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Air China and Cathay stake claim on Chinese cargo market

Air China and Cathay Pacific have finally unveiled the details of their Shanghai-based cargo joint venture, which is being set up to join hands against strong competition from Chinese and foreign carriers in this highly contested region.

The main vehicle for the convoluted deal is Air China Cargo, which is 75%-owned by Air China with the carrier's parent China National Aviation owning the rest through its Fine Star subsidiary. Under the venture plan, Cathay Pacific China Cargo Holdings will take a 25% share of Air China Cargo for 852 million yuan ($125 million). Fine Star will increase its financial contribution to Air China Cargo with a 238 million yuan injection to retain a 24% share. Air China will still hold the remaining 51%.

In a related transaction a Cayman Islands corporation, Advent Fortune, is to take over Fine Star from China National Aviation. Cathay Pacific will provide an 817 million yuan loan to Advent Fortune, of which 190 million yuan will support Fine Star's injection into Air China Cargo.

Air China Cargo operates a fleet of seven Boeing 747 freighters and handles the allocation of cargo hold space on other Air China flights. It will use the proceeds from the Cathay and Fine Star investments to purchase four Boeing 747-400 converted freighters from Cathay and Dragonair.

While Cathay is not downplaying the importance of its Hong Kong cargo hub, the move does mark the growing significance of mainland China in the international cargo market. By basing the venture in Shanghai, the carriers are also directly taking on China Eastern and Federal Express, which have a major presence in the city. Guangzhou-based China Southern Airlines is also likely to feel the heat, say analysts.

Cathay chairman Christopher Pratt says: "Air China Cargo will ensure an efficient capture of cargo movements that may otherwise divert to rival hubs in the region. It makes good sense for Cathay Pacific and Air China to team up for this joint venture."

Air China chairman Kong Dong believes the joint venture will create the "platform for future growth", and says this will help the carrier maintain its "leadership position in the market, and contribute to the development of the Beijing and Shanghai aviation hubs".

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