4minutos - Source: BBC
China Eastern has joined forces with a range of partners including China's biggest online travel agency Trip.com.
The new airline will be focused on the island destination of Hainan, home to eight million and a free-trade hub.
Some have questioned the timing of the launch which comes as the airline industry struggles to survive.
Government-backed China Eastern will own a majority 51% share in the new carrier, which will be called Sanya International Airlines.
Other backers include Shanghai-based Juneyao Airlines and a unit of Trip.com according to an announcement made to the Hong Kong Stock Exchange on Sunday.
No timeframe was given for the launch of the new airline, which will need regulatory approval.
The partners are hoping to capitalise on Hainan's growing significance in China. The island is about 30 times the size of Hong Kong and is a popular holiday destination for Chinese tourists.
Chinese president Xi Jinping also wants to turn the island into the nation's largest free-trade zone.
Beijing has outlined plans to lower the income tax rate on Hainan for selected individuals and companies to 15%, and relax visa requirements for tourists and business travellers.
The launch plans come during the biggest crisis the airline industry has faced as planes are grounded and strict quarantines put in place to curb the spread of the Covid-19.
Greg Waldron, Asia managing editor at FlightGlobal magazine, said: "The airline's official launch will likely depend on the continued recovery of Chinese domestic traffic and the Covid-19 situation in both China and regionally.
"It takes time to build an airline, however, so a great deal of work needs to take place in terms of equipment and personnel before the airline takes to the air."
A number of high-profile airlines have been struggling to survive during the crisis including Virgin Australia, Thai Airways and Colombia's Avianca. Other airlines have been forced to layoff thousands of workers and downsize operations.
The airline industry could suffer losses of more than $84bn (£66bn) this year, the International Air Transport Association, warned last week.
But Shaun Rein, founder of the China Market Research Group, said it was actually a good time to start a new airline focused on Hainan.
"Even before Covid, 2020 was the year of domestic Chinese tourism as China wants to focus more on seeing their own country, especially hot spots like Hainan, Yunnan and emerging ones like Gansu."
He added that the US-China trade war has seen "emerging patriotism with Chinese citizens wanting to show their children how great their country is and to teach them more about its heritage".
Meanwhile, ongoing pro-democracy protests in Hong Kong have discouraged many Chinese travellers from visiting the former British colony.
"Hainan itself as a destination is hot right now, especially as the government supports duty-free shopping there. Hainan also has no quarantine or other travel restrictions."