Source: American Shipper+
Date Posted: 2/25/2010 11:00:08 AM
Cathay, Air China cement cargo venture
Cathay Pacific and Air China on Thursday confirmed they have agreed to launch a joint venture cargo airline, using existing aircraft from both airlines’ fleets.
The new venture will use Air China’s existing cargo brand, Air China Cargo, with an expanded fleet and a goal to develop a strong hub in Shanghai to complement Air China's hub in Beijing and Cathay's hub in Hong Kong.
Hong Kong-based Cathay Pacific said it will provide four of its 747-400 converted freighters to the operation (as well as two spare engines). Those will be added to seven freighters in Air China’s existing cargo fleet.
The venture is expected to be operational this summer. Both airlines will retain ownership and operational control of the venture, with Air China providing four of the board of directors (including chairman) and Cathay the other three. State-owned and Beijing-based Air China will control 51 percent of the venture, with Cathay holding the other 49 percent. Cathay said its investment in the venture will amount to $244 million. Air China owns a 30 percent stake in Cathay and Cathay holds 18 percent of Air China.
Cathay stressed that the venture will not replace its current cargo subsidiary. Air China Cargo began operations in 2003 and is China’s largest all-cargo airline.
“Cathay Pacific is not creating a brand new airline -- it is buying into an existing airline that already has seven freighters flying and will have a total of 12 freighters by the end of next year,” the airline said in a statement. “The joint venture and Cathay Pacific Cargo are completely separate and will compete. They also have the chance to work together, within the normal antitrust parameters, to create, through interline arrangements, something of mutual value that neither could achieve working on its own. The conduits between (Hong Kong) and (China) are clearly critical to this end and both parties have agreed that over the next four years they will discuss further the possibility of future arrangements on Cathay Pacific freighter services within the PRC to strengthen their competitive positions in this respect.”
Cathay said it will continue to expand its own fleet and that of the joint venture.
“The joint venture needs additional aircraft to grow and its geographical location means that the four (converted freighters) from Cathay Pacific are well suited to the task,” Cathay said. “The Cathay Pacific Cargo freighter fleet will continue to grow, not diminish, with 10 new and larger Boeing 747-8 freighters being delivered from early 2011. This translates into double-digit capacity growth levels in 2011 and 2012, even after the four aircraft have left the Cathay Pacific fleet and joined the joint venture fleet.”
A focus of the new venture is to create what Cathay called a “strong home-based carrier” in the Shanghai. Cathay acts as that carrier in Hong Kong and Air China in Beijing.
“At present Cathay Pacific Cargo operates 15 to 16 freighter services per week between Shanghai and Hong Kong, successfully ‘hubbing’ export and import cargoes to and from North America and Europe” through Hong Kong, the airline said. “Cathay Pacific is able to do this because Shanghai lacks a strong, home-based carrier that is able to offer a more cost-effective and superior direct service than that provided by Cathay Pacific and other indirect operators.
“A strong home-based cargo airline with a firm foothold in the (Yangtze River Delta) will ensure an efficient capture of cargo movements that may otherwise divert to rival hubs in the region. It makes sense for Cathay Pacific and Air China to team up for this joint venture because the airlines’ complementary strengths in products, services, network and expertise will enable the joint venture to offer very competitive services to customers in northern and eastern China. The objective is that this joint venture will grow to become the strong home-based carrier in Pudong and Beijing, just as Cathay Pacific is at (Hong Kong),” Cathay said
The arrangement with Air China was precipitated by the reality that a carrier at some point will make Shanghai its hub, negating Cathay’s ability to use Hong Kong as a transshipping hub to North America and other destinations.
“The competitive advantage of Cathay Pacific and (Hong Kong International Airport) with respect to capturing transshipment traffic to and from Shanghai will be further threatened by the likelihood that Taiwanese carriers will soon be granted permission to transship PRC-originating traffic to and from Europe and North America over their Taipei hub,” Cathay said. “Given these competitive realities it makes strategic and commercial sense for Cathay Pacific to join its strategic partner, Air China, in forming a joint venture cargo airline that has the potential to become the strong home-based carrier that the Shanghai market needs and can support."
The recent merger of China Eastern Airlines and Shanghai Airlines, both based in Shanghai, could well be the impetus for the agreement between Air China and Cathay.
“It must be assumed that a strong home-based carrier will emerge in the Shanghai market," Cathay said. "Cathay Pacific and Air China are not alone in aspiring to fill this role. If Cathay Pacific were not involved in such a development, then it can be reasonably assumed that our ability to compete would be diminished.” — Eric Johnson
