Paul Lewis/HONG KONG
SWIRE PACIFIC has ceded control of Dragonair and lost to China its absolute majority interest in Cathay Pacific Airways, in a far- reaching settlement ending a year-long battle for control of Hong Kong's airlines.
Under a deal struck just 14 months before control of Hong Kong reverts to Chinese rule, two state-run Chinese companies have agreed to pay a total of nearly HK$8.3 billion ($1.1 billion) for an increased stake in Hong Kong's air-transport industry.
The agreement gives China National Aviation (CNAC) a larger-than-expected 35.9% controlling interest in Dragonair. It also revises a previously stalled plan to give the carrier a public listing.
Dragonair's two main shareholders, Cathay and Chinese investment company Citic Pacific, will each sell CNAC a 17.66% stake for HK$971 million. The sale and planned flotation will eventually reduce Citic's share in the airline to 25% and Cathay's to 20%.
CNAC, in return, is to scrap plans to establish its own competing regional carrier and instead "...use Dragonair as the vehicle for development of its airline interests in Hong Kong", says a joint Swire/ CNAC/Citic statement.
The sharing of influence between the two Chinese investors is potentially important, since they are broadly allied to different political factions within China.
A leased Boeing 737-500 and staff already recruited by CNAC for its planned start-up carrier China HongKong Airlines will now be transferred to Dragonair.
Cathay, at the same time, has agreed to issue HK$6.3 billion in new shares to Citic, increasing its holding from 10% to 25%. The move strengthen's China's collective stake in the Hong Kong flag carrier to 33.4%, with CNAC and China Travel Services holding 8.4%.
Swire's existing 52.6% interest in Cathay will, as a result, be diluted to 43.9%, ending 50 years of UK absolute-majority control. Citic has confirmed in a statement support for Swire to continue managing Cathay in the "long term".
The deal has been applauded by most analysts as a "good deal for Hong Kong", meeting Chinese demands for a larger stake in the colony's airline business and securing Swire's post-1997 position.
"It's going to take the heat out of the current situation," says consultant and former Dragonair managing director Steve Miller.
Swire's relations with China have been under increasing strain since CNAC, a wholly owned subsidiary of China's civil aviation administration (CAAC), applied for a Hong Kong air-operator's certificate in March 1995.
The planned new carrier was seen as a direct threat to Dragonair and, in the longer term, Cathay. Citic, which has also been under attack from CNAC, recently sought to distance itself from Swire in an effort to strengthen its political position in Beijing.
Many observers, though, view the agreement as only a first step and that Swire's interest in Cathay will continue to be eroded by China. "In Hong Kong, long term is about six months and [Swire] will have difficulty in sustaining the arrangement," predicts Miller.
Source: Flight International
