HONG KONG: China Eastern Airlines, the third largest airline by fleet size on the mainland, said yesterday that it will sell two aircraft for 590 million yuan and then lease them to raise cash and ease pressures on its finances.

The airline signed sale and lease agreements with the Bank of Communications Financial Leasing covering two Airbus A340 aircraft, it said in a statement filed with the Shanghai Stock Exchange.

"After the sale of the aircraft, the company will then lease them for five years under a lease agreement," China Eastern said.

The Shanghai-based airline said it will pay around 680 million yuan in rental fees for the two aircraft over five years. Under the lease agreement, it will pay a quarterly rent of around 17 million yuan per plane.

China Eastern said it plans to buy back the two aircraft after the expiration of the five-year lease agreement.

Analysts said the sales and subsequent lease of the two aircraft will have little impact on China Eastern's finances and will hardly improve its financial condition.

The carrier posted 13.9 billion yuan net loss in 2008, in contrast to a 604 million yuan net profit in 2007. Meanwhile, its total debt exceeded its total assets by 17 percent.

"The (sales and lease) arrangements may help ease the airline's cashflow position. However, its current gearing is still very high," said Conita Hung, head of research at Delta Asia Financial.

Hung said it will be difficult for China Eastern to return to the black this year, but losses this year are expected to be much lower compared to last year's level.

"Passenger and cargo demand will remain sluggish amid the global financial crisis," Hung said, "But oil price fluctuations and foreign exchange risks have eased which will help improve the airline's operations this year."

Cho Fook-tat, an aviation analyst at Taifook Securities, said the sale and lease of aircraft to Bank of Communications provides a financing channel for China Eastern.

"It's just like getting loans from the bank," he said.

Cho added that the contracts will hardly boost the company's earnings this year, unless the central government adds more capital to the airline.

The central government injected 7 billion yuan and 3 billion yuan into China Eastern and its bigger rival China Southern Airlines, respectively, at the end of last year. China Eastern said earlier that it is applying for more cash injection in 2009.

Patrick Yiu, an associate director at CASH Asset Management, said the investment value of China Eastern is not attractive enough, compared with Air China and China Southern.

"Its current share price is over-valued," Yiu said, "The stock may move between HK$1.3 and HK$1.5 in the near future."

Moving in step with the benchmark Hang Seng index which surged 5.51 percent yesterday, China Eastern shares advanced 6.06 percent, or HK$0.08, to close at HK$1.40.

(HK Edition 05/05/2009 page16)