Four years ago, Air China and China Eastern Airlines, majority holder of China Air Cargo Airlines, failed to merge their cargo divisions despite reaching an agreement. It must seem like deja vu for the two carriers as a current proposal to merge their parent companies hits a brick wall with Singapore Airlines playing the role of spoiler.

China Eastern rejected the partnership offer proposed a month ago by China National Aviation Co (CNAC), the parent of Air China. The CNAC proposal included consolidating the cargo businesses of both carriers and investing jointly to build an air cargo company.

But China Eastern prefers to have a strategic investor like Singapore Airlines as its partner. Singapore Airlines and parent Temasek Holdings' bid of HK$3.8 per share for 24 percent of China Eastern was blocked by minority shareholders late last year after comments by Air China that the offer price was too low.

The rejection of Air China's offer raises doubts over the long-awaited air cargo consolidation again, although analysts believe cooperation will continue between the carriers even if China Eastern refuses to change its stance.

"The two air cargo operators, relatively strong in northern and southern China, could achieve a win-win result in the case of an alliance," said Professor Cao Yunchun of the China Civil Aviation Management College.

China's airlines entered the air cargo arena late and with small fleets, limited stops and weak integration. Over the years the market shares of the Chinese carriers kept declining from over 70 percent on international routes to around 18 percent last year.

Unable to fill the bellyholds on the return flights from destinations such as Los Angeles, the carriers' profits dwindled. The situation worsened last year. The loss was attributed to unrivalled foreign capacity, outflow of cargo to shipping services, and excessive capacity on popular routes.

Air China initially held a 51 percent stake in its cargo unit with Citic Pacific of Hong Kong holding 25 percent and Beijing Capital International Airport Group 24 percent. But with gloomy prospects for the air cargo business the other shareholders wanted to pull out.

Zhang Zhizhong, chief executive officer of Capital International Airport Group, has proposed the disposal of its 24 percent stake in Air China Cargo. Air China has offered about $113 million for the holding, confirmed Rao Xinyu, an Air China board secretariat official.

Air China is trying to get full control of its cargo unit. On January 3, CNAC bought from Gold Leaf Enterprises Holdings, a subsidiary of CITIC Pacific, the entire issued share capital of Fine Star Enterprises Corp, which held the 25 percent equity interest in Air China Cargo.

With 100 percent ownership of its cargo unit, Air China hopes to pave the way for joint investment with other airlines on international routes.

"Air China is clearing the road for joint capital injection with Cathay Pacific even without China Eastern," said Zhang Xun, adviser to Tianxiang Investment Consulting. If it succeeds with its joint operations it will be a model for other Chinese airlines to follow.

Air China Cargo is likely to go into the red in 2007 after reporting a US$53.84 million deficit in the first nine months. It made a $25.36 million profit in 2005 and $281,888 in 2006.

This year Air China Cargo aims to make a U-turn on earnings. General manager Yao Jun is taking steps to upgrade marketing of cargo and and services to "increase efficiency and safety and achieve noteworthy improvements in economic benefits".

Departmental managers have also signed individual contracts of performance with the top management.

The airline got the green light in February to set up branches in a dozen or so foreign cities, paving the way for its global expansion. Air China can now set up offices in Chicago, Los Angeles, Dallas, Portland, Anchorage, New York, as well as in Manchester, Frankfurt, Copenhagen, Osaka, Seoul and Hong Kong.

The airline is implementing a cargo code system supplied by Intermec Inc from the United States to speed up its operations. It has also reinforced regulations on the transport of dangerous goods and live animals.

China Eastern was the first air cargo operator on the mainland with the launch of China Air Cargo in 1998 in Shanghai. The cargo carrier is owned 70 percent by China Eastern and 30 percent by the Cosco Group. It controlled two-thirds of the air cargo market in Shanghai.

The cargo carrier lost a major portion of its share a few years later when China opened up its market to foreign carriers under World Trade Organisation rules which called for liberalisation of aviation.

With foreign carriers getting a bigger share of the market because of their international connections, China Eastern and Air China in 2004 decided to join forces to take on the competition. The two carriers set up a strategy dubbed as "an alliance, a consolidation and an exchange".

By 2006, the two cargo airlines drew up contracts and in a ceremony in June, former China Cargo Airlines general manager Wang Guocheng said his carrier would be completing the merger with Air China Cargo by the end of 2006. Former deputy general manager Sun Zhongli said each carrier would hold a 50 percent stake in a new air cargo company to be based in Shanghai under a "gentleman's agreement".

But by the end of the year, the merger plans were scrapped as Singapore Airlines made its move. SIA's offer seemed more palatable to China Eastern.

Negotiations continued with SIA and an offer was made that was cleared by China's aviation administration. But Air China managed to turn the tables on SIA before also being shot down by China Eastern in a touch of irony.

A merger is now up in the air, but if SIA or Air China raise their respective offers, the proposal could once again be landing on the boardroom table of China Eastern.