The gloves are off between Hong Kong's second carrier Dragonair and its big brother Cathay Pacific Airways as the two move towards head-on competition on routes within the Asia-Pacific.
Hong Kong has long maintained a so-called "one airline, one route" policy, limiting services on any given route to just one locally based carrier. The policy was eased two years ago, when Dragonair added its first dedicated freighter aircraft and began competing with Cathay on services to the Middle East and Europe. In July it was further eased when Dragonair was given rights to the highly lucrative route between Hong Kong and Taipei, long dominated by Cathay.
Many observers had expected the direct competition to end there at least for the present. But in August Cathay sought rights to operate to Beijing, Shanghai and Xiamen in mainland China - routes on which Dragonair makes most of its money.
Senior executives from Cathay and its parent Swire Pacific only put in the application after making a lobbying visit to mainland China, in which they were given the clear impression that Dragonair, which is ultimately controlled by Chinese interests, would not oppose it. But Cathay was taken by surprise on 11 September when Dragonair launched a public objection.
It said in a statement that it believes there are already ample services between Hong Kong and the three cities Cathay wants to serve. It also said it has been prevented in recent years from expanding to major Asian destinations outside China, leading to its reliance on revenues from important Beijing and Shanghai services.
"Dragonair's position is that the points named in the application are unable to support the operation of more airlines, with more than sufficient capacity currently available on the routes. Allowing the application would therefore result in the uneconomical overlapping of air services," Dragonair said in the statement. "Moreover, Dragonair's ability to expand operations to primary destinations outside China has been constrained in the past, leading to its reliance on the Shanghai and Beijing routes."
Dragonair's formal objection now means that Hong Kong's Air Transport Licensing Authority will have to hold public hearings, potentially delaying Cathay's launch of services or even leading to its application being rejected.
Complicating the matter is the fact that Dragonair - viewing the one airline, one route policy as effectively dead - is seeking rights to serve four Asian capitals as well as Sydney in competition with Cathay, which may object to the application in retaliation.
Cathay flew to major Chinese destinations until 1990 when it bought into then-struggling Dragonair, which was launched in 1985 as a competitor. As part of the buy-in Cathay gave up its rights to serve mainland China to allow Dragonair to grow.
Cathay still owns a 17.79% stake in Dragonair, while its parent Swire Pacific owns a further 7.71%. Since 1996, when China National Aviation Company (CNAC), which owns 43.29%, and CITIC Pacific, which owns 28.49%, took control of Dragonair, the carrier has been steadily operating more independently.
Some long-time industry observers in Hong Kong believe Dragonair's objection was ordered by Beijing-controlled, CNAC. Hong Kong-listed CNAC has made no secret of the fact that it wants to boost its stake in Dragonair and a popular conspiracy theory says the intention is to bully Cathay and Swire into selling out - something CNAC did in 1996 when it won control of Dragonair.
Lurking quietly in the background, meanwhile, is China-backed and Hong Kong-listed conglomerate CITIC Pacific. As well as its Dragonair stake, it holds a 25.4% stake in Cathay and has been seeking to expand its aviation portfolio by buying into mainland Chinese airlines. It has also been seeking to improve relations with former rival CNAC, according to the observers.
Seven years ago CITIC was involved in a bitter public fight with Cathay and CNAC over control of Hong Kong's aviation industry. That came in the run-up to China's 1997 takeover of the then-colony from the UK.
Early in 1996 a compromise deal was reached under which CITIC, Cathay and Swire sold a joint 35.86% holding in Dragonair to CNAC in return for a promise that it would not launch a competitor. CITIC at the same time increased its stake in Cathay to 25% from 10%. CNAC has since increased its Dragonair holding to 43%.
Earlier this year CITIC entered into talks with Air China as well as CNAC's parent company (of the same name), and the operator of Beijing's airport, on the joint establishment of a Beijing-based cargo airline.
CITIC is now seeking a direct stake in Air China, which is merging with CNAC's Beijing parent. CITIC managing director Henry Fan says he wants a stake of at least 25% in Air China which is the current limit for individual foreign ownership in a Chinese carrier.
"We are hoping to participate in the restructured Air China, not only as equity investors but involving management as well if possible," says Fan. Closer relations with CNAC - the commercial arm of the regulatory Civil Aviation Administration of China - can only help.
Source: Airline Business
