Air China, the nation's flagship carrier, said on January 9 that it is likely to set up a 50-50 cargo joint venture in Shanghai with Cathay Pacific this year.

"We are now busy preparing for the joint venture program and hope to realize practical progress in the cargo business partnership with Cathay Pacific in the first half of 2007," said Fan Cheng, vice-president of Air China Ltd.

The move is part of a cross shareholding agreement reached between the two airlines in June last year and is expected to create the largest cargo carrier on the Chinese mainland.

"How to significantly improve our cargo transport capabilities is an important task for Air China in 2007. The establishment of the joint venture with Cathay Pacific will lay a solid foundation for our cargo business," Fan said.

Air China has been in talks with Shanghai-based China Eastern Airlines for more than half a year to create an air cargo conglomerate by merging their cargo units. But Fan said the two sides had not reached an agreement.

Analysts said that finding a compromise between the two sides had been a major difficulty in the tie-up negotiations as their parent companies are China's largest aviation groups.

Air China's A shares rose 9.97 percent to close at 6.4 yuan on January 9. The carrier had a frosty start to its initial public offering (IPO) on the Shanghai Stock Exchange in August last year, with its shares opening lower than its IPO price of 2.8 yuan.

The share price rise is mainly due to the positive expectation of investors for Air China's performance "in the mid term", analysts said.

"The expectation of lower international oil prices and further appreciation of the renminbi is good news for the whole airline industry," said Li Lei, an aviation analyst with CITIC China Securities.

"Another major boost for investor confidence in Air China is the partnership with Cathay Pacific," Li said, adding that Air China could reap stable revenue of at least 600 million yuan annually by holding 17.5 percent in Cathay Pacific, which is Asia's second-most profitable airline.

Beijing-based Air China recorded net profit of 3.35 billion yuan in the first nine months of last year. It will soon issue its annual report.

"We are confident that our performance in 2006 will break records," said Zheng Bao'an, the company's board secretary.

Air China's net profit reached 2.41 billion yuan in 2005, a slight rise of 0.85 percent from 2004.