China Airlines confirms China Cargo buyin

Taiwan-based China Airlines is taking a 25% stake in China Eastern's cargo unit

By staff and wire reports

HONG KONG, China -- Taiwan-based China Airlines confirmed Thursday it has signed a deal to buy 25 percent of the cargo operations of Shanghai-based China Eastern Airlines.

The two companies inked the agreement in Shanghai on Wednesday afternoon. China Airlines now has to apply for approval from the Taiwanese government.

The company expects that to take up to two months to land. Chinese authorities have given the deal a preliminary green light.

If the deal goes ahead, it would be a significant step forward in removing the transport and investment barriers between China and Taiwan.

China considers Taiwan a renegade province and has not ruled out the use of force to bring it back into the mainland fold.

Advisory group urged broader ties

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China Airlines is paying around $45 million for a 25 percent stake in the Shanghai-based China Cargo, a spokesman told CNN.

That values China Cargo at 1.5 billion yuan ($181 million). China Cargo is now 70 percent owned by China Eastern and 30 percent by China Ocean Shipping Co (COSCO).

China Airlines is buying stock from both China Eastern and COSCO. China Eastern's stake in the unit would be diluted to 55 percent and COSCO's interest would drop to 20 percent.

China Cargo operated one Boeing 747 and three MD-11s as of the end of 2000. It has since returned the leased Boeing due to a slowdown but hopes to add up to eight more planes by 2005.

Last month a top Taiwan advisory panel urged the government in Taipei to pursue broader ties with the mainland to help revive the island's sputtering economy.

The deal inked Wednesday would mark the first time a Taiwan airline buys into a mainland counterpart.

Initial cargo flights would be indirect, via Hong Kong. Taiwan has had a ban on direct flights to the mainland since the end of China's civil war in 1949.

But analysts see it as ultimately leading to direct cargo flights between the two. That might open the way to direct passenger flights.

Deal has been in pipeline for some time

"China Airlines will take some of the seats on China Cargo's board of directors and jointly manage the cargo carrier with us," said a China Eastern official.

China Eastern chairman Ye Yigan told reporters in August that the deal was expected to be signed this month and that both governments should approve the agreement by the end of the year.

But a similar agreement between the two collapsed, as terms proved hard to nail down and political tensions rose between Taiwan and China.

China Airlines, which is majority owned by a government-controlled foundation, ultimately shelved the plan last year.

Negotiations restarted and in June China Airlines said it hoped to finalize the purchase of a stake in China Cargo by the end of this year.

China Airlines' shares have gained about 50 percent since hitting a 2001 low of T$11.05 on July 19. They were flat at T$16.60 late Thursday morning.

China Airlines and its affiliates already own 18 percent of the Xiamen cargo airport, across the Strait of Taiwan in the mainland's Fujian province.

Reuters contributed to this report.