Shanghai Airlines Co. has reached an agreement with China Eastern Airlines Corp. (CEA) on a proposed merger through which it will become a wholly owned unit of its much bigger peer, Shanghai Airlines Chairman Zhou Chi said on June 30.

"We are discussing several ways to merge, including via a share swap," Zhou told reporters on the sidelines of a Shanghai Airlines shareholder meeting.

Zhou added that after the merger, Shanghai Airlines will remain an independent legal entity.

A person familiar with the situation said last week that under a proposal endorsed by China's state assets regulator, China Eastern will take over Shanghai Airlines through a share swap.

To complete the merger, China Eastern will raise 7 billion yuan (US$1.02 billion) via a private placement in both Shanghai and Hong Kong, the person added.

Photograph: The fleet of Shanghai Airlines at Shanghai Hongqiao airport in June 2007. Photo by CARNOC.com message board member.