(Xinhua)
Updated: 2008-02-27 14:02

China Eastern Airlines Corp (CEA) on Tuesday rejected a wide-ranging alliance proposal from China National Aviation Corp (Group) (CNAC).

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The move could close the door for an alliance between the Shanghai-based carrier and Air China, the country's third- and second- largest airlines, respectively, by fleet size, analysts said.

"Our board of directors has decided not to give further consideration to CNAC's proposal after prudent and sufficient discussions and advice-seeking from the legal and finance consultants," CEA said in a statement to the Shanghai Stock Exchange late on Tuesday.

"The company will stick to (the plan) of bringing in a strategic investor to make its main air transport business more competitive," the statement noted.

"In the whole process of proposal-making and with the communications method, CNAC has never showed any sincerity and deep and thorough planning for our cooperation," it said.

CEA stated the proposal does not have the legal binding power as any formal offers do and it has huge uncertainty in terms of law and future official approval process.

It added the ultimate purpose of bringing in a strategic investor was to improve corporate management, operation efficiency, profitability and the international competitiveness. "CNAC and the parties it represents will be unable to help us meet the above expectations."

CEA cited advice from its financial consultant, Shenyin Wanguo Securities, as saying the potential lengthy negotiations with CNAC might make it miss good development opportunities that can seriously affect its future operation and growth.

On January 21, CEA disclosed details of CNAC's alliance proposal, which it said it received on January 18. The Hong Kong-based CNAC is the wholly-owned subsidiary of China National Aviation Holding Co (CNAHC), parent of Air China Ltd.

On January 8, CNAC successfully blocked CEA's proposed sale of 1.88 billion H shares, or a 24 percent stake, to Singapore Airlines (SIA) and Lentor Investments, a unit of Singapore government investment arm Temasek Holdings.

Minority shareholders believed the offer price of HK$3.80 ($0.49) per share failed to reflect CEA's fair value. CNAC also accused the deal of being unfair to other shareholders and domestic airlines as it included anti-dilution rights and a non-competition clause.

In the proposal, CNAC said it offered to buy with China Eastern Group its listed arm's 2.98 billion H shares at a price of no lower than HK$5 a share.

Air China, the Beijing-based flag carrier, would help CEA facilitate construction of a Shanghai aviation hub, and optimise its air routes network and operation of the Pudong and Hongqiao airports, according to the proposal.

CNAC suggested setting up a joint venture to integrate the cargo business at the two state-owned airlines to sharpen their competitive edge. It also suggested the two carry out wide-ranging cooperation, including code-sharing, air routes optimization, maintenance and ground services.

The investment of no less than HK$14.9 billion in cash would reduce CEA's assets-liabilities ratio to 77 percent from 94.3 percent and save it 776 million yuan in debt interest annually, it said in the proposal.

The cooperation would bring the two five billion yuan ($699 million) in returns annually, including four billion yuan in revenue growth and one billion yuan in cost reduction, CNAC said.

The alliance would also help them grasp a larger market share of international flights to and from Beijing and Shanghai and boost the competitiveness of their internationally weak cargo business, CNAC stated.