With its planned stock exchange listing shelved, Hong Kong Dragon Airlines (Dragonair) is no longer regarded as the 'investors' darling' it was at the end of last year. The territory's second airline is being snubbed. Potential investors no longer ask when they can start subscribing to shares and dealers have stopped telling clients it is the one to watch. To those asking why, the airline's managers could give the following answer: 'Blame it on China.' The mainland - Dragonair's bread and butter and through which it earns about 90 per cent of its profit through services to 14 cities - is seen as the enemy that may lead to its demise. To be more accurate, it is China National Aviation Corp (CNAC), the commercial arm of China's aviation regulator, that is threatening to bring the regional carrier down. Last March CNAC applied to the Hong Kong Government for a certificate to operate flights from the territory in a move to take some of the business dominated by Dragonair and Cathay Pacific Airways. Approval is still pending but the firm has moved steadily towards setting up its tentatively named China Hongkong Airlines, leasing its first aircraft and employing experienced aviation officials from Cathay and Dragonair. News of the application jolted Swire, which controls 52 per cent of Cathay and together with Cathay, 43 per cent of Dragonair, as its future under Chinese rule was thrown into doubt. It immediately cried foul, arguing that CNAC was not a firm with its 'principal place of business' in Hong Kong and that it would be impossible to compete with a company controlled by the Civil Aviation Administration of China (CAAC). But the move also stunned Citic Pacific, Beijing's investment arm, which owns 10 per cent of Cathay and 46 per cent of Dragonair, as its support in Beijing appeared on the wane. To try to prevent CNAC from launching China Hongkong Airlines, it was offered a 10 per cent stake in Dragonair last summer. A combined 6 per cent would have come from Swire and Cathay, 3.5 per cent from Citic and 0.5 per cent from the family of pro-Beijing textile magnate Chao Kuang-piu. The talks dragged on for months before Citic and Mr Chao's family pulled out, and in January CNAC let Swire and Cathay know they did not want the meagre 6 per cent offered. That forced the indefinite shelving of plans to list Dragonair on the stock exchange, as its future was still left uncertain. CNAC, having had access to Dragonair's closely guarded books, appeared set on launching a copycat airline. Citic saw it was in trouble, and just before Christmas it went after Swire in a bid to show its allegiance to China. Managing director Henry Fan Hung-ling publicly lashed out at Swire, saying the conglomerate should stop complaining about CNAC's plans and calling for its managers to 'wake up to reality and face competition'. On March 11 came another severe blow to Swire, when two top officials from Citic, chairman Larry Yung Chi-kin and Mr Fan, resigned from Cathay's board. When asked whether it was a move by Citic to distance itself further from Swire, Mr Fan said: 'That is one interpretation.' Dragonair has not been granted new routes to China for more than two years and capacity on the Beijing and Shanghai routes have been constrained by CAAC so that demand could be created in China Hongkong's favour. Dragonair's profit growth has already been curtailed. According to analysts' estimates, last year's earnings were only about 25 per cent higher than 1994's, with about $740 million in profit taken in compared with 1994's $592 million. Year-on-year profit growth in 1994 stood at about 50 per cent, in 1993 about 85 per cent and 1992 about 90 per cent. With the trend set to continue unless flights can be added, a deal to bring CNAC into Dragonair is crucial, as the company would be left with little reason to launch a competitor to an airline it already owns part of. Under one scenario, Citic would run Dragonair with CNAC, together focusing on routes to China and other regional destinations. Cathay could still help to manage Dragonair and the de facto flag carrier would be left alone to serve long-haul routes. The worry is that CNAC is so far along in the expensive start-up process that it may be too late in the high stakes game for a deal to be struck. For the managers of CNAC - an airline before the communists came to power in 1949 - solid financial incentives must overpower the desire to have their own name painted on the sides of aircraft. If not, Citic and Swire might both be left crying foul.