WHEN Hong Kong Dragon Airlines revealed an ambitious fleet expansion last month, its chief executive, Stanley Hui Hon-chung, sounded bullish: 'This is the year of the dragon,' he said. Mr Hui said Dragonair planned to spend US$600 million (HK$4.66 billion) on 10 new passenger jets over the next six years. The Hong Kong-based airline, which has built its reputation over the past 15 years as the 'safe' alternative to the mainland's state-run carriers, is heading into a growth phase that may lead to war breaking out over the SAR's skies. Consumers may win cheaper fares and more flights, but aviation experts warn that in the long term Dragonair and Cathay Pacific Airways - the two airlines that fly out of Hong Kong - could suffer. Rather than fighting its competitors from across the border, Dragonair might have its bigger, traditional ally Cathay in its sights, aviation industry experts say. This extraordinary turn of events is the likely outcome of a scenario circulating among aviation analysts under which the regional airline is seeking to fly on profitable Asian routes served by Cathay. That would force Hong Kong's unofficial flag carrier to consider resuming services to Beijing and Shanghai, which it stopped 10 years ago under an arrangement not to compete with Dragonair. Cathay is already under pressure from legislators to begin mainland flights. And this looks likely to intensify, as Singapore seeks to promote itself to long-distance travellers as a gateway to China. 'We have lost a lot of competitive edge to Singapore Airlines,' Democrat Fred Li Wah-ming says. Mr Li worries that long-haul passengers headed for China will feel more comfortable flying Singapore's flag carrier, as Cathay passengers would have to change airlines at Chek Lap Kok, either to the less-known Dragonair or mainland airlines dogged by China's poor aviation safety record. Mr Li says the Hong Kong Tourist Association executive director Amy Chan Cheng Yi-yim has discussed his Singapore concerns with him and he has asked the Economic Services Bureau, which is responsible for aviation policy, to look into the issue. 'Cathay Pacific in the long run should have flights to China,' Mr Li says. Singapore Airlines, which flies to Beijing, Shanghai and Guangzhou, has cheaper flights from Los Angeles and London to Beijing (see table). The price difference may be explained as reflecting greater demand in Hong Kong for flights to the mainland, and the difficulty in securing a seat at short notice. Nonetheless, Cathay and Hong Kong hotels seem to be aware of the competition. Package tours from London to Beijing are a few hundred pounds cheaper with SAR stopovers than going through Singapore. And Cathay is content, for the moment, to leave the mainland to Dragonair. Its director of corporate development, Tony Tyler, who also sits on the board of Dragonair, says the smaller airline has enough on its hands in serving the fast-growing mainland market. Cathay has no plans to expand into a market that was been handed to Dragonair. 'At the moment we don't see that anything would be gained by that,' Mr Tyler says. But asked whether Cathay would seek to fly the profitable Beijing and Shanghai routes should Dragonair move into its territory, Mr Tyler says: 'We would review our position should that occur.' Aviation industry sources say it was not certain whether aviation authorities would give Cathay the right to fly to the mainland. Mr Tyler says Mr Li's concerns over Singapore passenger perceptions about flying with different airlines to the mainland is not an issue. Frequent travellers are aware of Dragonair's good safety record and package tourists are not bothered about transferring between airlines, he says. Singapore is also much farther west and south for flights from the United States and Europe, which adds a few more hours to travel time. The overriding concern for Hong Kong should be whether it wants to sustain two airlines and have a strong primary carrier to boost Chek Lap Kok's role as a regional hub, Mr Tyler says. He is referring to the 'one carrier, one route' arrangement that came into effect in 1990, when Cathay took a stake in Dragonair, along with the red chip China International Trust and Investment Corp (Citic), and withdrew from the mainland. That agreement was further solidified after the China National Aviation Co (CNAC) announced plans in 1995 to establish a third airline to operate from Hong Kong. The following year Swire Pacific sold large stakes in both Cathay and Dragonair to CNAC and Citic to avert the threat to