China Eastern-Shanghai Air deal gets govt nod: report

SHANGHAI (Reuters) - A proposed merger between China Eastern Airlines (600115.SS) (0670.HK) and its smaller rival Shanghai Airlines (600591.SS) has been approved in principle by the Shanghai government, China Business News reported on Tuesday.

The proposal calls for China Eastern to take a 60 percent stake in Shanghai Air, followed by a cash injection into China Eastern from the State-owned Assets Supervision and Administration Commission, the newspaper said, citing an unnamed source. It did not give the size of the proposed cash injection.

Spokesmen for both airlines said the carriers had not been informed by the government of any merger proposals or discussed the issue directly between themselves.

Sources familiar with the matter have told Reuters that the government was discussing the possibility of brokering a merger of the two Shanghai-based airlines to create a dominant player with a 60 percent share of domestic flights in China's financial hub.

China Eastern, one of the country's three leading carriers, has been seeking a partner as it struggles to cut its debt ratio and improve its efficiency and level of service.

In January, however, minority shareholders of China Eastern vetoed its $920 million plan to sell a 24 percent stake to Singapore Airlines (SIAL.SI).

A source with direct knowledge of the matter said in August that China Eastern had not given up hope on renewing a deal with Singapore Air, after its original agreement expired on Aug 9.

China Eastern's A shares traded in Shanghai rose 1.4 percent to 4.39 yuan by late morning, in line with a 1.44 percent rise in the benchmark Shanghai Composite Index .SSEC. Shanghai Air jumped 7 percent to 5.21 yuan. China Eastern's Hong Kong-listed shares rose 8.2 percent to HK$1.19, compared with 3 percent rise in Hong Kong's benchmark Hang Seng Index .HSI.

($1=6.834 Yuan)

(Reporting by Fang Yan; Editing by Edmund Klamann)