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Air China and Cathay Pacific set up Shanghai cargo JV. Chipping away the Hong Kong hub

26-Feb-2010

It may be two years overdue, but cross-equity partners Air China and Cathay Pacific have made good on their 2006 promise to develop a cargo JV carrier in Shanghai. As cargo markets come out of their two-year trough, the timing is good for the 51:49 Air China-Cathay foray into the Yangtze River Delta market. The carriers finalised their JV agreement yesterday, with the new Pudong-based operation to be named Air China Cargo Co Ltd (ACC).

The naming is important – Cathay is clearly the junior partner. But the Hong Kong-based airline would be grateful of gaining an exposure to Air China’s wealth of Mainland traffic rights, ensuring it is right in the middle of the action as China’s aviation market booms.

But just as Air China has moved to close to 30% ownership of Cathay (straddling two major global alliances in the process), there is a certain gravitational pull away from the traditional hubs towards the next-generation Mainland markets like Shanghai (particularly as markets liberalise and, for example, as cross-Strait relations normalise).

The Air China-Cathay Pudong cargo JV is another step in the diminution of the Hong Kong hub over time, as the Mainland market grows to dominate the region’s aviation market. And Cathay is determined not to remain on the periphery. (Interestingly, Cathay felt compelled to issue a separate press release noting it remains "firmly committed" to the further development of the Hong Kong aviation hub, presumably to soothe any concerns in the local freight community about the increasing focus further north. Cathay confirmed plans to invest "some HKD20 billion" (USD2.5 billion) in new freighters and double its freight capacity within the next five years).

Cathay Pacific Chairman, Christopher Pratt, stated, “we are very excited about this joint venture which further enhances our strong and deepening strategic partnership with Air China", adding, "as a strong home-based cargo airline with a firm foothold in the Yangtze River Delta, ACC 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 stated, "the restructuring of ACC’s shareholding comprises two major aspects. First, through fleet expansion, we efficiently set the platform for future growth. Secondly, two strong partners team up with complementary strengths to enhance our competitiveness. Given the solid cooperation foundation between Air China and Cathay Pacific, ACC will fully capitalize on both companies’ existing brand strengths and shareholders’ support, to capture business opportunities, maintain leadership position in the market, and contribute to the development of the Beijing and Shanghai aviation hubs”.

The existing Beijing-based Air China cargo operation will develop a base at Shanghai (see full operational details below). Beijing Airport outperformed Pudong in terms of cargo volume growth in 2009, but Pudong is a much larger (and higher potential) market than the capital.

Leading Chinese airports  cargo volume and cargo volume growth: 2009

Air China/Cathay Pacific sign cargo JV agreement - the details

Air China and Cathay Pacific signed a Framework Agreement to establish a jointly owned cargo airline. The two companies will use an existing cargo airline, Air China Cargo Co Ltd (ACC), a wholly owned subsidiary of Air China, as the platform for the JV.

The much-awaited agreement coincides with signs of recovery in the Chinese airfreight market, after a weak 2008, which has provided an impetus to negotiations between the parties.

CAAC freight traffic and growth: 2003 to 2010F

Competition to heat up in Shanghai

The Air China Cathay JV will give Cathay access to hubs in Beijing and Shanghai as overseas demand for auto parts, electronics and apparel recovers from last year’s global recession. The JV will also help Air China better compete with airlines, including FedEx and China Eastern Airlines in Shanghai, the nation’s financial capital and major air hub. UPS established its intra-Asia hub at Pudong in late 2008.

ACC commenced domestic and international operations in 2003 and is now China’s largest all-cargo airline. ACC's current cargo business strength is focused on the Northern China and Yangtze River delta (YRD) while Cathay Pacific's core cargo business is the Pearl River Delta (PRD). These two regions are already two of the world’s largest export-generating manufacturing centres and the airfreight trade lanes to Europe and the USA reflect this fact in their size and historic growth rates.

Air China currently has a 12.3% share of freight capacity to/from and within China, followed by China Cargo Airlines, with an 11.7% stake. Great Wall Airlines, also based in Shanghai, has 5.4% of the freight capacity share, followed by Cathay Pacific, with a 5.4% share.

Cathay Pacific to hold a 49% indirect/direct interest through a USD244 million investments

Key details of the agreement are as follows:

Details of Air China/Cathay Pacific jointly-owned cargo airline

 

Details

Ownership structure

ACC will continue to be a subsidiary of Air China, which will hold 51% equity in ACC, while the Cathay Pacific Group will acquire a 25% equity interest directly in ACC and fund an offshore trust, in the form of a loan, to hold another 24% economic interest in ACC. The total value of the Cathay Pacific Group’s investment in the JV will be CNY1,669 million (USD244 million)

Fleet

Cathay Pacific will sell four freighters and two spare engines to ACC, which currently operates seven B747Fs. ACC currently operates seven B747Fs and procures and sells the cargo belly space provided by Air China’s extensive domestic and international passenger network. The Cathay Pacific Group operates 25 B747Fs together with belly cargo space on 126 passenger aircraft. Scheduled freighter services are operated to 37 worldwide destinations.

Operating bases

Beijing and Shanghai will remain as the airline's its principal operating bases

Launch

ACC plans to commence operations in Summer of 2010, subject to the approval of the relevant authorities and the respective shareholders of Air China and Cathay Pacific

Executive appointments

The new ACC Board of Directors will have seven Directors, four (including the Chairman) appointed by Air China and three (including the Vice-Chairman) by the Cathay Pacific Group

Network

ACC operates all-cargo services to 14 destinations worldwide and procures and sells the cargo belly space provided by Air China’s domestic and international passenger network. Meanwhile, Cathay operates 25 B747Fs (with belly cargo space on 126 passenger aircraft) on scheduled freighter services to 37 worldwide destinations


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