shares listed in Hong Kong have been in a steady downtrend since then, however, dipping below 3.80 dollars in March. The shares closed Friday at 2.63 dollars.

A senior China Eastern executive said the share price fall might improve the chances of winning shareholders’ approval for a Singapore Air deal.

“We don’t want our share price to fall but that has actually taken ammunition away from our critics” of the Singapore Air deal, said the executive, who declined to be identified because of the sensitive nature of the matter.

But the executive said a deal was unlikely to be completed before the Aug. 9 expiration of the agreement with Singapore Airlines given Chinese government orders to focus on transport safety issues and Olympics-related matters as Beijing prepares for the Games that start Aug. 8.

Singapore Air has said its talks with China Eastern are now focused on business cooperation rather than buying shares.

China Eastern, one of the three major mainland Chinese airlines, is dogged by a reputation for poor service and has shown interest in getting a partner with the expertise to help improve its operations. The carrier has said that it would focus once more on talks with Singapore Air after the Olympics.

Airline industry and government officials said the prospects for an equity deal seemed stronger than they were a few months ago, in part because of the possibility of a merger between China Eastern and Shanghai Air.

The Chinese government and the Shanghai municipal government are discussing a merger of the two Shanghai-based carriers into an airline that could better compete with foreign rivals, officials said.

But many uncertainties still cloud the outlook for a deal.

After reporting a 15 percent drop in its first-quarter profit due to rising fuel prices, Singapore Air may have a harder time gaining approval from shareholders, especially in a slowing global economy that has dimmed the prospects for travel demand.

The International Air Transport Association issued a gloomy outlook in June, forecasting a $6.1 billion loss for the global industry in 2008, a sharp turnaround from the $4.5 billion profit it predicted in April, as oil prices soared.

In China, monthly air passenger volume, which had been growing at double-digit rates for years, slipped in May and June, and industry executives said the decline might extend into October as stricter security measures implemented for the Olympics deter travel.

Originally published by Reuters.

(c) 2008 International Herald Tribune. Provided by ProQuest Information and Learning. All rights Reserved.