bodyType

customContents

entityId

entityUuid

articlePageQuery

filter

article

articleBaseAdvertisingInfoArticle

articleListArticle

articleSeoArticle

hooksArticleAcknowledgementGateOverlayArticle

hooksTrackPageViewArticle

hooksContentInterestArticle

articleLinkingDataContent

hooksAmpRedirectArticle

articleSchemaContent

liveArticle

advertZone

sentiment

contentLock

topics

types

sections

paywallTypes

createdDate

publishedDate

sponsorType

urlAlias

moreOnThisArticles

commentCount

authorLocations

authors

corrections

displaySlideShow

multimediaEmbed

printHeadline

seriesContainer

articleSpeeches

socialHeadline

headline

images

flag

firstTopic

glossary

flattenTypeIds

image

relatedLinks

relatedNewsletters

__typename

sponsor

pdfFiles

seriesReverseOrder

series

disableOffPlatformContent

published

updatedDate

summary

subHeadline

body

keywords

readingTime

customTimezone

liveContents

SCMP Reporter

DRAGONAIR has turned from an ugly duckling into a graceful swan as it has expanded over the years and set itself in profitable territory with a bright-looking future.

   Upon its launch 10 years ago, Hong Kong Dragon Airlines (Dragonair) was seen as unlikely to ever establish itself as a major player on the territory's aviation scene.

   Unfortunately, that pessimistic view is being revived.

  With its solid reputation as the travellers' choice when flying to and from China, Dragonair is the envy of many a mainland airline official.

  Its services are good, its pilots have excellent reputations, it has a near flawless safety record and it is run by highly experienced managers.

  It has recorded steady profit growth over the past few years, and made $593 million in profit in 1994.

  But, partly because of that success, it is a target of destruction in the eyes of more than a few involved in China's ever-expanding air travel industry.

  Traditionally, it was Cathay Pacific Airways, the territory's British-backed de facto flag carrier, that was thought to be facing uncertainty under post-1997 Chinese rule.

   Now it appears that Dragonair has just as much, if not more, to worry about.

   Not only are China's big air carriers jealous about how much business Dragonair takes away from them, Dragonair's owners are the enemies of certain factions in Beijing who have their sights set on launching a new airline in the territory.

  It may be hard to believe, given that the biggest owner in Dragonair is Beijing's investment arm Citic Pacific, controlling 46 per cent of the shareholding.

  However, Citic's supporters in Beijing are dying fast. These days, Citic is struggling just as hard as British-backed conglomerate Swire Pacific for support among the decision makers in China.

  Swire owns 52 per cent of Cathay, and together with Cathay 43 per cent of Dragonair.

  Dragonair has for about two years been turned down for new routes to China - where it earns around 90 per cent of its money - and capacity on the busy Beijing and Shanghai routes has been constrained.

  A concern among Dragonair's management is that its massive profit growth of recent years may soon peak; and that China may strip it of some of its 14 routes to China and give them to the new airline being launched in Hong Kong.

  Although it would take years, few would dispute that it could. The existing arrangements on flights between China and Hong Kong blatantly favour mainland carriers.

  As one airline official put it: 'China's playing games with us, and there's not much that can be done about it.'    Just a few months ago, Dragonair was being tipped for greatness. There was talk that part of it would be bought by the state-owned China National Aviation Corp (CNAC) and that it would be listed on the stock exchange soon after.

  Analysts said it would be the 'investors' darling' if floated, and word was that it might generate more interest than Cathay's then record-setting listing in 1986, which was oversubscribed about 55 times.

  But it now appears CNAC will not be taking an all-important stake in Dragonair and as a result the tentatively planned listing has been shelved - at least for now.

  Why was CNAC's purchase of a stake so important? Because it is the one company that many believe has the clout and connections to bring both Cathay and Dragonair down.

  The state-owned company, the mainland's former flag carrier turned start-up airline, is controlled by the regulatory Civil Aviation Administration of China.

  It owns a majority stake in Air Macau, it has interests in many of Chek Lap Kok airport's franchises, and its Hong Kong subsidiary last March applied for permission to operate flights from Hong Kong.

  When news of the application first emerged, Cathay and majority owner Swire Pacific got understandably nervous, as the long-running speculation that China would not allow a foreign company to control such a profitable airline after the handover appeared on more solid ground.

   As way of an olive branch, Swire and Cathay approached CNAC in the middle of last year and offered it a 6 per cent stake in Dragonair.

  The thinking was that if it owned part of Dragonair, it would have no reason to compete against it and would subsequently withdraw its application.

  But CNAC's eyes were evidently bigger than first thought, and as the months of talks dragged on, it became more and more clear that the commercial arm of the regulatory authority was dead set on launching an airline called China Hongkong Airlines.

  The airline is to start this April with its operations modelled on those of Dragonair.

  Last week it was revealed that the talks had all but broken down. Sources close to the negotiations said that while the 6 per cent offer was 'still on the table', CNAC had indicated it was no longer interested.

  That has left managers at Swire worried, as CNAC now has detailed knowledge of Dragonair's closely guarded books.

   It knows what routes are the most profitable and exactly how they are run.

    The talks' failure not only worries Swire. Citic, which also owns 10 per cent of Cathay and was thought would be Cathay's saving partner because of its connections among Beijing's elite, is equally nervous.

  Citic and the family of pro-Beijing textile magnate Chao Kuang-piu, a founder of Dragonair, had also been negotiating to sell a joint 4 per cent stake to CNAC, but in November it pulled out, with no signs that CNAC wanted to bite.

  Citic has tried to distance itself from Swire in recent months and has publicly sided with CNAC on its application in a move to sidle up to the increasingly powerful company.

  Steve Miller, the former chief executive of Dragonair who helped launch the airline in 1985, said Dragonair was in a predicament of its own making.

  Not until 1990 did Swire or Cathay own a stake in Dragonair.

  'The rationale behind the establishment of Dragonair was to prevent exactly what is happening now. It was a true Hong Kong airline owned by Hong Kong people,' Mr Miller, now an aviation consultant, said.

  'It went off track when the shareholding went off track, in other words when Cathay and Swire bought in.

  'So I look at all this with mixed feelings. They [China] only want what is rightly theirs, what we, the British, have been doing for years.

  'Britain has protected Cathay all along, and we, as British, can't claim to be holier than thou. We haven't set a very good example.' 



Vultures circle Dragonair