Air China, Cathay Pac to form Shanghai cargo JV

HONG KONG Aug 27 (Reuters) - Air China (0753.HK) said on Thursday it will set up a Shanghai-based cargo joint venture with Cathay Pacific (0267.HK) this year, further cementing ties after a recent strengthening of their cross-shareholding.

Formation of the joint venture will help China's and Hong Kong's flag carriers better compete in Shanghai with China Eastern (0670.HK), which will have more than half of the Shanghai market after merging with Shanghai Air 600591.SS.

The new venture between Beijing-based Air China (601111.SS), the world's largest airline based on market value, and Cathay would come after Air China bought a further 12.5 percent stake in Hong Kong-based Cathay earlier this month, lifting its interest to 29.99 percent. [ID:nT321641]

The venture could enhance Air China and Cathay's southern China air cargo business by handling exports from Shanghai through Hong Kong, Air China's vice president Fan Cheng told reporters.

"Asset evaluation for the joint cargo company with Cathay is nearing an end, and we are now in advanced discussions on the operation and development of the venture," Fan said.

He did not disclose any investment terms or the fleet size of the planned company.

Air China, the largest of China's trio of major air carriers, has 243 planes and the biggest international air network among Chinese airlines, including China Eastern Airlines (600115.SS) and China Southern Airlines (1055.HK) (600029.SS).

Its chairman Kong Dong said his company's advance bookings for September and October had seen improvement in Europe and the United States, although it was still too early to tell whether the international routes had bottomed out.

Oil prices regained some ground this year and helped buoy earnings of Chinese airlines.

Air China reported strong second-half earnings on Wednesday on fuel-hedging gains but it warned of potential weakness facing the industry. [ID:nSHA365478]

China Eastern returned to the black by posting 984.6 million yuan profit in the first half. [ID:nSHA233207]

China Southern will report its earnings on Friday.

Shares of Air China eased 1.1 percent in Hong Kong on Thursday but have risen 91 percent this year, beating a 41 percent gain on the broader market .HSI. (Writing by Alison Leung; Editing by Doug Young and Ken Wills)