The most tumultuous changes in the history of the territory's aviation industry took place this year. Decades of British influence was ended by two Chinese organisations in April which took major stakes in the territory's two major airlines, Cathay Pacific Airways and Hong Kong Dragon Airlines (Dragonair). The two mainland organisations, China National Aviation Corporation (CNAC) and Citic Pacific, have emerged as increasingly crucial players in determining the future of the industry. A combined $8.27 billion deal saw Swire Pacific selldown from its previous 52.6 per cent stake in Cathay to just 44 per cent. A combined 43.16 per cent stake in Dragonair held by Swire and Cathay was diluted to 25.5 per cent. Citic's stake in Dragonair fell from just over 46 per cent to 28.5 per cent as the organisation devoted more resources to Cathay - raising its stake from 10 per cent to 25 per cent. CNAC was the major beneficiary of the Swire/Cathay and Citic selldown of their respective stakes in Dragonair. The state-owned mainland aviation body moved from a zero stake in the short-haul carrier to just under 36 per cent - effectively making it the controlling shareholder. The deal was the culmination of a period of protracted negotiation over the future of the territory's aviation industry. As the deal was signed, CNAC continued to apply for an air operator's certificate to set up a competing carrier in the territory, tentatively titled China Hong Kong Airlines. Up to the conclusion of the deal, senior CNAC executives maintained the new airline would take on de facto Hong Kong flag carrier Cathay as well as Dragonair. Whatever CNAC's real intentions, the move appeared to pressurise the British hong to consider negotiating with the mainland organisations about Cathay and Dragonair. However, CNAC's application has not been withdrawn, leading to speculation it may be leveraging for a higher stake in the Hong Kong carriers. Despite this development, the selldown agreements appeared to restore confidence in the two airlines' future - and of Swire Pacific. The deal has been seen as a model for further expansion by China into Hong Kong, with Hongkong Telecom generally seen as next on the takeover agenda. Immediately after the deal, Swire and Cathay shares rose by four per cent. Aviation consultant and former Dragonair chief executive Steve Miller said the deal was 'great news for everybody' and settled the ownership and traffic issues. He said maintaining the British presence via Swire and Cathay was positive. 'Whatever we may say about Cathay and Swire, operationally they run a pretty good airline,' he said. The ownership moves, however, prompted speculation that Dragonair would compete with many of Cathay's international routes. But Peter Sutch, the chairman of both Swire and Cathay, said Dragonair did not have the long-haul aircraft to compete outside Asia. The deal was subsequently approved by the Government and later by shareholders. CNAC then surprised the stock market by selling about 2.6 per cent of its 4.2 per cent remaining shareholding in Cathay. It was generally thought the organisation would hang on to all its stake, after the original April announcement said CNAC would 'retain a shareholding in the company as a long-term investment'. Dragonair is now preparing for another sale - this time a public share offering to investors which will see it listed on the stock exchange for the first time about the end of the year. There was further good news for Cathay in August with the airline reporting a 12.5 per cent rise in earnings before exceptionals. Analysts said it was a strong result, given the depressed passenger and cargo yields in Asia, high fuel prices and a weak yen. It is believed the airline will have to cut costs to increase profitability - although Cathay showed its confidence by announcing it was buying three new Airbus A340 long-haul aircraft. The opening of Chek Lap Kok airport, scheduled for April 1998, is seen by many as a focal point for the future of Cathay and Dragonair in Hong Kong, while much interest will also centre on whether direct air ties are re-established between Taiwan and China. It is argued that once direct China-Taiwan air links are re-established, Hong Kong airlines may suffer revenue and profit downturns.
