China Eastern Airlines Corp, the mainland's third-largest carrier, is poised to receive a second round of government aid to help it stay aloft amid mounting debt and a downturn in traffic demand.
The airline's H shares would be suspended from trading on Monday, with the new bailout proposal expected to be released on Monday night, said the company's investor relations officer, Sunny Zhou.
In addition to the 3 billion yuan (HK$3.4 billion) capital injection announced on December 10, China Eastern will receive more capital from its parent China Eastern Air Holding through a share issue.
The amount of the second round of aid will range between 3 billion yuan and 6 billion yuan, which will bring the total bailout to as much as 9 billion yuan, according to Chinese media reports.
'It is a lifeline to China Eastern, as its total debt tops 50 billion yuan and is set to exceed its total assets next year,' said Kelvin Lau, a transport analyst at Daiwa Institute of Research.
Once the company's debt outstrips its assets, bankers will be reluctant to offer more credit and may even recall loans.
The second capital injection, if it happens, could help cut China Eastern's debt by as much as 20 per cent and enable the carrier to refinance other debt with banks to improve its balance sheet, Mr Lau said.
The carrier's debt ratio would be trimmed by 3.77 percentage points to 94.7 per cent after the first capital injection, said the company. Gearing would be further reduced to below 90 per cent after the second round of aid.
China Southern Airlines, which secured 3 billion yuan of aid in the first round, would not get an additional injection, a spokesman for the airline said yesterday.
Before China Eastern's possible capital injection, Bank of Communications offered the carrier a 10 billion yuan loan facility on Wednesday, far larger than the previous 1.9 billion yuan facility.
The Shanghai-based carrier is in competition with Shanghai Airlines over domestic routes since a large part of their networks overlap. Analysts likened the government aid to pouring water into the sea, without a subsequent consolidation plan between the two airlines.
Various media reported that the State-owned Assets Supervision and Administration Commission, the ultimate owner of China Eastern, was working on a proposal to the Shanghai municipal government, the key shareholder of Shanghai Airlines, to merge the city's two carriers.
China Eastern has posted losses in four of the past six years and incurred a net loss of 6.5 billion yuan for the seven years to September, denting its capital reserves.
At the same time, the carrier has aggressively expanded its fleet to 225 aircraft from 64 in 1997, when its shares started trading in Hong Kong.
Another overhang for the carrier is the massive fair-value loss from its hedging contracts.
As of October, China Eastern had 1.8 billion yuan of hedging losses, which are set to increase to 3 billion yuan by the end of the year because of the further softening of oil prices.
New rescue plan comes amid talk of proposal to merge with Shanghai Air
The aid effort could bring funds injected into China Eastern to, in yuan: 9b yuan