Hong Kong airline Cathay Pacific is buying its rival Dragonair
for HK$8.22 billion (US$1.05 billion) to expand its flight network
on the Chinese mainland.
Cathay Pacific currently operates just two passenger routes
between Hong Kong and the mainland. It will now be able to take
over Dragonair's 23 mainland routes.
As part of the deal, Cathay will also spend HK$4.7 billion
(US$605.5 million) to double its stake in Air China to 20 percent.
In return, Air China will pay HK$5.39 billion (US$694.4 million)
for 10 percent of Cathay.
Cathay Pacific and Air China also said they planned to set up a
joint cargo airline based in Shanghai.
A total of 51 percent of that firm will be owned by Air China,
with 49 percent owned by Cathay. Neither company has disclosed
further details about the new airline.
"Gaining mainland access will give unlimited possibilities to
Cathay Pacific, and I believe it will have the ability to turn
around any unprofitable routes that Dragonair currently has, and
reduce its costs significantly," said Peter Drolet, senior analyst
at UOB Kay Hian, a Hong Kong-based stock brokerage house.
Because of an earlier arrangement between Cathay and Dragonair,
the former's presence on the mainland has been limited to passenger
routes from Hong Kong to Beijing and Xiamen.
But rumors about the company taking over Dragonair, which will
keep its current branding under the new deal for at least six
years, have been floating around for years.
"The reshuffle of Cathay and Dragonair will reinforce the status
of Hong Kong as an international aviation hub," said Steven Ip,
secretary for economic development and labor in Hong Kong.
"Hong Kong will be the main channel for foreign travelers to the
mainland."
Cathay, which already held a 17.8 percent stake in Dragonair, is
buying the shares that it does not own from its own parent, Swire
Pacific, as well as CITIC Pacific and China National Aviation
Corporation (CNAC) for HK$820 million (US$105.6 million) in cash
and the remainder in new shares.
The deal will see Swire's stake in Cathay pared from 46.3
percent to 40 percent, while CITIC Pacific's holding in Cathay will
fall from 25.4 percent to 17.50 percent.
Although its holding will decrease, Swire Pacific will remain
Cathay Pacific's largest shareholder.
Swire Chairman Christopher Pratt stressed at a press conference
in Hong Kong that the firm has no intention to further reduce its
stake.
"Air China is a prestigious brand name in the mainland aviation
industry and it is an invaluable opportunity for us to enlarge our
shareholding in the company."
The combination of Cathay's international reach and Dragonair's
well-established branding on the mainland means that several
airlines will face stiffer competition, especially Shanghai-based
China Eastern and Guangzhou-based China Southern airlines, analysts
said.
"Undoubtedly, Cathay will consider the acquisition a springboard
to advance its presence on the mainland market," said Casor Pang, a
strategist at Sun Hung Kai Financial Group.
China Eastern seems not worried about the deal.
"We have a firm hold of at least 40 percent of the market in
Shanghai," said Luo Zhuping, secretary of China Eastern's board of
directors.
"We have the support of the (Shanghai municipal) government and
we enjoy special advantage in the choice of facilities at Pudong
International Airport."
To prepare for the increased competition, China Eastern is
planning to close down some of its less-profitable routes to
concentrate its resources on Shanghai, Luo said.
"This is our home town and we are ready to take on all
customers."
(China Daily June 10, 2006)
