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Airlines soar on profit hopes from merger and cash pump

SHARES of two Shanghai-based airlines jumped by the daily limit yesterday - the first trading day after five weeks of suspension - in anticipation of greater profitability through their merger and on another 7 billion yuan cash injection.

On Sunday, China Eastern Airlines announced it would take over its smaller rival Shanghai Airlines through a share swap and planned to raise another 7 billion yuan (US$1.02 billion) by issuing shares to no more than 10 investors to replenish its working capital.

China Eastern Air Holdings Co, parent of the carrier, will spend at least 3 billion yuan to buy the shares. China Eastern already raised 7 billion yuan earlier this year by issuing shares to its parent to reduce its debt-to-asset ratio.

"China Eastern is very likely to turn profitable this year via the cash injection and the special trading limits will be lifted next year," said Ma Xiaoli, an analyst at CITIC Securities Co.

Ma said that to boost Shanghai as an international aviation center, the local government ''will grant more preferential policies on tax, lands and airports to support the new carrier."

Shares of China Eastern, the country's third-largest carrier, jumped 5 percent to 5.60 yuan apiece and Shanghai Airlines rose 5 percent to 6.22 yuan on the Shanghai Stock Exchange after being suspended due to the merger talks. Special trading limits - a daily trading cap of 5 percent in either direction - were imposed on the two carriers after they suffered losses for two years.

Merrill Lynch said yesterday in a report that the excessive competition in the Shanghai market is the major reason that led to the huge loss for China Eastern and that the carrier is expected to raise ticket prices and generate profit after the merger.

But it pointed out that if China Eastern doesn't reduce the number of staff and planes, the company will not be able to reduce costs on a massive scale.

Liu Shaoyong, chairman of China Eastern, said earlier that they won't cut jobs after the merger.

The merger will expand China Eastern's market share in Shanghai to more than 50 percent, which will threaten Air China's 12 percent.


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