Air China Cargo and China Southern Cargo to merge?

The cargo divisions of Air China and China Southern are likely targets for reform, and could soon be spun-out as standalone companies.

As the Chinese Government moves to pare down its outlays on state-owned behemoths, it has been widely reported that the cargo and logistics operations of Beijing-based Air China and Guangzhou-based China Southern will be divested and merged into a single entity. Sources quoted in Bloomberg have even identified potential investors for the new company, which include freight forwarder Sinotrans, Cathay Pacific Airways and YTO Express. According to Cargo Facts interviews with sources familiar with drafts of the reform plans at each of the big three airlines in China however, Air China and China Southern are indeed drafting proposals to spin-off their cargo operations into standalone companies, but at this stage these proposals do not include merging and combining into a single company.

For the past year, China’s National Development & Reform Commission has been busy facilitating its pilot program for “mixed-ownership” reforms which aim to open up state-owned companies to private investment. Although the process is not completely transparent, in practice the commission identifies targets for reform, to which the companies respond with a proposal. “Pilot” companies were identified last year, and ten companies have already embarked upon the reform process. The commission has since said that it expects two more tranches of reforms to follow, with the next round occurring this year.

China Eastern Airlines was the first major airline to embark upon the reform process last November when it divested China Cargo Airlines and Eastern Air Logistics, and sold the assets to a separate holding company (which is expected to go public later this year).  Moving into 2017, the reform commission along with the State-owned Assets Supervision Administration are now preparing for round two. To no surprise, China Southern and Air China are included in the second tranche of ten companies targeted for reform, and have already begun drafting reform proposals.

What exactly both companies are planning remains to be seen, though China Eastern Airlines is likely a suitable model. If that is the case, the freighter fleets and cargo divisions of both airlines could soon be divested from their parent airlines to form standalone holding companies. Although Cathay Pacific (which already owns a significant stake in Air China Cargo) and Sinotrans are plausible investors, minority investors could include any mix of companies. Further into the future these two entities could merge– but there is no evidence to suggest the Chinese government is forcing China Southern and Air China to merge their respective cargo operations into a single company at this time.

Also uncertain, is the long-term impact these sell-offs will have on the freighter fleets of the three carriers. The bulk of the freighter fleets operated by Air China Cargo, China Southern and China Cargo Airlines consist of 777Fs and 747-400Fs which are deployed on long-haul flights carrying non-express general and specialty freight. But the e-commerce-fueled express market in China is hot, and largely underserved by the big three apart from belly space in their passenger affiliates (Air China Cargo does operate 757Fs in express service on behalf of China Postal Airlines). As standalone companies, these new entities could venture into serving the domestic express market, but that would require the addition of narrowbody freighters.

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