Taiwanese carrier China Airlines sees competition across the border clouding the outlook for Hong Kong's airfreight business, especially once airports in southern China resume direct links with Taiwan.

China Airlines is the world's fifth largest air cargo carrier in terms of freight ton kilometers flown, data for 2005 from the International Air Transport Association show. Korea Air, Deutsche Lufthansa, Singapore Airlines and Cathay Pacific are the top four, according to 2005 rankings by IATA.

China Airlines general manager (Hong Kong) Michael Wu said: "Hong Kong International Airport is facing a significant threat to its cargo business from Guangzhou's new Baiyun airport. If Guangzhou strengthens its facilities, such as customs and capacity, Hong Kong would lose its advantage after three to five years."

At Hong Kong Air Cargo Terminal, cargo growth in 2005 was 7.5 percent, down 5.1 percentage points from 12.6 percent in 2004.

"We've got to face reality that there will be an impact if direct flights between China and Taiwan resume. We have no idea what the impact might be because it depends on how many direct flights there are," Wu said.

He also objects to the third self- operated air cargo facility proposed by Cathay Pacific (0293), considering slow air cargo growth and overcapacity.

He said China Airlines intends to tie up with other mainland carriers through a special prorate agreement to avoid losing market share.

"We plan to sign more agreements with other airlines such as CR Airways, HK Express, Shenzhen Airways, or even Hainan Airlines, to tap their network to secondary cities like Changsha," Wu said.

A special prorate agreement is a ticket discount offer from airlines to others aimed at increasing passenger volumes.

China Airlines has experience working with mainland carriers.

"We collaborate with three major airline groups in China, with respect to code-sharing," Wu said. Between 500,000 and 600,000 people fly from Hong Kong to Taiwan every year. China Airlines operates 17 flights from Hong Kong to Taiwan every day. The load factor is about 80 percent. China Airlines accounts for between 30 percent and 35 percent market share on the Hong Kong-Taiwan route and 50 percent to 53 percent on the Hong Kong-Kaohsiung route.

Wu expects the next round of negotiations between Hong Kong and Taiwan, due in the first half of next year, will pave the way for a rearrangement of cargo capacity on the route.

"Our cargo business increased 10 to 15 percent in the first 10 months of the year, better than the overall Hong Kong market. We should ask for more capacity in the next round of talks," Wu suggested.