Dragonair has become the pawn in a struggle between two Chinese companies for dominance in Hong Kong after the transfer of power in July 1997.
China National Aviation Corp (CNAC) has the initial advantage with plans to start its own operation in the UK colony by June. But Citic Pacific, the Hong Kong branch of China International Trust & Investment Corp and a 10 per cent stakeholder in Cathay Pacific, is gearing up to fight back.
But whoever wins the Dragonair gambit, the repercussions could ultimately damage Cathay, which itself controls 43 per cent of Dragonair and is already fighting to counter the incessant speculation about its future. Battle lines became clearer and Cathay's future looked bleaker when Citic's president and managing director both resigned as directors of Hong Kong's de facto flag carrier in March. This 'sent a shudder through the Hong Kong market,' recalls Jim Eckes, managing director of Hong Kong-based consultants Indoswiss Aviation.
Eckes sees the resignations as evidence that Citic 'is not so interested in being associated with the British anymore because it hurts them in Beijing,' and predicts Citic will focus more on bolstering Dragonair.
Citic owns 10 per cent of UK-controlled Cathay, but is Dragonair's biggest shareholder with 46 per cent and Henry Fan, Citic's managing director, has admitted that he is more interested in Dragonair because it has 'more scope for expansion.'
This was not the first sign that Citic has moved to defend Dragonair against CNAC's Hong Kong expansion. Last year Citic denied reports that it might join the Swire group, including Cathay Pacific, in offering Dragonair shares to CNAC.
And now CNAC is reportedly talking to the Swire group about a bigger Dragonair stake than the 6 per cent offered in February. But CNAC's motives remain murky. One theory is that CNAC is hedging against refusal of a Hong Kong air operator's certificate. The opposite view is that the licence application itself is a ploy to pressure Swire to sell out of Dragonair in exchange for CNAC's assurance to leave Cathay alone.
But this theory is losing support. 'From day one CNAC wanted to set up in Hong Kong to compete with Cathay. They own 51 per cent of Air Macau; they de facto own China Southwest. They're in this for the big time,' says Eckes.
Whatever its reasons, CNAC is still gearing up to launch its own Hong Kong airline. It has slid the startup date back to a more realistic one in June and continues to hire managers and flight crews. Moreover, it recently leased a B737-500 specifically for Hong Kong operations, on top of the two B757s ordered last year for charters in China.
But even if CNAC disclaims any interest in Dragonair, the struggle with Citic will not end there. As the commercial arm of the Civil Aviation Administration of China, CNAC benefits from CAAC control over its rivals: Beijing has denied Dragonair any new routes or capacity for two years. But Citic also has friends in high places. That could lead to a showdown over approval of Hong Kong's air accord with Taiwan, which currently designates Dragonair on a route CNAC covets. With Fan confirming that Citic's goal now is to help Dragonair expand, the battle for Hong Kong's skies has clearly moved to Beijing.
David Knibb
Source: Airline Business
