Korean/Sinotrans China
Joint Air Cargo Venture

     No doubt about it, 2006 is stacking up as a special year for China’s air cargo industry. Following the successful takeoff of Lufthansa-invested Jade Airlines, Korean Air, the world's largest international commercial cargo carrier, has scored for itself a milestone in China’s air cargo market.
     Only four months after ceasing negotiation with OK Airline, on September 19th, Korean Air signed a contract with Sinotrans Air Transportation Development, subsidiary of Sinotrans, China’s largest logistics company.
     Total capital of the planned 30-year venture will amount to US$65 million (RMB507 million), with Sinotrans Air, which is 65 percent owned by Sinotrans, as the major stakeholder, taking a 51 percent stake in the joint-venture company.
     Korean Air will take a 25 percent stake.
     Two South Korean financial institutions, Hana Capital and Shinhan Capital, holding 13 percent and 11 percent respectively, will share the remainder .
     Since 2004, OK Airline, China’s first private airlines, had negotiated with Korean Air with the aim of establishing a cargo carrier.
     By way of background, the only one airplane, B737-900 that OK Airline operates is rented from Korean Airlines.
     Commenting on the negotiation, Mr. Liu Jieyin, (left) President of OK Airline, told FlyingTypers:
     “When Korean Air first approached us they wanted complete control over the joint venture.
     “The Korean view was that both CEO, but also CFO should be nominated by them.
     “They also were seeking a merger with OK Airline.
     “But OK Airline was not interested in those terms.
     “Also as a Chinese airline company we cannot really participate in the operation of the joint venture.
     “We determined not to negotiate further with Korean Air and broke off talks earlier this year in May.”
     Growth rate of China’s logistics service market has been top in the world for years, about 30 percent year on year, attracting major cargo carriers.
     However, China currently does not allow foreign airlines to operate domestic cargo routes independently.
     Only through joint ventures with domestic companies can foreign airlines enter China’s cargo market.
     Talking about Korean Air’s contract with Sinotrans, Mr. Liu said:
     “Sinotrans is a logistics company, not an airline.
     “The impression that their cooperation gives to me is that Korean Air will play a dominating role in the joint venture, despite its smaller share versus Sinotrans.
     “If the joint venture rents freighters from Korean Air, in my view that amounts to the same as Korean Air directly flying into China.
     “According to the contract, Korean will appoint the chief executive and chief finance officer of the cargo carrier, with board chairman from Sinotrans.
     Mr. Pan Baoliang, Security Department of Sinotrans, told FlyingTypers during a telephone interview :
     “The main reason why Korean Air will lead daily operation and management of the joint venture at the first stage is that they have rich air cargo experience, we don’t have.
     “The Tianjin-based joint venture, will start operations in the second half of next year with three freight planes, Boeing 747-400 freighter.
     “The new company will mainly operate international air cargo business.
     Supported by international flight lanes of Korean Air, the new company will fly to Europe, North America, and other countries in Asia, with China to be the starting destination.” Mr. Pan said.
     Korean Air hopes this joint venture would be the largest air cargo carrier in China.
     But there is a long way to go before the company gets to that point and in fact even starts business.
     After submitting the JV proposal to China, KAL and Sinotrans must wait for final approval from both Civil Aviation Administration of China (CAAC) and Ministry of Commerce of China to examine and approve the deal.
     Right now in addition to Jade Cargo, and the joint venture of Korean Air and Sinotrans, China's air cargo market has attracted other world's leading carriers.
     Singapore Airlines holds a 25 percent stake in Great Wall Airlines, an all-cargo carrier jointly established with China Great Wall Industry, while Taiwan's Evergreen Group, parent of Evergreen Airlines, formed Shanghai Airlines Cargo with Shanghai Airlines.
(David)