Hong Kong's airline sector is looking set for another sweeping ownership shakeup that may see Cathay Pacific Airways re-acquiring smaller Dragonair and at the same time boosting ties with Chinese flag carrier Air China.

Sources in Hong Kong close to Cathay confirm it has for some time been in talks to co-operate more with Beijing-based Air China and this could include bringing Dragonair back under its control. Dragonair is effectively controlled by Air China given that the Chinese carrier is majority owner of China National Aviation (CNAC), which is the biggest single shareholder with 43%.

There has been speculation for a year that Cathay wants to take over Dragonair, in which it is already a minority shareholder along with its own parent, Swire Pacific, and China-backed conglomerate CITIC Pacific. Adding to the convoluted ownership links, CITIC is a more than 25% shareholder in Cathay and is a joint-venture partner in Air China Cargo. Rumours grew stronger when Cathay acquired 10% of Air China late last year and the two airlines began discussing an operational partnership that would also involve Dragonair, which makes most of its money from services to China.

Recently Hong Kong media reported a deal was close to being completed that would see Swire handing over its 46.5% stake in Cathay to Air China, and through a share swap becoming the biggest single shareholder in the enlarged Air China group. All the parties involved denied that Air China's parent planned to give up control of the airline and that Swire planned to give up its Cathay holding in return for Air China shares. Importantly, however, they did not deny that Dragonair could be taken over by Cathay, saying only that Air China-Cathay partnership talks were continuing and these have "necessarily involved Dragonair".

The sources say that if Cathay is successful in re-acquiring Dragonair, Air China would take a minority stake in Cathay. CNAC, which previously owned a minority stake in Cathay, became the biggest single shareholder in Dragonair in 1996 in Hong Kong's last major airline ownership shakeup. Since then Dragonair has been steadily forging its independence from Cathay while trying unsuccessfully to keep it out of the fast-growing China market.

Ownership changes that enhance ties between Air China and founding oneworld member Cathay would probably have further implications for the multilateral alliance plans of China's three major airline groups. It had long been assumed that Air China would join the Star Alliance but Cathay's purchase of 10% last year took observers by surprise, in part because oneworld has been trying to enhance ties with Shanghai-based China Eastern Airlines. Only Guangzhou-based China Southern has named its alliance choice, last year saying it would join SkyTeam.


Source: Airline Business