China Eastern Airlines said it had received a proposal for a "strategic partnership" with Air China that could bring it a cash injection of $1.9 billion and involve a tie-up between many of the airlines' operations.
The country's third largest airline said it was studying the proposal, and did not give any sign that it might modify its strong opposition to accepting Air China as a strategic investor.
"The board of our company is now dealing with this proposal, and we will announce our decision when it has been made," China Eastern said in a statement on Sunday.
The proposal was made 10 days after minority shareholders in China Eastern rejected a US$920 million plan for Singapore Airlines and Singapore investment agency Temasek Holdings to buy 24 percent of China Eastern.
The parent group of Air China, China National Aviation Corp (CNAC), proposed that it and China Eastern's own parent group buy a placement of 2.98 billion new Hong Kong-listed H shares in China Eastern, the statement said.
The shares would be bought for no less than HK$5 each, compared to China Eastern's last traded price in Hong Kong of HK$6.75. CNAC, which already owns 3.9 percent of China Eastern, would end up with a stake of under 30 percent.
The share issue would inject at least HK$14.9 billion (US$1.9 billion) of cash into China Eastern, reducing its debt-to-asset ratio from 94.33 percent to 77 percent, China Eastern quoted CNAC's proposal as saying.
CNAC also suggested that regardless of whether or when its equity investment went ahead, Beijing-based Air China help Shanghai-based China Eastern form an "operations hub" in Shanghai to strengthen the use of its route network and other resources.
The two airlines would consolidate their cargo operations in a joint venture, and cooperate in areas such as sharing flights, frequent flyer programs, maintenance and ground service.
"We believe fully carrying out this proposal would bring concrete cooperative benefits to both sides, while benefiting shareholders, the companies, employees and society," CNAC was quoted as saying.
CNAC calculated that its investment in China Eastern would allow the airline to save at least 776 million yuan ($107 million) in annual interest expenses, and bring the two airlines around 5 billion yuan annually in synergies from higher revenues and lower costs, China Eastern said.
The alliance would help to make Shanghai and Beijing major air transport hubs in northeast Asia, while boosting the airlines' competitiveness in global markets, CNAC added.
When shareholders voted on the Singapore plan, CNAC had already said it would offer to pay at last HK$5 per share for a major stake in China Eastern, making the Singapore offer of HK$3.80 per share look unattractive.
After the shareholder vote, China Eastern chairman Li Fenghua insisted he would not consider Air China as a strategic investor, saying an alliance with the flag carrier would not benefit his airline and he would continue pursuing the Singaporean tie-up.
Singapore Airlines, however, has responded ambiguously, saying it will not walk away from its deal but also that it will not get into a bidding war.
Further complicating the situation, Hong Kong's Cathay Pacific Airways, a partner of Air China, has said it is willing to support any bid for China Eastern by the Air China group, though CNAC's proposal did not mention Cathay.
Some China Eastern executives say they think CNAC may be content to use its proposal to block an alliance between China Eastern and Singapore Airlines, regardless of whether any part of its proposal is actually implemented.
"This is just a gesture," a China Eastern official, speaking on condition of anonymity, said of the proposal. He declined to comment on what the airline's formal response would be.