Air China is set to acquire a 100% stake in a private airline, and is negotiating with Cathay Pacific and China Cargo Airlines, a subsidiary of China Eastern, on the establishment of a joint venture cargo airline in Shanghai.

Kong Dong, chairman of Air China and general manager of Air China Group, Air China’s parent company, revealed that the deal with East Star Airline would be finalized soon, and denied the rumor that Air China would take only a 90% stake in East Star Air for 600 million yuan.

East Star Airline was established on May 19, 2006 by several Hubei-based companies. With 9 planes, it has now developed over ten routes.

Last year’s oil price hike and the later demand decline have thrust China’s aviation industry into an unprecedentedly cold winter. Private airlines, small and lacking adequate financing channels, are facing the heaviest pressure. Hangzhou Xiaoshan Airport claims East Star Airline owes the airport over 3.8 million yuan.

Air China’s acquisition of East Star Airline brings the Wuhan market, a key area in the middle of China, into its orbit. Air China’s operations have mainly focused on Shanghai, Beijing and Chengdu, and haven’t had much traffic through Wuhan.

Eyeing Shanghai for cargo business

Shanghai has long been an even bigger target for Air China. Last year saw its unsuccessful attempt to take a major stake in China Eastern, which is based in Shanghai. Kong Dong said Air China wants to set up a cargo airline out of Shanghai and was talking with Cathay Pacific and China Cargo Airlines, but had yet to decide who to cooperate with and the details of share holding.

Earlier China Eastern planned to set up a cargo airline in Shanghai jointly, 51% and 49%, with Cathay Pacific. It now seems China Eastern may be a potential partner for Air China through its China Cargo Airlines.

China’s Civil Aviation Administration once predicted that in 2009 domestic routes would still grow by 10%. Chairman Kong thinks the 10% may yet be realized judging from the situation in January and February. But if international routes fail to rebound, the cargo market will worsen. China Eastern and China Southern both received a capital injection from the government at the end of last year. Now Air China is also looking to the government for funding.

Kong said Air China would not postpone the delivery of new aircraft this year, and would allocate planes to key and profitable routes. He added that the company was cutting loss-making routes.