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Mon, Sep 03, 2007 - Page 10 News List

China Eastern Airlines to sell stake

GROWTH OPPORTUNITY Singapore Airlines and Temasek Holdings will have no say in how China's third-largest carrier will be run, but see rising traffic as a potential bonanza


China Eastern Airlines workers load luggage from an airplane at Beijing's Capital Airport last Thursday.


Struggling after two years of losses, China Eastern Airlines Corp (中國東方航空) agreed yesterday to sell a 24 percent stake to Singapore Airlines Ltd and Temasek Holdings Pte, the Singaporean government's investment arm, company officials said.

The HK$7.2 billion (US$923 million) deal has been long anticipated with trading in the two airlines' shares suspended since late May. The alliance will bring welcome cash and managerial expertise to China Eastern, a Shanghai-based carrier.

"We are determined to ensure the success of our strategic investors," China Eastern chairman Li Fenghua (李豐華) said at a news conference yesterday.

Singapore Airlines will pay HK$4.7 billion for a 15.7 percent stake in China Eastern, while Temasek will pay HK$2.5 billion for an 8.3 percent stake, officials said.

"We are proud to be playing a growing role in China's aviation market," Singapore Airlines chairman Stephen Lee (李慶言) said. "We are confident we can bring more business to each other's airlines."

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 last year.

"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.

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

China's flagship Air China Ltd (中國航空), based in Beijing, has cross-shareholdings and cooperative arrangements with Hong Kong carrier Cathay Pacific Airways Ltd (國泰航空). 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 decisionmaking 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 to 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 (周俊成) 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 in the US.

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