Hong Kong's largest airline Cathay Pacific is applying to launch passenger flights to Shanghai in the fourth quarter of this year, after expanded air service arrangements were signed between the mainland and Hong Kong on Monday.

Government approval of the route is expected to significantly boost Cathay's business on the Chinese mainland. The Hong Kong airline has lobbied unsuccessfully for years to fly to Shanghai, the most lucrative destination on the mainland.

"Shanghai is an important mainland market for Cathay Pacific. It accounts for 35 per cent of the passenger market and 68 per cent of the cargo market between the mainland and Hong Kong," Cathay said in a statement.

Cathay resumed flights to the Chinese mainland at the end of 2003 after a 13-year absence. But it only provides passenger services to Beijing and Xiamen, in East China's Fujian Province, and carries cargo to Shanghai.

The airline said yesterday that it also plans to provide additional services to Beijing and increase its cargo operations to the mainland.

Analysts said Shanghai-based China Eastern Airlines would be affected the most by the entry of Cathay, which is a world-leading carrier.

"Nearly 30 per cent of China Eastern's aviation revenue comes from the Shanghai-Hong Kong route," said Li Lei, an aviation analyst with CITIC, a Beijing-based securities company.

China Eastern is competing head-to-head with another Hong Kong carrier Dragonair on the same route. Cathay's takeover of Dragonair last month is expected to make the small carrier a stronger rival with Cathay's capital and management support. The entry of Cathay is expected to increase the stiff competition faced by China Eastern.

But China Eastern officials said they are not worried.

"We enjoy geographical advantages as we are based in Shanghai and we have a strong presence in East China," said Luo Zhuping, secretary of China Eastern's board of directors.

"Cathay might not launch too many flights because that would threaten the market of Dragonair, which is now a wholly owned subsidiary company of Cathay," Luo said.

Luo said China Eastern will not launch more flights to Hong Kong due to the sky-high fuel costs. The airline currently operates about 30 flights per day on the Shanghai-Hong Kong route.

Cathay's announcement came shortly after the General Administration of Civil Aviation of China and the Economic Development and Labour Bureau of Hong Kong signed an expanded air transportation agreement.

The agreement will add another 11 routes between Hong Kong and the mainland. Hong Kong will have direct flights to 56 mainland cities, covering all major cities.

The new cities will include Lhasa, in the Tibet Autonomous Region, Xishuangbanna in Yunnan Province and Kashgar in Xinjiang Uygur Autonomous Region.

The agreement also loosens air transport capacity constraints between Hong Kong and the mainland.

Starting from winter 2007, each side can designate three to four airlines to operate the same passenger and/or cargo route. The passenger service capacity limits on 35 routes will be cancelled by summer 2007. The cargo capacity limits for Beijing and Shanghai will be increased, with the limits on all other routes removed by autumn 2007.

"The agreement will strengthen Hong Kong as a premier aviation hub in the Asia-Pacific region," said Liu Weimin, director of the Aviation Laws Research Centre of the Civil Aviation Management Institute of China.

The Chinese mainland expanded the scope of its free trade pact with Hong Kong last Friday on the third anniversary of the Closer Economic Partnership Arrangement. Starting next year, Hong Kong will be granted greater access to the mainland market in 10 areas, including air transport.

(China Daily July 5, 2006)