Air China and Cathay Pacific Establish Cargo Airline Joint Venture

Air China Limited and Cathay Pacific Airways Limited signed a Framework Agreement today (25 February) in Beijing 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 joint venture.

Upon completion of the transaction, ACC will continue to be a subsidiary of Air China. Air China 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 joint venture will be RMB 1,669 million.

Cathay Pacific will also sell four freighters and two spare engines to ACC.

The joint venture partners established their strategic cross-shareholding relationship on 8 June 2006, under which Air China made a direct strategic investment in Cathay Pacific, and Cathay Pacific increased its strategic investment in Air China and assumed 100 per cent ownership of Dragonair. At the same time, both parties signed an operating agreement that also announced their intention to form the cargo joint venture.

Subject to the approval of the relevant authorities and the respective shareholders of Air China and Cathay Pacific, ACC plans to commence operations as a joint venture airline in the summer of 2010, with Beijing and Shanghai remaining as its principal operating bases.

The new board of directors at ACC will have seven directors, four (including the chairman) appointed by Air China and three (including the vice-chairman) by the Cathay Pacific Group. The make-up of the board and the management team is designed to take full advantage of the complementary strengths of the two companies in terms of experience and expertise that would prepare ACC for broader international growth.

ACC began domestic and international operations in 2003 and is now China's largest all-cargo airline. The joint venture partners will continue to develop its business on this solid foundation. 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). The PRD and YRD 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.

The establishment of a cargo airline joint venture based in Shanghai by Air China and Cathay Pacific will enable ACC to capture the air cargo business opportunities from the important and competitive YRD region. The complementary strengths of Air China and Cathay Pacific in products, services and expertise will bring to customers more competitive services and greater choice, therefore further strengthening ACC's competitive position.

Air China Chairman Mr Kong Dong said: "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."

Cathay Pacific Chairman Mr Christopher Pratt said: "We are very excited about this joint venture which further enhances our strong and deepening strategic partnership with Air China. The joint venture airline will provide the two most important cargo-generating regions in the Mainland with two highly competitive and efficient home-based carriers - Cathay Pacific in the Pearl River Delta and ACC in the Yangtze River Delta.

"Both regions will remain competitive relative to other export zones elsewhere in the world. 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."

ACC currently operates seven Boeing 747 freighters. It also procures and sells the cargo "belly space" provided by Air China's extensive domestic and international passenger network. The airline operates all-cargo services to 14 destinations worldwide.

The Cathay Pacific Group operates 25 Boeing 747 freighters together with belly cargo space on 126 passenger aircraft. Scheduled freighter services are operated to 37 worldwide destinations.

(More details of the joint venture are available through the Stock Exchange announcement at www.airchina.com.cn or www.cathaypacific.com).