Cathay Pacific in talks with Air China over strategic investment

Asian Economic News, March 21, 2005

HONG KONG, March 17 Kyodo

Hong Kong's flagship airline Cathay Pacific has confirmed it is in talks with Air China over a range of strategic investments, which may include a possible takeover of its smaller rival Dragonair.

A statement issued Wednesday said Cathay Pacific and Air China entered into a memorandum of understanding last October, which envisaged a strategic investment by Cathay Pacific in Air China and future cooperation between them.

''Such cooperation discussions necessarily involved Dragonair,'' said the statement, which was jointly issued by Cathay Pacific Airways Ltd. and its major shareholder Swire Pacific Ltd.

Three local newspapers reported that Cathay Pacific is to take over the city's No. 2 carrier Dragonair Airline Ltd., which is held by Air China's parent China National Aviation Co. with a 43.29 percent stake.

If the deal is to go ahead, it would make the British conglomerate Swire, parent of Cathy Pacific, a major owner of Air China, which became a publicly listed firm in Hong Kong late last year.

But Air China has denied the possibility.

Analysts are also skeptical of the reports as the Chinese government is unlikely to allow a foreign company to have a controlling stake in Air China, although they do not rule out a merger between Cathay Pacific and Dragonair in the longer term.

''We believe a merger between Cathay Pacific and Air China is unlikely at this time, but a cross-holding structure would be more possible,'' said Vincent Ng, senior analyst with Asian equity research at Standard and Poor's in Singapore.

''Cathay and Air China have been exploring ways to work together, including code-share deals on routes to and from mainland China destinations, transfer of technology and operations expertise, and even an acquisition of Dragonair by Cathay,'' he said.

Cathay Pacific, together with the Hong Kong government, has been pressing hard for Beijing to grant it more rights to fly between the territory and Chinese cities.

As a strategic move to enhance its access to China, Cathay Pacific acquired 10 percent of Air China's shares last December. Currently, Cathay Pacific and Swire also hold a combined 25.5 percent of Dragonair.

Dragonair has enjoyed greater route access between the territory and other Chinese cities.

Beijing has strictly limited the number of these flights while trying to prepare its domestic carriers for international competition, though it has relaxed it somewhat by allowing more nonstop flights from the United States recently.