Cathay Seen Deal for Rest of Dragonair
By Keith Bradsher, The New York Times | Jun. 05, 2006
After two years of talks that have been dogged by complex regulatory and financial issues, Cathay Pacific Airways is on the verge of taking full ownership of Hong Kong Dragon Airlines to become the primary carrier outside the mainland serving China, people close to the talks said Monday.
Cathay Pacific plans this week to conclude a complex transaction in which it will acquire the four-fifths of Hong Kong Dragon, known as Dragonair, that it does not already own, said people close to the talks, who insisted on anonymity to avoid disrupting the carefully devised arrangement. As part of the deal, Cathay will increase its existing 10 percent stake in the mainland's Air China, and Air China will acquire for the first time at least a 10 percent stake in Cathay, one of the people said.
Financial details were not available.
Trading was suspended Monday in shares of Cathay Pacific and its biggest shareholder, Swire Pacific of Britain, after a report in a Hong Kong newspaper, The Standard, that a deal was imminent.
Trading was also suspended in Citic Pacific, which owns stakes in both Cathay Pacific and Dragonair, as well as in Air China and its majority-owned subsidiary, China National Aviation Co.
Cathay Pacific holds 17.8 percent of Dragonair, while China National Aviation owns 43.3 percent.
Cathay Pacific, based in Hong Kong, a former British colony, and Air China, controlled by the Chinese government, have long been China's links to the world.
But both face rising competition, and now appear to have decided to team up to confront their rivals.
Their mainland Chinese competitors are becoming increasingly aggressive in starting nonstop air routes from inland Chinese cities to destinations in Europe and the United States.
They are bypassing Air China's hub in Beijing and Cathay's Hong Kong hub.
The pending deal for Cathay to take over Dragonair, "is Cathay's attempt to try to be a continuing player" in the Chinese market, said Andrew Miller, the chief executive of the Center for Asia Pacific Aviation, a consulting firm based in Sydney.
Cathay is one of the world's top 10 airlines in terms of the number of international passengers carried. But Hong Kong's role as the gateway to China has been eroding.
With its British ancestry - Hong Kong was a British territory until 1997 - Cathay has struggled to win permission to fly to destinations on the mainland.
It currently serves just two mainland cities, Beijing and Xiamen.
Chinese regulators have preferred to authorize flights by Dragonair, in which the Chinese government owns the largest stake through a series of indirect investments. Dragonair now has flights from Hong Kong to 21 mainland cities.