China Eastern Airlines said it had no plan to merge with Shanghai Airlines, despite previous reports that the government might be considering a tie-up between the two.

"We don't have a plan to merge with Shanghai Airlines because the aviation industry is suffering from stagnancy this year," said Luo Zhuping, board secretary of China Eastern. But he added that the government may take action to encourage a merger.

"The potential merger is being discussed only at the government level at this point," the Wall Street Journal said yesterday, citing China Eastern President Cao Jianxiong.

Cao, quoted by the journal, said that the government plans to first inject capital into China Eastern and then to merge it with Shanghai Airlines. The combined companies would then consider a potential stake sale to Singapore Airlines.

Cao could not be immediately reached for further comment.

Shanghai Airlines' board secretary Xu Junmin said over the phone yesterday that he hadn't received any notice, and had no comment on the talks.

"The two Shanghai companies are not likely to combine together unless there is impetus from the government," said Li Lei, an analyst with CITIC China Securities Co. "The country's airways are in its lean time, and the two firms probably will report a loss in profit this year and even next year."

China Eastern, the country's third largest airlines, fell 28.5 percent in net profit to reach 41.62 million yuan in the first six months due to the soaring fuel cost, according to the firm's interim report.

"These aren't easy talks for the two firms given their relationship," Li said. "They competed more than they cooperated in the past. "

Yang Guoxiong, director of the State-owned assets supervision and administration commission of Shanghai municipal government, denied that the commission was involved in the deal in a press briefing last Wednesday, and said he was not in a position to comment on a listed company.

Shanghai Airlines is under the supervision of the commission.

As for restarting talks between China Eastern and Singapore Airlines, Luo said they had not yet considered resuming the talks.

Luo told China Daily this July that the company may continue discussing the issue with Singapore Airlines after the Olympics. The proposed deal worth $923 million failed on Aug 9 after the expiry date of the agreement had passed.

"Singapore Airlines may lose interest in China Eastern because of the latter's continuing weak performance this year," Li said, adding that it could be a different story if the authority was involved.

A shares of China Eastern fell 5.24 percent to close at 3.98 yuan yesterday.

(China Daily September 9, 2008)