Cathay's return to the mainland paves the way for the opening of more routes that are high-yield, such as Xiamen When the regulatory authorities last week gave Cathay Pacific licence to return to the mainland after a 13-year hiatus, it opened a lucrative market for Hong Kong's top carrier, but it also turned up the pace of reform for China's aviation sector. Until last week, liberalisation consisted mainly of domestic restructuring, foreign cargo carrier access to secondary markets such as Nanjing and the coolly received opening of Hainan as an international transit hub to all-comers. But granting direct access to a well-capitalised carrier such as Cathay, even on a limited basis, significantly accelerated the process. Cathay was granted only three times a week services to Beijing, but has route rights eventually to fly three times a day to Beijing and Shanghai, and three times a week to Xiamen. With more than 170 flights a week between Hong Kong and Beijing, Cathay's three times a week return starting on December 2 is expected to be absorbed in the short term without a ripple, in all but symbolic terms, according to Kim Eng Securities analyst Tony Lau. 'The impact of Cathay's entrance in to the Beijing market will be real small, both in its effect on the market and the carrier's revenues,' Mr Lau said. 'But, symbolically, it is a good sign for the opening of high-yield routes such as Xiamen, where there's less competition.' On whether Cathay would receive access to Shanghai before the end of the year, Mr Lau said: 'It is hard at this early stage to see any firm indications, but my gut feeling is that they will.' David Dodwell, a consultant for Golin/Harris Forrest, described the liberalisation of China's aviation sector as 'surprisingly rapid' over the past two years, but said it had also been well-considered, with the central government fully aware of the value of the mainland market. 'They are the last continental passenger market and they are not going to just give it away, particularly to the United States, in a rush for liberalisation without getting a similar return,' Mr Dodwell said. 'And the US is light-years away from any meaningful, reciprocal movement within its aviation industry.' For this reason, a growing camp of industry watchers believe most near-term movement towards liberalisation will take the form of code-sharing agreements, such as the one set to take effect on Friday between United Airlines and Air China on the Beijing-Chicago route. They will start a similar code share, which allows either carrier to sell tickets on the other's flights, between San Francisco and Shanghai. Cathay's return to the mainland would appear to set the scene for an intensified and protracted battle for market share with Dragonair, especially given the divisive rhetoric that surfaced during April's hearings in front of the Air Transport Licensing Association (Atla). However, some analysts believe that the rivalry between the airlines has been overblown and belies their common shareholding structures and divergent business models. Cathay owns almost 20 per cent of Dragonair and Citic Pacific has more than 25 per cent in both airlines, so the incentive for a knockout price war is not there. 'Cathay would not have fought as hard as they did throughout the whole Atla process if they didn't think [a return to the mainland] was important,' Mr Dodwell said. 'But what emerged [during Atla] was that Cathay had no desire to go head to head with Dragonair or anyone else for [origin and destination] passengers on the mainland.' While Dragonair uses Hong Kong as a source and destination for passengers, Cathay, with its extensive international network, tends to use Chek Lap Kok more as a transfer point. When negotiations revealed the cost of a code-share deal into the mainland was going to make it unable to compete on price with other international carriers flying direct, Cathay had little choice but to turn to Atla for its own licence. The question is how will the two carriers co-exist, with Cathay soon to operate to the mainland and Dragonair spreading its wings to traditional Cathay destinations such as Taipei and Bangkok, with Sydney, Seoul, Tokyo and Manila potentially on the cards? Peter Hilton, head of regional transport for investment bank Credit Suisse First Boston, said the direct competition did not have to materially alter the carriers' relationship. 'Their common ownership structure will probably result in some 'measured' competition,' Mr Hilton said. 'The temperature may go up a degree or two between them on routes they compete [on]. 'But they have been competing on the Taipei route since last year and we haven't seen an all-out war there.' Phil Wickham, aviation analyst for ING Barings, agreed that Hong Kong's two carriers were unlikely to draw swords over the mainland, or any other market. The common markets may even draw them into closer co-operation. 'Their relationship will change, but it is how that change takes shape. I doubt we'll see a situation such as in [South] Korea or Japan, where rivalry has become intense,' Mr Wickham said. 'I believe that eventually code-shares will emerge because they make sense and it helps develop the hub. You're not going to see carriers flying London to Wuhan direct for a long time.'