Cathay Buying Out Dragonair in $1.75bn
By Rowan Callick, Theaustralian | Jun. 08, 2006
HONG Kong-based Cathay Pacific should have been the international airline that gained most from China's relentless economic rise. Instead, it has been limited to two flights a day to Beijing and three a week to Xiamen.
Now, however, access to China is being shaken up, because Cathay is about to take over - for a likely $1.75 billion - rival Dragonair, which dominates Chinese business travel and operates to 23 Chinese cities, with more than 300 flights a week into China.
The shares of Cathay and its owner, Swire Pacific, were suspended in Hong Kong yesterday as negotiations for the takeover entered their final stage.
Together, the two own just over 25 per cent of Dragonair.
China has become the world's second-biggest air passenger market after the US. Its major international carrier, Air China, with 176 planes operating 37 routes, is also a substantial owner of Dragonair, and is in turn 10 per cent owned by Cathay.
It is expected that the deal will see Air China and Cathay holding up to 20 per cent of each other's stock, and will make Cathay the primary carrier serving China that is not based in the Chinese mainland. It will gain one of the most profitable passenger routes in Asia, between Hong Kong and Shanghai - to which it only flies freighters at present.
The Chinese competitors of Air China and Cathay including China Southern and China Eastern have been increasing their flights to Europe and the US, flying over Cathay's hub of Hong Kong and Air China's hub of Beijing.
Cathay and Air China appear unlikely allies, the former owned by a longstanding British trading company with 150 years experience in Hong Kong, and the latter by the Chinese Government.
But they will now be better placed to tackle the growing competition from other Chinese state-owned regionally based airlines, dominating the "golden triangle" between Beijing, Hong Kong and Shanghai.
Cathay played a major role in establishing Dragonair, which it dominated until a decade ago, when Chinese state-owned enterprises, including Air China, came to the fore as Hong Kong prepared to return to Chinese sovereignty.
The closer embrace for Cathay and Air China will be complicated by the latter's joining the Star Alliance group of airlines last month, while Cathay belongs to the Oneworld group.
Once the Dragonair deal is concluded, Cathay is expected to move to save costs by integrating their back office operations.