Air China Cargo and China Southern Cargo to merge?

The cargo divisions of Air and Southern are likely targets for , 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 and Guangzhou-based 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 , Cathay Pacific Airways and YTO Express. According to Cargo Facts interviews with sources familiar with drafts of the plans at each of the big three airlines in however, Air and 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.

Airlines was the first major airline to embark upon the process last November when it divested 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 commission along with the State-owned Assets Supervision Administration are now preparing for round two. To no surprise, Southern and Air are included in the second tranche of ten companies targeted for , and have already begun drafting proposals.

What exactly both companies are planning remains to be seen, though 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 Cargo) and 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 Southern and Air 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 Cargo, Southern and 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 is hot, and largely underserved by the big three apart from belly space in their passenger affiliates (Air Cargo does operate 757Fs in express service on behalf of 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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