Air China moves closer to control over Cathay
Air China yesterday raised its stake in Cathay Pacific Airways to almost 30 per cent, moving closer to the ultimate goal of taking control of Hong Kong's flag carrier.
But Air China's ambition to take a controlling stake in one of the world's most respected airlines is raising disquiet because of their differing management styles and cultures.
Cathay Pacific has been controlled by Swire Pacific, a subsidiary of the British family-run John Swire & Sons, for over 60 years, while Air China is a state-controlled company.
It would also be politically sensitive. Under Hong Kong law, the city's designated carrier should be controlled and owned by a company incorporated in Hong Kong or by a Hong Kong resident.
'It has always been the goal of Air China to take control of Cathay, only Swire is reluctant to [let that happen],' said Kelvin Lau, a transport analyst at the Daiwa Institute of Research. Control of Cathay would let Air China benefit from Cathay's extensive international network, world-class brand and training.
Under yesterday's deal, Beijing-controlled Citic Pacific agreed to sell HK$6.34 billion of Cathay shares to Air China. The latter lifted its stake to 29.99 per cent from 17.5 per cent. That is just under the 30 per cent threshold that would require it to make a mandatory offer for Cathay's shares. The agreement is a sequel to the 2006 deal that saw Air China and Citic Pacific offload their stakes in Dragonair to Cathay Pacific in exchange for cash and a combined stake of 35 per cent in Cathay. As part of the deal, Citic will also offload HK$1.01 billion of Cathay shares to Swire Pacific.
Swire Pacific chairman Chris Pratt said his company was very keen to maintain its stake in Cathay Pacific. 'We have a good relationship with Air China and there'll be no significant change from here,' he said. But he understood why the market was speculating about Air China's intentions, given that the mainland carrier had increased its shareholding by such a large extent. After the deal, Swire Pacific will still have nearly 42 per cent of Cathay Pacific.
Citic Pacific, which has considered Cathay a passive investment, has taken a neutral role on the board, favouring neither Cathay's management team nor Air China. This neutral approach has made it difficult for Air China to influence the decision-making at Cathay Pacific.
By acquiring Citic Pacific's stake, Air China will gain more influence and leverage over Cathay's international network. But differences in management styles could prove difficult if Air China moves to take full control, said Corrine Png, a transport analyst at JP Morgan.
Citic Pacific, which booked a HK$14.63 billion loss from a wrong-way currency bet last year, could get HK$7.34 billion cash from the deal and a disposal gain of HK$1 billion.