(Yicai Global) May 31 -- Air China will buy a majority stake in struggling Shandong Airlines, which is technically insolvent after its debt-to-asset ratio reached over 100 percent last year, China’s flagship carrier said yesterday.

Although no reasons were given for the acquisition, the Covid-19 pandemic, slowing economic growth and surging fuel costs have posed severe challenges to smaller players in the air travel sector. Conversely, it has brought new opportunities for big firms in terms of mergers and acquisitions.

Air China, which already holds a 22.8 percent stake in Shandong Airlines and a 49.4 percent stake in its parent firm Shandong Airlines Group, is likely to take over, the Jinan-based airline said on May 26. The company chairman, board secretary, deputy general manager and chief accountant have all been working for Air China for a long time, it added.

Shandong Airlines accrued losses of CNY1.8 billion (USD280 million) last year and its debt-to-asset ratio reached 102.81 percent, according to the company’s latest earnings report.

Shandong Airlines, although listed on the Shenzhen stock exchange, is traded in Hong Kong dollars which are known as B-shares. New listings and refinancing in the B-share market ceased in 2000, making it difficult for Shandong Airlines to raise the funds it needs to get it out of this hole.

Shandong Airlines’ stock [SEB:200152] halted trading yesterday due to the reorganization of major stakeholders. In the three trading days before that, the stock surged 12 percent to CNY2.70 (USD0.41). Air China’s share price [SHA:601111] was trading up 0.31 percent at CNY9.78 (USD1.47) as of 1 p.m. China time today.

The airline owns 134 Boeing 737 aircraft and operates over 290 passenger and freight routes. Apart from domestic destinations, it also flies to South Korea, Japan, Thailand, India and Cambodia.

Editor: Kim Taylor