Shanghai Airlines said today that it had agreed to become a wholly-owned subsidiary of its larger rival, China Eastern Airlines.
Shanghai Airlines Chairman Zhou Chi told reporters at a shareholders' meeting that the two carriers had reached an agreement after merger talks announced earlier in June, but had yet to finalise the mechanics of the deal.
"We are discussing several ways to merge, including via a share swap," Zhou was quoted as saying by Dow Jones Newswires on the sidelines of the meeting.
Zhou said Shanghai Airlines would remain a legal entity independent of China Eastern Airlines, one of China's three largest carriers, to ensure it would keep its routes.
"The legal entity can help Shanghai Airlines keep the traffic rights it already owns, which will benefit the merged group," Zhou said.
To complete the merger, China Eastern will raise 7 billion yuan ($1.02 billion) through a private placement in Shanghai and Hong Kong, under a proposal endorsed by China's state assets regulator.
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China Eastern will swap 1.3 of its Shanghai-listed A shares for each Shanghai Airlines A share, Dow Jones reported, citing a person familiar with the situation.
China Eastern and Shanghai Airlines shares have been suspended from trading since June 8 pending the merger talks. China Eastern is listed in Hong Kong and Shanghai, and Shanghai Airlines is listed in Shanghai.
Zhou said in March that Shanghai Airlines may return to profit this year if passenger transportation growth regains momentum later this year.
Shanghai Airlines posted a net loss of 1.3 billion yuan in 2008, wider than the 435.1 million yuan loss the previous year.
The merger is expected to create an aviation company with a dominant position in the Shanghai market as part of the city's efforts to gear up for the World Expo starting in May 2010.
Analysts have said the merger would give the new group a 50 percent market share in Shanghai and ease fierce competition in the local market, according to previous state media reports.
This would help the combined carrier to better compete against its major rivals, Air China and China Southern Airlines.