[photopress:air_shanghai.jpg,full,alignright]China Eastern Airlines, Shanghai’s biggest carrier, put a spurt on in the stock market amid speculation – the stock market being the biggest purveyor and believer in gossip of any institution – it may combine with smaller rival Shanghai Airlines (some of the crew seen in this illustration).
China’s third-largest carrier jumped 6.26% to close at RMB10.69, after climbing by as much as the 10% daily limit. Shanghai Airlines gained 0.5% to close at RMB8.02.
It is unusual for rumors to have a sound basis for thinking it. But this one has its reasons.
A tie-up with Shanghai Airlines would raise China Eastern’s market share in China’s commercial capital to 55%, helping it compete with larger rivals Air China and China Southern. The carrier is also seeking funds to cut debt and improve its operations.
Shanghai Airlines is controlled by the city’s government, while China Eastern is majority-owned by the state government.
[photopress:air_China_Eastern_1.jpg,full,alignleft]Chairman Li Fenghua earlier this month said China Eastern wants to raise RMB15 billion ($2.1 billion) for new planes and training. He said the company plans to reach the target by reviving the sale of a stake to Singapore Airlines, by tapping capital markets and through government subsidies.
The airline’s minority shareholders vetoed the sale of a stake to the Singaporean carrier and its parent Temasek in January in anticipation of a higher offer from Air China.
What will happen now? Your guess is as good as anyone’s. Probably better.
What can be safely said is that China Eastern needs to get its debt sorted out and it desperately needs to improve its customer service at every level. Whether it buys Shanghai Airlines or not is a comparatively trivial business decision compared to those two major tasks.