Excluding foreign airlines, China’s three leading carriers Air China Ltd, China Southern Airlines Company Ltd and China Eastern Airlines Corporation Ltd – popularly known as the ‘Big Three’ – and Cathay Pacific Airways, Hong Kong’s de facto flag carrier, are the principal players in the China market, whose air cargo is forecasted to rise 12 per cent to 4.45 million tonnes this year.
Looking back four years ago, Air China and China Eastern, a majority stakeholder in China Air Cargo Airlines, attempted a merger of their cargo divisions, and despite reaching an agreement, they failed. History repeated itself when another proposal last year by the two carriers’ parent companies to merge also collapsed with Singapore Airlines taking on a spoiler’s role.
Over the same period, there was also speculation that China Southern would merge with a Chinese airline, but it did not happen. However, the airline recently formed a cargo joint venture with AirFrance-KLM.
“As at December 31, 2007, Air China, China Southern and China Eastern accounted for 28.2 per cent, 25.7 per cent and 21.4 per cent, respectively, of the total commercial air traffic (as measured in RTKs) handled by Chinese airlines”, an aviation official said.
Against this scenario, Cathay Pacific, made the first major acquisition move two years ago by acquiring the territory’s second largest airline, Hong Kong Dragon Airlines (Dragonair).
On September 28, 2006, Cathay, which previously owned about 17.79 per cent of Dragonair, acquired the remaining 82.21 per cent equity interest in Dragonair, turning the latter into its wholly-owned subsidiary.
The Dragonair acquisition involved five parties – Cathay Pacific, Air China, China National Aviation Company (CNAC), CITIC Pacific and Swire Pacific – which carried out a shareholding realignment exercise to complete the deal.
In connection with the acquisition, Cathay doubled its shareholding in Air China to 20 per cent and the latter acquired about 10.16 per cent equity interest in Cathay.
Air China
In March this year, state media reported that Air China was in talks with Shanghai Airlines on “deep-level cooperation”.
Quoting Sun Yu, an Air China official responsible for corporate strategy, the Beijing Times reported that the Shanghai local government would be key to reaching an agreement, and Air China was “definitely” pursuing a merger and not just cooperation.
However, the report was denied with both airlines saying they had no plans to enter into an equity tie-up.
Sources said that the Shanghai government’s resistance against a merger proposal was not at all surprising as the Shanghainese, who are very proud people, would want Shanghai Airlines to remain autonomous and preserve their Shanghainese identity.
China Southern
In August last year, China Southern, the country’s largest carrier by fleet size, denied media reports that it may merge with a mainland airline.
“Reports that the company may merge with other airline companies are not true,” the company said in a Shanghai Stock Exchange statement.
On June 2, 2008, China Southern and Air France-KLM announced that they would jointly develop a Sino-European Cargo joint venture, which subject to approvals, should be completed by year end.
In a separate development, both China Southern and China Eastern signed in January this year a business cooperation framework agreement, according to a statement filed by China Southern with the Shanghai Stock Exchange.
China Eastern
In April, 2006, China Eastern President Li Fenghua said that the airline was planning to sell at least 20 per cent of its shares to raise about 3 to 4 billion yuan.
A few months later, Singapore Airlines (SIA) admitted that it was interested to buy into China Eastern which was facing massive losses due to the soaring oil prices at that time.
In September last year, SIA and Temasek, the Singapore government’s investment arm, signed a deal with China Eastern to buy a 24 per cent stake in the Chinese airline at HK$3.80 per share.
However, the deal was derailed when China Eastern’s shareholders rejected SIA and Temasek’s offer at a shareholders’ meeting in January this year. CNAC, Air China’s parent company, which owns more than 12 per cent of China Eastern, and China Eastern Airlines Group, parent of China Eastern, offered no less than HK$5 per share.
Subsequently, China Eastern rejected both bids on the grounds that the latter had failed to demonstrate sincere intentions and thorough planning.
China Eastern said its agreement with SIA in November has a lockup period preventing it from accepting any other offers for nine months, which is up to August 9, 2008.So, it seems that another round of consolidation is around the corner for the China air cargo industry.