Analysis: Will China Eastern-Shanghai Airlines merger trigger industry restructu

After the merger plan of China Eastern Airlines (CEA.NYSE; 01055.HK; 600029.SH) and Shanghai Airlines (600591.SH) received overwhelming vote approval by their shareholders, the final 'marriage' between the two airlines is just round the corner. Now, analysts and industry insiders are talking another question: Will their merger be followed by a tide of restructuring in the country's aviation industry? -- Creating a bellwether in Shanghai's civil aviation market

Since China Eastern suspended its share trading on June 8 for planning the restructuring issue, to October 9, when China Eastern and Shanghai Airlines convened interim shareholders' meeting that approved the merger plan, the internal legal procedures for the merger of the two airlines have been completed in only four months.

The plan is yet waiting for the approval from China Securities Regulatory Commission (CSRC). Luo Zhuping, board secretary with China Eastern noted that if every thing goes smoothly, the restructuring between China Eastern and Shanghai Airlines is expected to be completed by the end of this year.

The merger between China Eastern and Shanghai Airlines will be the first reorganization event in China's civil aviation industry history that involves two listed airlines. After the merger, the new China Eastern is expected to become a bellwether in Shanghai's civil aviation market.

China Eastern now operates about 220 planes and Shanghai Airlines owns 66 units. After the merger, the aircraft fleet of China Eastern will increase by some 25 percent. Its market share in Shanghai will rise from 31.4 percent to some 50 percent. The merger meanwhile will inject more flight route resources and sales channels into China Eastern. -- China's aviation industry requires restructuring upon sluggish demand and overcapacity

Under the influence of the international financial turmoil, the global aviation industry has undergone its lowest period for the past 20 years. Chinese airlines are with no expectation.

The sluggish transportation demand has reduced the passenger and cargo transportation of Chinese airline companies. China's three airline giants including Air China (0753.HK; 601111.SH), China Southern Airlines (ZNH.NYSE; 01055.HK; 600029.SH) and China Eastern all incurred huge losses in the year of 2008.

So far, China has 41 airlines with dependent legal person status. The transportation capacity is rising quickly and severe competition exists among them.

Of the 41 airlines, some are local or private airlines with relatively small scale. In competition with large airline companies, they experienced even more serious difficulties.

The restructuring between China Eastern and Shanghai Airlines are expected to strengthen the competition in China's aviation market. Under the sluggish economic background, seeking resource restructuring is expected to be a good choice for Chinese airline companies.

China Eastern and Shanghai Airlines' restructuring therefore might become a start for the restructuring in China's aviation industry.

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