Shareholders in China Eastern, China's third largest carrier, are to meet on Tuesday to decide whether to accept a bid by Singapore Airlines (SIA) to buy a 24 per cent stake in the airline.

 

But at the weekend, Air China's parent company, China National Aviation Corp (CNAC), upped the ante, announcing it would pay about a third more for the stake if shareholders reject the SIA bid.

 

The counteroffer puts Air China, the world's biggest airline by market value, head to head against SIA, the world's most profitable carrier.

 

Singapore Airlines is eager to gain a bigger slice
of China's aviation market [EPA]
The Singapore carrier, backed by state-owned investment agency Temasek, is eager to gain a foothold in the booming Chinese aviation market, particularly the lucrative Shanghai-Hong Kong route.

 

With China's aviation market sealed off, buying stakes in domestic carriers is the only option for foreign airlines looking to tap into the industry.

 

A deal between SIA and China Eastern – which has received approval from the Chinese government - would also create a formidable rival to Air China on its home territory. 

Loss-making China Eastern has backed the Singaporean offer, which would give it access to much-needed cash, international expertise and industry know-how.

 

Unveiling its rival offer on Sunday, CNAC said it planned to submit a formal bid to China Eastern shareholders within two weeks.

 

The Singaporean bid offers China Eastern shareholders a price of HK$3.80 a share, while CNAC says it is prepared to pay at least HK$5.00.

 

'Synergy potential'

 

China's aviation market is growing fast on the
back of the booming economy[EPA]
"The Singapore Airlines proposal merely brings together one China-based airline, one Singapore-based airline and an investment agency and lacks the synergy potential that can be created by the co-operation of two major China-based airlines," CNAC argued in a statement.

 

"In the event that the Singapore Airlines proposal fails to be approved [by shareholders]…, we intend to propose to assume the role of Temasek and Singapore Airlines."

 

The firm made no mention of Hong Kong-based Cathay Pacific, which has a strategic partnership with Air China.

 

CNAC itself already owns more than 12 per cent of China Eastern's Hong Kong stock and had already said it planned to vote against the Singapore Airlines' proposal, saying the offer was too cheap, unfair and called for sweetened terms.

 

Both Singapore Air and China Eastern have countered by saying the deal - to buy into an airline that had made losses in three of the past five years - was fair at about six times the airline's end-2006 book value.