SYDNEY(Reuters) - Australia's competition watchdog said on Tuesday it plans to reject a proposal for Qantas Airways and China Eastern Airlines Corp to co-ordinate operations.

In a draft decision, the Australian Competition & Consumer Commission said the plan could lead to "significant public detriment" by increasing the carriers' ability and incentive to limit capacity or raise airfares on the Sydney-Shanghai route.

Qantas and China Eastern together account for more than 80 per cent of capacity on direct services on the Sydney-Shanghai route, which accounts for about a quarter of all direct flights between China and Australia, the ACCC said. "They are the two major airlines on the route and the only airlines offering daily flights, and so the major competitive constraint on each other. Competition between them will be greatly reduced under the proposed agreement," ACCC Chairman Rod Sims said in a statement.

Under the agreement, Qantas would co-locate at China Eastern's terminal in Shangai, providing better connectivity for passengers transferring to the latter's flight in Shanghai and leading to cost savings for both carriers.

Still, the range of travel options available to passengers for travel beyond Shanghai may not increase, the ACCC noted.

The watchdog is seeking submissions before making a final decision. Submissions are due by April 5.

Last month, Qantas reported its best first-half profit in four years, reporting a profit at its troubled international divisions for the first time since the global financial crisis.

Qantas has struggled in recent years thanks to high fuel costs, a strong Australian dollar, increasing international competition and a domestic price war with rival Virgin Australia Holdings.