China Southern Airlines and Air France-KLM said they have agreed to hold exclusive talks over establishing a joint-venture cargo airline in China.

"It indicates discussions between the two companies have entered a one-to-one, in-depth phase," Saturday's Shanghai Securities News quoted unnamed analysts as saying.

Xu Jiebo, vice general manager of China Southern, said January last year that his company was seeking cooperation with Air France-KLM and other Sky Team member airlines.

"China Southern surely hopes the foreign investor will hold the biggest possible share if the negotiation turns out to be successful," said Xu.

A foreign company is allowed to possess a 25 percent stake, at most, in a Chinese airline, or no more than 49 percent by two foreign investors, according to China's regulations.

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Analysts believe that China Southern prefers European and American airline companies as investors because it hopes to promote sales of cabin space for cargo planes on their way back to China from abroad.

As one of the three largest Chinese carriers, China Southern is the only one that does not have a cargo transport unit -- China Eastern and COSCO Group established China Cargo Airlines in 1998, while Air China set up Air China Cargo in 2003.

Jade Cargo International, established in 2004 by Shenzhen Airlines, Lufthansa Cargo and DEG, has proved to be fierce competition for China Southern in south China's market for air cargo transport.

China Southern and Air France-KLM have already had cooperation in passenger and cargo services, connecting their major hubs in Europe and China, according to a joint statement from the two companies.

China Southern has 300 passenger and cargo aircraft and operates more than 600 domestic and international routes, with Guangzhou and Beijing as its hubs.

The company carried 49.21 million passengers in 2006, making it the only carrier on the Chinese mainland among the world's top 10 passenger transport airlines, according to the company website.

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