The long-awaited marriage of China Eastern Airlines and Shanghai Airlines looks set to finally be consummated with the two carriers announcing today that money-losing China Eastern would acquire its smaller, Shanghai Airlines through a share swap in a deal valued at 8.9 billion yuan (US$1.3 billion). China Eastern said the merger would help it expand its market share and integrate resources in Shanghai, China’s biggest business centre and a major transportation hub.

Under the deal, China Eastern will exchange 1.3 new Shanghai-listed shares for each share of Shanghai Airlines which represents a 17 per cent premium on the June 5 closing share prices of RMB5.33 (US$0.78) for China Eastern and RMB5.92 (US$0.87) for Shanghai Airlines. The deal is supported by Shanghai Airlines’ board and actively promoted by the government which has been pushing for consolidation of the countries highly fragmented air industry.

Shares of China Eastern and Shanghai Airlines resumed trading in Shanghai following a suspension while the merger was announced, and both surged 5.1 per cent before midday.

The central government earlier bailed out both Shanghai Airlines and China Eastern following combined losses of US$2.41 billion in 2008. China Eastern will also raise US$1.02 billion by selling new shares in Shanghai and Hong Kong and Shanghai Airlines will be de-listed from the Shanghai bourse.

China Eastern had earlier tried to bring in Singapore Airlines (SIA), one of the world’s most profitable carriers, as a minority owner of its operations last year to help improve operations, but the plan to have SIA buy 24 per cent of the carrier was rejected by China Eastern shareholders in January 2008. Similarly, a deal for the parent of Air China Ltd., China Eastern’s main rival, to buy a stake in the company also fell through. China Southern is China’s other major carrier.