Paul Lewis/TAIPEI

CHINA NATIONAL Aviation (CNAC) is negotiating with Swire and Cathay Pacific Airways to buy up to a 10% stake in Dragonair, giving mainland Chinese companies majority control of the Hong Kong-based regional carrier.

Principal Dragonair shareholders Swire Pacific and Chinese Investment Company CITIC Pacific, have confirmed CNAC's interest in Dragonair. Swire chairman Peter Sutch says, that it is too early to give any further details because of continuing negotiations.

Cathay Pacific manages Dragonair, and, with its parent company, Swire, owns around 43% of the airline. A further 11% is held by other Hong Kong interests and the remaining 46% is with CITIC.

The 10% share sale is reportedly worth HK$350 million ($45.2 million), which analysts consider a good deal for Swire, given its original HK$400 investment in Dragonair in 1990. Dragonair is understood to have made a substantial profit in the past year.

The sale would give Chinese firms a majority share and bring into question Dragonair's status as a Hong Kong carrier. "It's moving along to the situation where the Chinese will control more aviation in Hong Kong," says aviation consultant and former Dragonair chief executive Steve Miller.

The deal is being linked to CNAC's application to the Hong Kong Government for an Air Operators Certificate (AOC). The move threatens Cathay Pacific's post-1997 position and the future of Swire's controlling 52% share.

Analysts suggest that a sale by Swire of part of its Dragonair holding, is designed to head off CNAC's attempt to establish a third competing airline in Hong Kong and, possibly, launch services to Taiwan.

A tentative agreement was recently reached between Cathay Pacific and Taiwan to allow a second Hong Kong carrier to fly to the island. Dragonair, with EVA Air of Taiwan, wants to launch flights, but any new bilateral air-services agreement going beyond 1997 would require China's approval.

It is unclear whether CNAC will scrap its application for an AOC in exchange for a Dragonair stake.

Source: Flight International