Air China will seek approval from China's central government to establish a Shanghai-based cargo joint venture with Cathay Pacific to boost its cargo business amid rising demand.

"International cargo demand from Shanghai is four times higher than Beijing, so we should capture cargo movement opportunities between Beijing, Shanghai and Hong Kong to develop the cargo business in Yangtze River and Pearl River delta areas," said Air China president and executive director Cai Jianjiang at a news conference in Hong Kong on March 20.

Beijing-based Air China, mainland China's largest international carrier, reported a weak showing from its cargo division in 2006 with cargo revenues climbing only 8.75 percent to 4 billion yuan (HK$4.04 billion).

However, cargo yield declined 6.8 percent year on year to 2.06 yuan per tonne kilometer.

Cai said the airline's cargo business is facing fierce competition from foreign carriers as a result of the central government's open skies policy.

Air China has increased cooperation with Cathay Pacific in sales and operations after taking a larger stake in the Hong Kong carrier as part of Cathay Pacific's HK$8.2 billion takeover of Dragonair last September. Air China sold its indirectly held 43.29 percent stake in Dragonair to Cathay Pacific for HK$430 million in cash and 289 million shares in Cathay Pacific, giving Air China a 10.16 percent strategic stake. At the same time, Cathay Pacific doubled its stake in Air China to 20 percent.

On March 19, Air China announced net profit for 2006 jumped 87 percent to 3.2 billion yuan, while revenues rose 17 percent to 47 billion yuan on the back of stronger passenger and cargo traffic.

On March 20, Goldman Sachs analyst Julie Lim wrote in a report that Air China's strong passenger momentum is expected to continue and its strategic alliance with Cathay Pacific may further raise its Hong Kong and mainland load factor and yields in 2007.

Air China has earmarked 16.9 billion yuan for capital expenditure in 2007, of which 11 billion yuan will be used for fleet expansion. It hopes the government will inject cash to boost the ailing aviation sector.

"Airlines are one of the key industries that the government will control and support," Air China chairman Li Jiaxiang said on March 20.