HONG KONG: Air China Ltd's parent may sell its HK$471 million ($61 million) stake in Shanghai-based China Eastern Airlines Corp to focus on developing its own presence in the nation's financial capital.

The shares may be sold if China National Aviation Holding Co can avoid incurring a loss on the deal, Air China Chairman Kong Dong said in Hong Kong yesterday. The company owns 12 percent of China Eastern's Hong Kong-listed shares.

Air China has opened a branch in Shanghai and is forming a cargo venture in the city with affiliate Cathay Pacific Airways Ltd, after abandoning attempts to increase its China Eastern stake. China Eastern scuttled Air China's plans by agreeing to take over hometown rival Shanghai Airlines Co.

"It's the reality and we have to face it," Kong said. Air China's parent will hold talks with China Eastern about the stake "at the appropriate time," he added, without elaboration.

The parent is "paying attention to the investment loss" from the stake, Kong said. China Eastern Board Secretary Luo Zhuping wasn't available for comment.

China Eastern dipped 0.08 percent lower to HK$2.47 in Hong Kong trading yesterday. Air China dropped 1.1 percent to HK$4.59.

Air China has no immediate plans to further increase its stake in Cathay, after agreeing to raise its holdings to 30 percent, Kong said. The airline earlier this month agreed to spend HK$6.3 billion buying shares in Hong Kong's biggest carrier from CITIC Pacific Ltd.

"For now, I think the structure is good," Kong said. The two airlines will also increase cooperation in purchasing and other areas to cut costs, he added.

Air China would also support any capital expansion plan by Cathay, Kong said. Cathay has no plans for a rights offer, Chairman Christopher Pratt said earlier this month.

Cathay may have "limited room" to increase its 18 percent stake in Air China because of rules requiring the government to hold 51 percent of mainland airlines, Kong said. Cathay has said it doesn't plan to buy more Air China shares.

The two airlines plan to set up the Shanghai cargo venture by the end of this year, said Chief Financial Officer Fan Cheng.

The asset valuation work is nearly finished and the two parties are discussing the future business structure, he said.

Air China has seen demand on international routes stabilize following declines in the first half, Kong said, citing bookings for US and European flights in September and October.

The carrier reduced international capacity by about 9 percent earlier this year.

Bloomberg News

(HK Edition 08/28/2009 page4)