China Eastern expected to sign deal with Singapore Airlines

SHANGHAI, China (AP): China Eastern, struggling after two years of losses, is expected to sign a deal Sunday to sell a stake to Singapore Airlines, an alliance that would bring welcome cash and managerial expertise to the Shanghai-based carrier. 

State media reports said Saturday that China Eastern and Singapore Airlines had reached an accord. China Eastern officials said the company would hold a news conference near Shanghai's Hongqiao Airport on Sunday, but would give no details. 

The deal has been long anticipated _ trading in the two airlines' shares has been suspended since late May. 

China Eastern is the country's third-biggest carrier. Like other state-owned airlines it has suffered from soaring jet fuel prices and intensifying competition. 

The company reported net losses in 2005 and 2006. Last week, it reported that foreign exchange gains helped it trim its first-half net loss by three-quarters from a year earlier to 383.9 million yuan (US$50.8 million; euro37.3 million). 

"One thing for sure is that joining with Singapore Airlines will bring a lot of capital to China Eastern,'' said Ma Yin, an analyst with Haitong Securities. 

"But this is no guarantee that China Eastern will overcome its debt problems,'' she said. 

The 726 million yuan (US$96 million; euro70 million) windfall exchange rate gain that China Eastern reported in the January-June period, because of the Chinese yuan's rising value, was not enough to make up for high fuel prices, which accounted for 35 percent of the company's operating costs. 

Like other major Chinese companies, airlines are seeking strategic investors to help build their cash bases and upgrade services. 

China's flagship Air China, based in Beijing, has cross-shareholdings and cooperative arrangements with Hong Kong carrier Cathay Pacific Airways. Speculation over more merger activity stepped up last week after Air China said the government was considering a restructuring of the civil aviation industry to boost efficiency. 

"Airline companies in China do not perform very well,'' said Deng Hongmei, an analyst with Essence Securities. "I'm sure the good service and management from Singapore Airlines will somehow have an impact on Eastern.'' 

But China limits foreign ownership in domestic airlines, given their strategic importance, to less than 50 percent. That could limit Singapore Airlines' say. 

"It's a tough decision to go into a situation where you have less than 50 percent ownership _ and no decision-making control _ in a carrier like that,'' said Richard Pinkham, a consultant in Singapore with the Sydney-based Center for Asia Pacific Aviation. 

Still, with air traffic demand expected to grow 9 percent a year, all of China's airlines are seeing strong increases in demand. China Eastern reported a 12 percent rise in passenger traffic in the January-June period to 26.5 million. 

That potential is the attraction for Singapore Air, Pinkham said. 

The Singapore carrier has seen disappointing results from its previous strategic investments. It held a 25 percent stake in Air New Zealand but lost millions of dollars when the New Zealand carrier came close to collapse in 2001. It has since sold off that stake. 

Recently, Singapore Airlines Chief Executive Chew Choon Seng said returns on the company's investment in Sir Richard Branson's Virgin Atlantic Airways had been disappointing following the Sept. 11, 2001, terror attacks on the U.S. 

With China's market booming and next year's Olympic Games in Beijing certain to boost demand further, China Eastern offers a fresh start. 

"The biggest thing SIA gets out of this is a growth opportunity,'' Pinkham said. "The Singaporean travel market has basically reached maturity and is unlikely to post much more than single-digit growth in any future year. China is where the future is.'' 

Earlier reports said the Chinese airline's board had approved the sale of a 24 percent stake to Singapore Airlines and Singapore's Temasek Holdings, a government investment arm. 

Caijing Magazine, a major financial journal, reported in June that Singapore Airlines would pay 4.7 billion Hong Kong dollars (US$602 million; euro440 million) for 1.24 billion Hong Kong shares in China Eastern, representing a 15.8 percent stake. 

Temasek would pay 640 million Hong Kong dollars (US$82 million; euro60 million) for an 8.2 percent stake, it said. 

The plan would involve issuing 2.98 billion new Hong Kong-traded "H shares,'' boosting state-owned China Eastern's market capitalization by about 60 percent, the report said. 

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