Cathay Happy With Dragonair Share Structure

March 30, 2005

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Cathay Pacific Airways, Hong Kong's biggest carrier, said on Wednesday it was satisfied with the shareholding structure in its smaller rival, Dragonair, and has no current plans to change it.

There has been much market and media speculation of a potential takeover of Dragonair by Cathay, which covets the smaller carrier's dominance of routes between Hong Kong and mainland China.

Cathay owns 18 percent of Dragonair, 43 percent is held by Beijing-controlled CNAC, 28.5 percent by CITIC Pacific and 7.71 percent by Swire Pacific, which is the parent of Cathay.

"We have no plans to change that structure right now," Tony Tyler, chief operating officer of Cathay Pacific said. "We are happy with the structure of the shareholding in Dragonair at the moment."

He declined to say whether Cathay intended to boost its stake in Dragonair.

Earlier this month, a Hong Kong newspaper reported that Swire Pacific was in advanced negotiations that would see Cathay take over Dragonair before itself being subsumed into the Air China group. That takeover talk -- which sent shares in the carriers and Swire surging -- was denied by both Swire and Cathay, as well as Air China.

Cathay holds a near 10 percent stake in Air China.

Peter Hilton, transport analyst at CSFB, said Tyler's remarks were a "cut and dried" dismissal of the Dragonair takeover talk.

"While there is an interest in reducing competition to some extent, I can't see how it would produce a change in the shareholding structure that would be reasonable to all parties concerned and probably acceptable for the mainland," Hilton said.

"You might see some pretty impressive levels of cooperation that do not involve the change of shareholding. They'll be pursuing that route," he added.

Cathay, the world's fourth most valuable airline, has long been frustrated in its efforts to build a meaningful presence in mainland China.

Cathay is in talks with Air China and Dragonair about code sharing on routes to secondary cities in China, Tyler said. Dragonair has recently expanded a code-share agreement between Hong Kong and Beijing with Air China.

Cathay is also seeking cooperation with Air China in other areas, such as cargo, customer service, purchasing and operations.

Cathay currently offers passenger service from Hong Kong to Beijing and Xiamen. The firm, which has cargo flights to Shanghai, can only fly passengers there from October, 2006.

Separately, Cathay expects a double-digit percentage rise in its fuel bill this year on higher fuel prices, lower hedging and more planes joining the fleet, Tyler said.

Rising jet fuel prices are the bane of carriers globally. Cathay spent HKD$7.84 billion (USD$1 billion) on fuel in 2004, and Tyler said that would rise this year. He said high oil prices are more of a challenge than mounting competition from low-cost carriers.

Cathay has no intention to set up a low-cost carrier in Hong Kong, nor buy stakes in other start-ups, Tyler added.

Oil prices, which affect the airline's profitability, will also have an impact on Cathay's agenda on aircraft purchases, he said. Cathay may unveil its plans in the second half of this year for plane purchases after 2007, Tyler said.

Based on a targeted annual capacity rate of 7-8 percent, Cathay will need seven to eight new planes a year. Airbus's A380 and Boeing's new 787 were among the potential candidates, Tyler said.