China Eastern Airlines, the country's second largest airline by fleet size, said yesterday that it was considering issuing corporate bonds or shares to finance the purchase of assets from its parent China Eastern Air Holding.

"We are now considering a number of proposals, including issuing A shares on the mainland, H shares in Hong Kong and corporate bonds either in local or foreign currency," said China Eastern's Chairman Ye Yigan, at a results briefing yesterday.

China Eastern has hired Morgan Stanley and Guotai Junan to deal with the purchase of core assets such as passenger business of Yunnan Airlines and China Northwest Airlines from its parent.

"We are considering all of the possibilities, and will strive to complete the asset acquisition by the end of the year," said Ye.

If the company chooses to issue corporate bonds, Luo Weide, the company's chief financial officer, said China Eastern would raise about 2.56 billion yuan (US$309.2 million), or 40 per cent of its net asset value.

Luo also revealed that China Eastern would spend a total of 12.4 billion yuan (US$1.5 billion) to buy 22 Airbus aircraft by the end of 2005, 10 of which will be delivered in the second half of 2003, seven next year and five in 2005.

Shanghai-based China Eastern posted its biggest first-half loss of 1.25 billion yuan (US$151 million) since its listing in 1997 on Monday as the SARS outbreak led to many cancelled flights and the Iraq war hiked oil prices.

But the company's executives said the impact of SARS was basically over and they were confident the airline's second-half performance would be better.

"The better performance results from China's continuing robust economic growth, the increased service from 10 new aircraft as well as the preferential industrial policies," said Li Fenghua, the company's president.

"We will try to turn the loss into profit for the full year," he added.

The preferential policies refer to the Ministry of Finance and the State Administration of Taxation exempted sales tax and civil aviation infrastructure charges from May to September for all domestic airlines, a move to help them cushion the SARS impact.

Li said China Eastern was seeking approvals to extend the tax exemption till the end of the year, which could save about 8 per cent of its total revenue.

Li also said that passenger traffic in July had recovered to the normal level of the same period last year, while traffic flow in August was expected to be better than a year earlier. Daily passenger flow achieved a record high of 80,000 at the best day this month.

Looking ahead, Li said China Eastern would expand passenger cargo flights to Japan, Hong Kong and South Korea. The airline will increase more flights to Hong Kong to meet the growing travel demand following the relaxed travel policy.

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