Both airlines made a loss last year
China Eastern Airlines is to buy its smaller rival Shanghai Airlines, in an all-share deal set to be worth about 7bn yuan ($1bn; £637m).
Under the announcement, each share of Shanghai Airlines will be exchanged for 1.3 China Eastern shares.
China Eastern will also raise 7bn yuan via a share issue.
The takeover will give China Eastern control of more than 50% of flights from its Shanghai base. Analysts said the deal would "relaunch" the carrier.
The joining together of the two firms, both of which made a loss last year, will enable them to compete more effectively with domestic rivals Air China and China Southern Airlines.
Shanghai Airlines will become a subsidiary of state-controlled China Eastern following the completion of the deal, but keep its brand name.
China Eastern currently operates 240 planes, while Shanghai Airlines has a fleet of 66.