There is continued speculation about the merger of several passenger and cargo airlines to create a new force in air transport in China. It is now widely reported that Cathay Pacific has assumed control of Dragonair, a move which will dramatically transform the air cargo market.

Last week saw speculation about the merger of several passenger and cargo airlines to create a new force in air transport in China- the reality appears to be somewhat different. It is now widely reported that Cathay Pacific has assumed control of Dragonair- the company that it helped create.

In doing so it will create a passenger and cargo airline alliance with unique access to both Chinese national and international traffic.

Newspaper reports suggest that Cathay ? which already has a 17.8% stake in Dragonair- will pay US$1.29bn for the rest of the equity. In exchange, Air China will take an estimated 10% stake in Cathay Pacific. Air China owns 43.3% of Dragonair

The logic of the deal is further reinforced by the fact that government investment organisation CITIC owns 28.5% of Dragonair and 25.4% of Cathay. The UK based creator of Cathay, Swire Pacific, will retain the largest shareholding in Cathay Pacific.

On the freight side alone this is a highly attractive deal. China has closely limited international access to its air?routes. Only Chinese based airlines can trade between different cities in China. Even Cathay is limited to just two international routes into China. But Dragonair, based out of Hong Kong has a rapidly growing business. On the freight side it has been growing by 30% a year for the past couple of years. Therefore the opportunity exists to create a cargo airline with a Chinese based global network.

The big losers are the smaller Chinese airlines that have been expanding their freight operations over the past few years. China Cargo Airlines-a joint venture between the shipping line COSCO and the airline China Eastern- and Great Wall Airlines -a joint venture with China Great Wall Industry Corp/ Temasek Holdings and Singapore airlines- face being relegated to second division status. Despite this their prospects are still good in a market comfortably growing in double figures. Nevertheless, if the Cathay/Dragonair deal does come-off it will change the landscape of the airfreight market into and within China.

Source: Transport Intelligence

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