Shares in China Southern Airlines and China Eastern Airlines Corp surged more than 40 per cent yesterday on news of large cash injections and speculation of further industry consolidation among major carriers. China Southern rose 43.01 per cent to HK$1.33, while China Eastern closed 41.33 per cent higher at HK$1.06. Both companies announced government-funded capital injections from their parents on Wednesday, worth a combined 3 billion yuan (HK$3.39 billion). 'The cash injection is an interim measure to shore up the balance sheets of the carriers,' said Cazenove transport analyst Andrew Au. 'It is likely to be followed by a much wider industry restructuring.' Industry observers widely expect China Eastern to be merged with Shanghai Airlines to form a larger domestic carrier based in Shanghai. Some analysts said shares of the companies, which were suspended from trading for 10 days prior to the announcement, rose abruptly simply to catch up with the overall market, and in particular Air China. During the suspension, Air China gained more than 50 per cent on news of 10 new measures by the Civil Aviation Administration of China (CAAC) to mitigate the carrier's operating costs and regulate new aircraft supply in the market. The capital injections and the CAAC's actions were essential to the ailing carriers, but not sufficient to compensate for losses due to the downturn in air traffic, Mr Au said. In the first 10 months, mainland carriers incurred more than 4 billion yuan in losses as a result of natural disasters, restrictive security measures during the Beijing Olympic Games and shrinking demand for air traffic. Mr Au said mainland carriers would likely incur 6 billion yuan in losses next year, up from 4 billion yuan this year, followed by 3 billion yuan in losses in 2010. The financial aid, including capital injections and tax rebates, was somewhat limited but the order to delay aircraft acquisitions and consolidate the industry encouraged by the CAAC was a long-term positive to the sector, said Ally Ma, a transport analyst at Citigroup. According to the terms of the financial proposal, China Southern Air Holding Corp will subscribe to A shares in China Southern at 3.16 yuan each and to 721 million H shares at 1 yuan each. This translates to a 22 per cent premium to its last closing price before the suspension. China Eastern Air Holding is to subscribe to A shares in China Eastern at 3.60 yuan each and 652 million H shares at 1 yuan each, a 51 per cent premium to its closing price before the suspension.