Both Cathay Pacific Airways Ltd. and Hong Kong Dragon Airlines Ltd., the city's two main airlines, welcomed the move and said further liberalisation would provide them with greater growth potential in the mainland market.

Cathay has applied to the Hong Kong government to request the re-launch of passenger flights to Shanghai, additional services to Beijing and increased all-cargo operations to the mainland, tentatively in the fourth quarter of this year, it said after the new arrangement was announced.

Last month, Cathay Pacific announced a US$1.05 billion buyout of smaller river Hongkong Dragonair to expand its access to the fast-growing mainland China aviation market.

The Hong Kong government also said that starting from winter 2007, each side could designate three airlines to operate passenger and/or cargo flights and another airline to operate all-cargo flights on most of the routes, allowing both Hong Kong and mainland airlines to pursue their expansion plans.

Capacity constraints on routes will be relaxed with the capacity limits for passenger services on 35 routes to be completely lifted in two phases between winter 2006 and summer 2007, and capacity for the remaining routes will be increased, the government added.

The government also said the cargo capacity limits for Beijing and Shanghai would be raised, while the limits for other routes would be removed by summer 2007.

Stephen Ip, Hong Kong's secretary for Economic Development and Labour, said the new arrangement would strengthen the aviation links between Hong Kong and the mainland and would enhance competitiveness of Hong Kong International Airport as an international and regional aviation centre.