The most surprising thing about Cathay Pacific's stillborn bid to acquire a stake in China Eastern Airlines was that it was even attempted in the first place. In an ordinary sector in a normal market, the proposed bid might have been feasible, although it would undoubtedly have attracted close scrutiny from competition regulators. But the airline industry is not an ordinary sector, and China is far from being a normal market. When rumours of the bid first broke, it sounded like a bold move likely to shake up a sickly sector. Cathay was to team up with China National Aviation Holding, the parent of its mainland partner China Airlines, to bid for a stake in the ailing China Eastern Airlines. If successful, Cathay's proposal would have skewered an earlier US$923 million bid from Singapore Airlines and its parent Temasek Holdings for a 24 per cent slice of China Eastern. Yet the proposed joint acquisition of a substantial stake in China Eastern - possibly as much as a third - never stood a chance of success. Whatever its commercial merits, and despite rumours of a handsome bid price, the deal would have run counter to Beijing's grand plan for the nation's aviation industry. That doomed it to inevitable failure. With the last round of sector consolidation completed a few years ago, the mainland authorities created three big state airlines - Air China, China Eastern and China Southern, based in Beijing, Shanghai and Guangzhou respectively - to be the mainland's future national aviation champions. Yet despite passenger traffic increasing at an annual rate of 17 per cent, the big three are struggling. Confronted with rising fuel costs, political pressure to keep fares low, poor management, the difficulties of maintaining mixed fleets, inefficient air traffic control and inadequate airports, their profitability has been dismal. China Eastern has made losses for three of the past four years. Beijing's answer has been to seek foreign partners with the capital and management expertise to help create a world-class aviation industry. The negotiations have been tortuous, however. It took Cathay about two years of hard bargaining before it secured its 17.5 per cent stake in Air China. Singapore Airlines spent about 18 months pursuing China Eastern. It should be no surprise, then, that the mainland authorities were mightily displeased when news broke of the joint Cathay-China National Aviation Holdings bid for a stake in China Eastern. It threatened to spoil their carefully laid plans. Quietly they let it be known that the proposed deal would never be allowed to fly. The late Monday announcement that the bid would not go ahead came as a big disappointment to Cathay's shareholders. It was an even bigger letdown for investors in China Eastern's stock, which had shot up 56 per cent after the rumours broke only to fall back by 29 per cent as hope for the deal collapsed. The bid's failure is good news for air travellers, however. Had it gone through, the combined Cathay-Air China-China Eastern alliance would have dominated aviation in the mainland, capturing an effective monopoly on the lucrative Hong Kong-Shanghai route. No aviation authority would have willingly allowed that, let alone China's. Cathay should have known better.
