The boards of Air China, Cathay Pacific, China National Aviation Company (CNAC), CITIC Pacific and Swire Pacific recently announced an agreement to realign their shareholding structures and create one of the world's strongest airline groupings. These far-reaching changes will also deliver significant benefits for the Chinese aviation industry and its customers, and strengthen the position of Beijing and Hong Kong as key hubs in the region.

The four most significant results of the restructuring are that: (i) Air China will make a strategic investment in Cathay Pacific; (ii) Cathay Pacific will increase its strategic investment in Air China; (iii) Hong Kong Dragon Airlines (Dragonair) will become a wholly owned subsidiary of Cathay Pacific; and (iv) Air China and Cathay Pacific will enter into an Operating Agreement that will include implementing reciprocal sales representation where Air China will be exclusively responsible for Cathay Pacific's passenger sales in Mainland China while Cathay will be exclusively responsible for Air China's passenger sales in Hong Kong, Macau and Taiwan; the extension of code share arrangements between Hong Kong and Mainland China; the implementation of joint venture routes, that will operate under profit sharing arrangements, between Hong Kong and key cities in China; cargo joint venture in Shanghai; maintaining Dragonair as a principal airline for at least six years; and the strengthening of business cooperation in a number of other areas.

Background

Cathay Pacific and Dragonair are natural partners. Cathay Pacific part-owned and managed Dragonair between 1990 and 1996 before its current ownership structure came into effect. Economic and aviation circumstances have since changed dramatically, particularly in Mainland China, and so too has the world in which Cathay Pacific and Dragonair and Hong Kong must now compete.

Hong Kong's future prosperity hinges to a large extent on its development as a gateway to the Chinese Mainland and as a hub for the movement of people and goods around the globe. As Hong Kong's home carrier, Cathay Pacific has a shared interest in and commitment to the welfare of Hong Kong and its people.

Yet neither Cathay Pacific nor Dragonair separately can serve all Hong Kong's needs adequately. Dragonair lacks an international network. Cathay Pacific has a comprehensive international network hub is not yet able to offer the access consumers want to the Chinese Mainland, the world's fastest growing economy and Hong Kong's natural hinterland.

Given the urgency of competition Hong Kong faces from other regional hubs, there is not enough time for either carrier to evolve organically in order to fill these gaps. This agreement meets this pressing need.

Cathay Pacific and Dragonair are, in effect, like two separated halves of a whole: their networks and capabilities complement each other. Reunited, the whole will be greater than the sum of the parts. Hong Kong, the Hong Kong aviation hub, consumers, staff and shareholders will enjoy the benefits.

What It Means for Customers?

Cathay Pacific and Dragonair's combined networks and capabilities have the potential to deliver more destinations, greater travel choice, enhanced convenience and, therefore, better value for its customers.

The acquisition will be a boost for the consumer. Hong Kong will benefit from an aviation industry better able to compete in a global marketplace. Hong Kong people will share the benefits of such growth.

Greater international traffic flows through Hong Kong unlocked by the deal will enable Dragonair to operate with greater frequency to cities it now serves and to mount new services to destinations it does not - creating more competition and choice.

Hong Kong has a population of only 7 million people. With such a small domestic market, many of the flights now available to Hong Kong people would not exist were it not for the international traffic funneled through the Hong Kong hub. About half of Cathay Pacific's passengers transit Hong Kong.

Cathay Pacific would not, for example, be able to operate daily to Bali and Colombo without the support of passenger and cargo traffic drawn from across its network. The fare on a less frequent service sustained only by Hong Kong travelers would be higher as well.

With great volumes of traffic fed from the Cathay Pacific network, infrequent and even daily services operated by Dragonair would be improved and new routes opened. Similarly, Cathay Pacific would be able to mount more services and offer greater customer value with support from Dragonair's Mainland network.

The two airlines' fleet structures will help such growth. With a fleet comprised entirely of large aircraft, Cathay Pacific cannot operate economically to smaller Mainland and regional cities. Dragonair with its fleet of small, short-range aircraft can. Yet it needs the support of international traffic from Cathay Pacific to profitably do so.