its interests. Observers saw Swire's sale as a symbol of British interests passing the baton of Hong Kong aviation to Chinese interests. Nevertheless, Swire still retains a large share of Cathay - 45 per cent - much to the chagrin of some in Beijing. One aviation analyst says: 'Cathay Pacific is probably the last big glittering asset in Hong Kong that is still in British hands.' Talk of Dragonair competing on Cathay routes, such as Taipei, Singapore and Bangkok, within the next few years is understood to have come from its mainland shareholders. CNAC is ultimately controlled by the mainland ministry regulating aviation, the General Administration of Civil Aviation of China. A US investment bank, Donaldson, Lufkin and Jenrette, said in a recent report on CNAC: 'We believe the absence of Dragonair from the oneworld alliance indicates the reluctance of management to forge a closer relationship with Cathay Pacfic.' The report, written by analysts Charles Donald and Philip Wickham, continues: 'The main reason, according to management at Dragonair, is that the 'one airline, one route' policy of Hong Kong is considered unsustainable. 'Dragonair would prefer to compete with Cathay Pacific, rather than allow a third airline to establish itself within Hong Kong. 'If Dragonair forged a very close co-operation agreement with Cathay Pacific, management believes a third airline would emerge in Hong Kong.' Analysts also believe that CNAC wants to move to seize control of Dragonair by increasing its 43 per cent shareholding to more than 50 per cent. Cathay insiders make it clear that if a sky war broke out the larger of the two airlines can use the brute force of its larger fleet to crush a smaller competitor. Aviation industry observer David Dodwell believes more competition could be beneficial for developing Hong Kong's air services to the rapidly growing mainland market. 'There is a case for saying Dragonair is strong enough to cope and the passengers would benefit from more competition,' says Mr Dodwell, who has written reports for Cathay and other airlines arguing against US demands for the SAR's air routes to be further opened to American carriers. He suggests there is an overreaction to Singapore's push into the mainland. 'A lot of people get anxious about Singapore. The Singapore Government, its agencies - and Singapore Airlines is one of them - they are very powerfully focused and they have the capacity to rattle people's nerves,' Mr Dodwell says. Chek Lap Kok's size and the growth in demand for flights serving the mainland provide the potential to further build Hong Kong's role as a regional aviation hub, he says. But the Airport Authority needs to build more amenities for transit passengers - a strength of Changi Airport in Singapore, Mr Dodwell says. Spokesman Chris Donnolley says the authority has pioneered a VIP lounge at Chek Lap Kok for passengers who do not have access to airline lounges, the food court on the airside is being changed and the airport hotel is upgrading its facilities for transit passengers. Tourist Association deputy chief executive Douglas Gautier says Hong Kong is stronger as an aviation hub than Singapore. The SAR is the dominant centre for the region last year: 30.4 million passengers passed through the SAR, compared with 27 million in Bangkok and 25 million each in Tokyo's Narita airport and in Singapore. About 11 million visitors came to Hong Kong last year, compared with the almost seven million who went to Singapore. 'We are determined to hold that place and perhaps do better and that means an objective analysis of the competition,' Mr Gautier says. Economic Services Bureau deputy secretary Arthur Ho Kin-wah says the bureau has not received an application from Cathay to fly to the mainland but would be prepared to consider one. The Government recently signed an air services arrangement with the mainland, and that would allow services to expand. 'We are always aware of competition not only from Singapore but other cities in the region,' Mr Ho says. 'Every economy is trying hard to develop. We have to really keep on enhancing our competitiveness.' Chek Lap Kok has allowed the Government to liberalise its aviation policy, which had been constrained by the smaller airport at Kai Tak, and officials are seeking more airlines to add to the more than 60 already flying to Hong Kong. But Cathay's Mr Tyler warns that liberalisation should not be pursued so aggressively that it undermines the strength of Hong Kong's unofficial flag carrier and its role in building a regional hub.