BEIJING, Nov. 22 -- CITIC Pacific plans to sell its 25 percent stake in Air China Cargo, clearing the way for a merger between Air China Cargo and China Cargo Airlines, the biggest such deal in the nation's cargo sector.

The proposed link up would create a Chinese cargo conglomerate able to compete with the world's biggest carriers.

Rao Xinyu, board secretary of Air China Ltd, Air China Cargo's parent company, said that CITIC Pacific plans to sell its stake, "but we haven't reached any agreement yet."

Rao declined to reveal yesterday whether Air China would buy the stake from the Hong Kong-based company. CITIC Pacific was unavailable for comment.

By selling its stake in Hong Kong's Dragonair and reducing its shareholding in Cathay Pacific earlier this year, CITIC Pacific has indicated its intention to pull out of the aviation business.

Launched in 2003, Beijing-based Air China Cargo is 51 percent owned by Air China, with CITIC Pacific holding a 25 percent stake and Capital Airports Holding Co having a 24 percent shareholding.

Air China is widely expected to buy the shares from CITIC Pacific, which could make the cargo carrier's shareholding system less complicated and pave the way for its merger with China Cargo Airlines, analysts said.

"Air China should be the natural choice to take over the stake. The result is that Air China Cargo would have only two shareholders, and that could make the negotiation with China Cargo Airlines less complicated," said Li Lei, an aviation analyst with CITIC China Securities.

Shanghai-based China Cargo Airlines, in which China Eastern Airlines holds a 70 percent stake, was established in 1998 as China's first company specializing in air cargo transportation. Shipping firm COSCO holds the remaining 30 percent stake in the firm.

Facing heated competition from international rivals, China's two leading cargo carriers have been in talks for more than half a year to create an air cargo conglomerate by merging their fleets and networks.

But finding a deal that suits both sides has proved a major sticking point during the negotiations.

"Their parent companies are China's largest aviation groups. Neither side wants to give up its decision-making power," Li said.

China Eastern Airlines yesterday declined to comment on CITIC Pacific's possible sale of its stake in Air China Cargo.

"Whether the two cargo carriers can be merged depends on how to solve the relationship between the shareholders," said Luo Zhuping, board secretary of China Eastern Airlines.

With average annual growth of 17 percent over the past decade, China is one of the world's fastest growing air cargo markets. But due to intense competition and limited capacity, Chinese cargo carriers suffer from poor profitability.

Air China's cargo traffic experienced a year-on-year growth of 15 percent in the first six months of 2006. Its cargo capacity also increased 14 percent year-on-year. But the average cargo yield dropped 4 percent compared to the same period last year.