Shanghai Airlines said on Tuesday that it had agreed to become a wholly-owned subsidiary of its larger rival, China Eastern Airlines.
Shanghai Airlines Chairman Zhou Chi told reporters at a shareholders' meeting that the two carriers had reached an agreement after merger talks announced earlier in June, but had yet to finalise the mechanics of the deal.
"We are discussing several ways to merge, including via a share swap," Zhou was quoted as saying by Dow Jones Newswires on the sidelines of the meeting.
Zhou said Shanghai Airlines would remain a legal entity independent of China Eastern Airlines, one of China's three largest carriers, to ensure it would keep its routes.
"The legal entity can help Shanghai Airlines keep the traffic rights it already owns, which will benefit the merged group," Zhou said.
To complete the merger, China Eastern will raise 7 billion yuan (1.02 billion dollars) through a private placement in Shanghai and Hong Kong, under a proposal endorsed by China's state assets regulator.
China Eastern will swap 1.3 of its Shanghai-listed A shares for each Shanghai Airlines A share, Dow Jones reported, citing a person familiar with the situation.