Jan. 11 (Bloomberg) -- Air China Ltd. and China Eastern Airlines Corp. may swap shares in an alliance plan being prepared after Singapore Airlines Ltd. failed to buy a stake in China Eastern, said three people familiar with the negotiations.

Air China's parent, China National Aviation Holding Co., will suggest the cross-shareholding, said the people, who declined to be identified before an official statement.

Air China, the world's largest airline by market value, and affiliate Cathay Pacific Airways Ltd. are seeking a tie-up with Shanghai-based China Eastern to dominate the world's second- largest aviation market. China National Aviation will offer at least HK$5 a share, after minority shareholders rejected Singapore Air's HK$3.80 bid.

``The share swap may make it easier to be accepted'' by China Eastern's management, said Jack Xu, an analyst at Sinopac Securities Co. in Shanghai. ``China Eastern may not reject the plan as it can't afford to lose the best opportunity for expansion now.''

China National Aviation will make an offer by Jan. 22. It may bid to buy as much as 30 percent, it said on Jan. 7. The company may also propose a cargo venture between the two carriers and Hong Kong-based Cathay Pacific, the people said.

China Eastern closed unchanged at HK$7.04 in Hong Kong. Air China rose 1 percent to HK$10.52.

China Eastern spokesman Li Jiang was unavailable to comment immediately. Air China's head of investor's relation Rao Xinyu declined to comment.

Chinese carriers have a 44 percent share of the nation's international passenger market and less than 20 percent of its international cargo market, according to China National Aviation.

Independence

The proposed tie-up will come after China National Aviation helped scuttle Singapore Air's bid to buy 24 percent of China Eastern on Jan. 8. China National Aviation owns about 10 percent of China Eastern's minority shares and voted against Singapore Air's offer.

China Eastern had previously said it wouldn't consider an alliance with any company other than Singapore Air.

China Eastern will keep its management independence under the bid to be submitted by China National Aviation, the people said. It will be another ``successful case,'' following Air China's share swap with Cathay Pacific in 2006.

``A share swap may enable China Eastern to have some influence in Air China,'' said Xu. ``Combining routes and other resources may boost both companies' performance.''

China Eastern is forecast to have an operating margin of 2.5 percent this year, according to Xu. That compares with 10.7 percent at Air China and 9.9 percent at Cathay Pacific. Air China and Cathay Pacific own about 17.5 percent of each other.

The government, which controls both airlines, would like to see the combination if it can improve profits, the people said. The Assets Supervision and Administration Commission, an arm of the State Council, China's cabinet, controls the country's big three carriers.

To contact the reporters on this story: Irene Shen in Shanghai at ishen4@bloomberg.net;

Last Updated: January 11, 2008 05:28 EST