Air China the big winner from Cathay deal

Air China 737-800.jpg

Air China is likely to emerge as the biggest winner in CITIC Pacific’s sale of its stake in Cathay Pacific, with the Beijing-based carrier getting a bigger share of the Hong Kong market and help against competition in the mainland.

The Chinese state-owned carrier took a 17.5% stake in Cathay in 2007 and increased this to 29.9% yesterday – just below the line where a mandatory offer is necessary.

Increasing its exposure to the Hong Kong market makes sense after it failed to buy China Eastern Airlines. That would have allowed it access into Shanghai, which is now even more difficult for Air China after China Eastern and Shanghai Airlines announced their merger earlier this year. Hong Kong, however, is also a major financial centre and another lucrative market.

Air China will not have a significant say in Cathay’s management, and it is unlikely to try to launch a takeover bid. However, given that the airlines are likely to cooperate even further, it could use Cathay and its subsidiary Dragonair to fend off growing competition in the mainland market against China Eastern and China Southern.

Cathay could also get greater access to the mainland markets out of the deal. That will be important as its key long-haul and premium markets continue to be badly affected by the economic crisis, and there is still no indication of when those will recover.

It may not be immediately apparent, but the Chinese and Hong Kong aviation markets likely became even more aligned, and competitive, with yesterday’s deal.

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