Cathay eyes significant China move
AAP | May 12, 2006
China's tightly regulated airline industry faces a shake-up that could see Cathay Pacific pay up to $HK2.2 billion ($366.81 million) to become Asia's biggest carrier.
Cathay Pacific Airways, Hong Kong's international carrier, is in talks that could see it take a controlling stake in unlisted Dragonair, which flies more than 300 times a week between Hong Kong and mainland China.
"With Cathay's feed from around the world and Dragonair's access to China, you'll have the making of a hugely powerful carrier," said Richard Pinkham, Singapore-based consultant with the Centre for Asia Pacific Aviation. "It would be a win-win."
Beijing may be a significant roadblock however, as it is thought to be reluctant to permit foreign-controlled Cathay to take such a big slice of the market.
Cathay, which declined comment on the stake sale talks, sold 10.65 per cent of Dragonair to China in 1996, a move seen as a sop to Beijing ahead of Britain's handover of Hong Kong.
Up for grabs now is a 28.5 per cent stake in Dragonair held by CITIC Pacific, a Hong Kong-listed investment arm of China's State Council - the country's cabinet.
Cathay, which already owns 17.8 per cent of Dragonair, may take that and add a 7.7 per cent stake held by its parent, Swire Pacific, taking its Dragonair holding to 54 per cent.
CITIC Pacific, which owns 25.4 per cent of Cathay, has said that while it plans to be a "significant shareholder" for the long term, it may cut its stake in line with plans to trim non-core shareholdings and focus on property and resources.
UBS and Morgan Stanley estimate Cathay would have to pay $HK1.5 billion to $HK2.2 billion for CITIC Pacific's entire 28.5 per cent stake in Dragonair.
While speculation of a reshuffle has swirled for at least a year, industry sources are confident this time it's for real.
"A deal looks more imminent now as there's a willing seller," said a senior private banker at HSBC who oversees portfolios that invest in Swire, CITIC Pacific, Cathay and Air China. "It's a question of which company ends up buying what."
Analysts say a deal makes good commercial sense: allowing Cathay to tap China's huge growth potential, and simplifying the shareholding structure of Cathay Pacific, Dragonair and Air China, the largest shareholder in Dragonair.
For Air China, the deal would bring new technology and training, access to a global alliance and cost benefits. For its part, Air China would bring traffic to Cathay's international base and Dragonair's Hong Kong base.
Cathay Pacific and foreign carriers such as Japan Airlines Corp., Singapore Airlines Ltd. and Korean Air Co. have only limited access to Chinese skies.
Cathay can operate passenger services just to Beijing and Xiamen, a city of about 2 million people in Fujian province. Buying Dragonair would fill a hole in Cathay's global network.
"Clearly, Cathay would benefit from controlling Dragonair as it could cut competition and allow Cathay to fully utilise Dragonair as a feeder airline," HSBC's regional transport analyst Mark Webb said in a research note.
Official data shows China had 120 million inbound visitors last year, with projected annual growth of 8 per cent in the next five years. China is expected to receive 137 million visitors by 2019, making it the world's largest inbound tourist nation.
China's outbound tourists topped 20 million in 2003, overtaking Japan, and the International Air Transport Association (IATA) puts average annual growth at 9.6 per cent.