The once-strong links between Cathay Pacific and China are unravelling, fueling concerns over the unofficial flag carrier's status after the return of Hong Kong to Chinese rule next year.
Cathay has withdrawn from its joint venture in southeast China to develop Xiamen airport, a project once touted as a stepping stone to other Chinese aviation partnerships. Cathay cited commercial reasons for its pullout, specifically unresolved differences over the venture's duration and officials' reluctance to involve Cathay in passenger security services or ticket sales.
Cathay's management has also been publicly quarreling with its largest Chinese owner over the airline's future role in Hong Kong. Managing director Rod Eddington started the debate when he contrasted the move within China towards airline consolidation with events in Hong Kong, where China National Aviation Corporation hopes to start operations with China Hong Kong Airlines soon.
Eddington's claim that Hong Kong is not big enough to support more than one major international airline drew immediate fire from Citic Pacific, which owns a 12.5 per cent stake in Cathay. Henry Fan, Citic's managing director, told a local newspaper that it was 'about time' the Swire group, which owns the largest single stake in Cathay, faced reality. Defending CNAC's right to apply for a Hong Kong operating licence, Fan warned that with the change in Hong Kong's sovereignty, Cathay's monopoly 'will have to go.'
Concerned about the effects of this public spat, Cathay quietly proposed to Citic that the two issue a joint statement to calm nervous investors. Citic refused, fueling speculation that its criticism of Cathay was designed to improve its own stature in Beijing, where official intentions towards post-1997 Hong Kong remain obscure.
Indeed, Beijing's attitude to the aviation sector is particularly baffling. There is a great deal of speculation about why CNAC has moved on Hong Kong after Beijing blocked China Southern's plans in early 1994 to establish a Hong Kong base by taking a stake in cargo operator Air Hong Kong. Ironically, it was Cathay that finally took a 75 per cent stake in the freight carrier for a reported US$30 million. Analysts considered the price excessive then but claimed Cathay paid the premium to keep China Southern out.
Even now, CNAC's intentions remain confused. Despite hiring former Dragonair staff and predicting a Hong Kong launch by April, CNAC has yet to submit documents to support its licence application, according to a high ranking Hong Kong official. Moreover, the prospect that CNAC might buy a stake in Dragonair remains in play. Citic Pacific, which owns 46 per cent of Dragonair, has pulled out of negotiations, but Cathay Pacific and Swire have agreed to offer more shares so that CNAC could still take a sizeable stake in Dragonair. Some analysts claim CNAC's threat to launch a Hong Kong airline is simply a ploy to press Cathay and Swire into selling Dragonair shares, and that CNAC's application will wither away if that effort succeeds.
Meanwhile, a proposed float of Dragonair shares has become a bouncing ball, with Cathay insisting that it wait for CNAC's decision before any public offering. With Citic holding stakes in both Cathay and Dragonair and CNAC holding 5 per cent of Cathay and a seat on its board, Cathay's links with China will need to a lot more untangling before they are fully unravelled.
David Knibb
Source: Airline Business
