(Xinhua)
Updated: 2008-03-03 16:04

After two days of silence, China National Aviation Corp (Group) (CNAC) has responded to China Eastern Airlines' (CEA) rejection of its offer to buy into the Shanghai-based carrier.

A CNAC source said on Monday the company "has always been sincere about the possible establishment of a strategic partnership with CEA, and hopes the CEA board to study the proposal earnestly and consider it prudently".

Observers believed CEA's rejection could close the door for an alliance between CEA and Air China, the country's number three and number two carriers, respectively, by fleet size.

Related readings:  Singapore Airlines disappointed over rejection  CEA rejects CNAC's wide-ranging alliance proposal  CNAC offers higher price for Eastern  SASAC denies intervention in China Eastern's SIA deal vote

Responding to the rejection, CNAC said in a statement the reason why the CEA board made such a decision was that the two sides had not yet had the chance to hold wide-ranging and deep discussions on the bid.

CNAC invited CEA to discuss every detail of the proposed equity cooperation so as to finalize the related scheme.

A source with the board of CEA's listing arm said earlier that it "is willing to study any sincere bid that conforms with legal procedures and is better than Singapore Airlines offer".

But in a statement released last Tuesday CEA said, "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".

CNAC said when the company prescribed its bidding price, it took into consideration CEA financial status and the possible collaboration effect of the proposed alliance between the two airlines.

CNAC believed upon the implementation of the proposal, CEA's financial situation would be improved and operation of both companies would be optimized.

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 the Singapore government investment arm Temasek Holdings.

Minority shareholders believed the offer of HK$3.80 (49 US cents) 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 flagship 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 of the two state-owned airlines to sharpen their competitive edge. It also suggested the two conduct 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 ($109.1 million) in debt interest annually, it said in the proposal.

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

The alliance would 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.