Chris Jasper/SHANGHAI

China Southern Airlines has confirmed that it has held talks with flag carrier Air China over a possible merger that would bring together two of the country's three biggest airlines.

China Southern says that its parent, Southern Airlines Group, has held preliminary talks with Air China which may or may not lead to a strategic relationship.

Guangzhou-based China Southern issued the statement after asking for trading in its shares on the Hong Kong stock exchange to be suspended for a day on 9 July, following the disclosure of its plans in Flight International. When trading resumed, the carrier's share price jumped and closed 8.5% up. Details of the merger scheme were first revealed by Flight International's sister on-line service Air Transport Intelligence.

The merger, which would effectively float ailing Air China, is understood to have government backing, although industry sources say senior airline managers are just as keen.

Although some Hong Kong analysts have welcomed the news, the logic behind merging China Southern with Beijing-based Air China is not obvious. Sources at China Eastern, China's other major airline, say it would prefer not be involved in a forced consolidation of China's 30-plus carriers.

China Eastern accepts that a China Southern/Air China deal could force it to act, but it is suffering the after-effects of absorbing Great China Airlines, says a source.

Although China Eastern is attempting to restrict capacity growth, it believes it is staging a modest recovery from the Asian downturn and would prefer to pursue overseas options rather than domestic consolidation. Crucial to its plans is an overseas alliance partner. China Eastern already code-shares with American Airlines, All Nippon Airways, Korean Air and Asiana, but the source says a deal with Air France, which serves Shanghai, is most probable. That could pave the way for China Eastern to join the global alliance Air France plans with US partner Delta Air Lines.

Source: Flight International