Air China yesterday confirmed it was in talks with China Cargo Airlines (CCA) about the potential for future 'business co-operation' with its freight division, Air China Cargo. While confirming discussions with CCA, a 70-30 joint venture formed eight years ago by China Eastern Airlines and China Ocean Shipping (Cosco), a Beijing-based executive for the mainland's most profitable carrier sidestepped queries about a merger, as reported by mainland media yesterday. 'The two companies are in contact in regards to the potential for future business co-operation,' said Rao Xinyu, head of investor relations for Air China. 'On whether or not a merger will be the result, we have no comment.' Xinhua, citing a weekend report in the Economic Observer, said the company created by the merger of Air China Cargo and CCA would also envelop by the end of the year the cargo division of Hong Kong Dragon Airlines (Dragonair). Dragonair's chief executive Stanley Hui Hon-chung was not aware of the supposed merger yesterday, according to an official for the company. Air China officials, too, were surprised by the report. 'It's true there are discussions [with CCA], but I see no reason why Dragonair has been included,' Ms Rao said. Asked if Dragonair is in any way involved, she said: 'No.' Industry watchers believe the impetus for a closer working relationship between the two state-owned air freight divisions would be coming from China Eastern, which lost 955 million yuan in the first three months this year. While the carrier is understood to have front-loaded some of its anticipated fleet maintenance costs from the nearly two-year-old merger with China Northwest and Yunnan Airlines on to the first-quarter result, it also laid bare the cargo division's poor performance. 'The only disappointment was cargo traffic, up only 4.8 per cent year-on-year compared with the other big two's 16 per cent to 19 per cent growth,' said Peter Hilton, head of transportation research for Credit Suisse. 'We heard from industry sources that [China Eastern] has had some arguments with its cargo joint-venture partner Cosco. This affected the carrier's cargo growth and the JV was loss-making last year, we believe.'