When it comes to China Eastern, the Shanghai-based airline that frequent flyers and investors love to scorn, the stock market rumor mill seldom takes a rest.

Each time the State-owned company, listed on both the Shanghai and Hong Kong stock exchanges, discloses any news that's less than positive, the market buzzes with talk of its impending shotgun marriage to smaller Shanghai Airlines. Such a marriage seems to make obvious sense to outsiders because it could produce an airline capable of achieving much-coveted domination of the Shanghai air traffic hub.

The rumor mills were churning at a feverish speed last month after China Eastern disclosed potential large losses in fuel contracts, prompting the Shanghai State-owned Assets Supervision and Administration Commission (SSASAC), which owns Shanghai Airlines, to deny any merger talks with China Eastern.

SSASAC was quoted by the Xinhuanet as saying it "has never made any merger announcement". Senior executives of both airlines have also told China Daily they were not aware of any merger talks.

Last week, the new Chairman of China Eastern Liu Shaoyong denied equity alliance talks with its local rival Shanghai Airlines. However, he said the carrier is open to discussing cooperation opportunities with interested partners to fight the economic downturn. But that didn't end market speculation that there will be some form of cooperation between the two airlines.

"It is common that before any final decisions (on a major transaction) are made, all the parties concerned will keep mum," said Li Lei, an analyst with CITIC China Securities.

China Eastern posted a loss of 2.292 billion yuan in the first nine months of 2008, and said paper losses on hedging contracts in 2008 reached 6.2 billion yuan. Despite the 7 billion yuan capital injection from the government, stock analysts remain skeptical of any improvement in the company's performance in the next couple of years.

"Although the cash injection will relieve the fiscal pressure on China Eastern to some extent, it cannot turn the tide of the industry-wide recession," said Li.

Shanghai Airlines has predicted that its 2008 losses might double the 435 million yuan deficit of 2007.

"Building an alliance can strengthen the two airlines making them more fit to survive the economic downturn," said Li Shurong, analyst with Shenyin & Wangguo Securities.

The two airlines are already code-sharing some domestic flight routes, and according to Liu, have established collaborations such as sharing airways and aircraft equipment material.

(China Daily February 10, 2009)