Because of regulatory issues and competition concerns, airline mergers and acquisitions are always lengthy affairs, and most of them collapse, said Edward Tse, the managing director of Greater China for Booz Allen Hamilton.

In 2006, Ryanair proposed a Euro1.48 billion (HK$16.91 billion) takeover of Irish government-owned airline Aer Lingus. The deal was rejected by the authorities, who did not want to see the merged group monopolise routes to and from Ireland. Ryanair and Aer Lingus accounted for a combined 78 per cent of air traffic between Dublin and London.

In January last year, US Airways had to abandon an US$8 billion acquisition of larger rival Delta Airlines because of concerns over job cuts and fare increases raised by the United States Congress.

The combined market share of a merged Air China and China Eastern at the Beijing and Shanghai airports would exceed 50 per cent. They would also dominate traffic between the two cities - a route that has the mainland's highest percentage of premium passengers.

Since the two airlines overlap on many domestic routes, the merger would lead to consolidation and massive layoffs.

But, some analysts think competition issues will not be a factor in the deal.

A merger of Air China and China Eastern would not create a monopoly as their combined market share would not be as high as that of some international airlines, said Citigroup transport analyst Ally Ma.

'British Airways serves more than 50 per cent of international flights in and out of London and Qantas Airlines accounts for 75 per cent of outbound flights from Australia,' Ms Ma said. 'China Southern Airlines has a 50 per cent market share at Guangzhou Airport. It would be unfair for Air China and China Eastern to be accused of creating a monopoly by taking a 50 per cent market share in two of more than 100 mainland airports.'

Ms Ma predicted that the deal would completed very soon due to cash losses at China Eastern.

Financial considerations are not always a top priority for state-owned enterprises. Alitalia, an Italian government-owned airline, put off a decision on a takeover bid by Air France-KLM, despite losing Euro1.8 billion over the previous four years because the Italian government was torn between teaming up with a foreign carrier over a domestic player.

The situation is similar for China Eastern. It is not known whether the central government, the ultimate owner of Air China and China Eastern, is in favour of consolidation of the big three airlines or maintaining the status quo.

Regardless, the deal cannot be completed before 2009, said Daiwa Institute of Research transport analyst Kelvin Lau. Singapore Airlines has not expressed any interest in raising its bid from HK$3.80 per share and China Eastern has said it will not consider any proposal other than that of Singapore Airlines, he added.

Besides, some intangible costs will likely arise after the merger, making the airline less successful than expected, Mr Tse said.

Differences in corporate culture was one of the issues that weighed on profit at China Eastern after it merged with China Northwest Airlines and Yunnan Airlines in 2002, he said.

China Eastern could not implement policies at regional offices originally owned by the target companies. In addition, the high debt burdens of the loss-making target airlines added to downward pressure on China Eastern.

Delayed arrivals

Regulatory issues and competition concerns dog airline acquisitions

A merged Air China and China Eastern would control a market share of over: 50%