Air China has revealed plans to take over Shenzhen Airlines in a move that would bring the majority of China’s aviation sector under the control of just three state-controlled carriers. The $100m deal would also strengthen the flag carrier’s foothold in the south of China.

The airline said it would double its current stake in Shenzhen to 51 per cent with an injection of Rmb682m ($100m). Shenzhen city government is investing Rmb348m to boost its share in the airline from 10 per cent to 25 per cent.

The deal effectively amounts to a re-nationalisation of privately-owned Shenzhen, which has been hit with allegations of financial mismanagement.

Li Zeyuan, a former military officer who controls Huirun, beat Air China in a bidding war in 2005 and acquired a 65 percent stake of Shenzhen Airlines for Rmb2.7bn.

However Li Zeyuan was arrested in December and two weeks ago his top executive at the airline, Li Kun, was also named in the investigation, leaving management of the airline in the hands of people who also serve as Air China executives.

Following years of heavy losses and a growth in small private carriers, China’s aviation industry is undergoing a state-directed overhaul that is intended to consolidate the sector around the big three state-controlled carriers – Air China, China Southern and China Eastern.

China Eastern bought its smaller rival Shanghai Airlines last year and a series of smaller private airlines have gone under or been bought out by state-owned competitors since 2008.

The deal appears to be part of a larger plan that would put the flag carrier’s operations on a par with the other two giant state-controlled carriers – China Southern and China Eastern.

Both Li Zeyuan, a well-connected former military officer, and Li Kun, former president, are under criminal investigation. Fan Cheng, a senior vice-president at Air China, took over as president and was named Communist party secretary at the smaller carrier in December.

Chinese media reports and industry insiders say the investigations are related to Li Zeyuan’s 2005 buy-out and possible problems he had funding his purchase of a 65 per cent stake in Shenzhen Airlines.

Air China is expected to raise its stake following the outcome of bankruptcy proceedings involving Huirun, the private company which holds a 65 per cent stake in Shenzhen Airlines.

The latest deal gives Air China a regional hub and a much-needed boost to its presence in the south, where it faces strong competition from China Southern, another state-owned carrier.