Identifier
Created
Classification
Origin
06HONGKONG2335
2006-06-06 09:28:00
CONFIDENTIAL//NOFORN
Consulate Hong Kong
Cable title:
CATHAY PLUS DRAGONAIR EQUALS ASIA'S LARGEST AIRLINE
how-toVZCZCXRO9012 OO RUEHCN RUEHGH DE RUEHHK #2335/01 1570928 ZNY CCCCC ZZH O 060928Z JUN 06 FM AMCONSUL HONG KONG TO RUEHC/SECSTATE WASHDC IMMEDIATE 7088 INFO RUEHOO/CHINA POSTS COLLECTIVE RULSDMK/DEPT OF TRANSPORTATION WASHDC RUCPDOC/USDOC WASHDC
C O N F I D E N T I A L SECTION 01 OF 02 HONG KONG 002335
SIPDIS
NOFORN
SIPDIS
STATE FOR EAP/CM AND EB/TRA
STATE PASS USTR
USDOC FOR 4420
E.O. 12958: DECL: 06/06/2031
TAGS: ECON EAIR PREL PGOV CH HK
SUBJECT: CATHAY PLUS DRAGONAIR EQUALS ASIA'S LARGEST AIRLINE
Classified By: EP Chief Simon Schuchat; Reasons: 1.4 (b/d)
SUMMARY
-------
C O N F I D E N T I A L SECTION 01 OF 02 HONG KONG 002335
SIPDIS
NOFORN
SIPDIS
STATE FOR EAP/CM AND EB/TRA
STATE PASS USTR
USDOC FOR 4420
E.O. 12958: DECL: 06/06/2031
TAGS: ECON EAIR PREL PGOV CH HK
SUBJECT: CATHAY PLUS DRAGONAIR EQUALS ASIA'S LARGEST AIRLINE
Classified By: EP Chief Simon Schuchat; Reasons: 1.4 (b/d)
SUMMARY
--------------
1. (C) A JP Morgan transportation analyst told us that he is
confident that media reports are accurate regarding plans for
Cathay Pacific to take over Dragonair. He anticipates the
deal will be announced tomorrow (June 7). If true, Cathay
Pacific would become the Asia-Pacific region's top carrier by
revenue, ahead of Qantas and Singapore Air, according to a
Morgan Stanley estimate quoted by media. Cathay is presently
a long-haul carrier with a Hong Kong-centered route structure
but with very limited access to mainland China. The
motivation for the takeover appears to be acquisition of
rights to serve the 23 mainland cities now covered by
Dragonair. END SUMMARY
BUYOUT OF MAINLAND STAKES; BUY-IN FROM AIR CHINA
-------------- ---
2. (C) JP Morgan Transportation Analyst Peter Negline told us
that he is confident that media reports are accurate
regarding plans for Cathay Pacific to take over Dragonair.
He anticipates the deal will be announced tomorrow (June 7).
Press reports suggest that Cathay will pay USD 1 to 1.3
billion in cash and stock for the 72 percent of Dragonair now
owned by China National Aviation Corporation (CNAC) and Citic
Pacific, both of which are Hong Kong red chips, i.e., locally
listed companies that have significant ownership ties to PRC
government entities. If true, Cathay Pacific would become
the Asia-Pacific region's top carrier by revenue, ahead of
Qantas and Singapore Air, according to a Morgan Stanley
estimate quoted by media. Although Cathay had a controlling
stake in Dragonair from 1991 to 1996, it divested ahead of
the Hong Kong handover and now holds only 18 percent. As a
result, the two airlines are competitors, especially on Hong
Kong-Taiwan flights.
3. (SBU) The media reports suggest that direct mainland
holdings in Dragonair may disappear, but the contemplated
deal is not that simple. Along with Cathay's takeover of
Dragonair would come changes to Cathay's own holding
structure. Presently, the largest shareholder in Cathay is
Swire Pacific, linked to the UK's Swire Group, with second
place going to Citic Pacific, one of the red chips whose
stake in Dragonair Cathay is buying. Current speculation is
that Air China would now take up some of the holdings of
Swire and Citic Pacific. What remains to be seen is whether
the two (mainland) entities would have a combined
shareholding greater than (British) Swire's.
A COMPLICATED WEB OF INVESTORS
--------------
4. (U) The anticipated deal actually involves five listed
Hong Kong companies, all of which have a complicated web of
cross-holdings in each other, and all of which have suspended
trading since June 5 as a result of reports of the deal:
o Cathay Pacific, the Hong Kong-based airline, which owns
17.8 percent of Dragonair and 10 percent of mainland carrier
Air China.
o Swire Pacific, a Hong Kong-listed entity of the British
conglomerate Swire Holdings. The firm holds the largest
single stake in Cathay, 46.33 percent, as well as 7.71
percent of Dragonair.
o Citic Pacific, a Hong Kong-listed red chip of the mainland
financial conglomerate Citic. The firm owns 25.42 percent of
Cathay and 28.5 percent of Dragonair.
o China National Aviation Company Ltd, the Hong Kong-listed
red chip, which owns 43.29 percent of Dragonair, and is 66.36
percent held by Air China.
o Dragonair, which is 97.39 percent owned by the four noted
entities.
The five entities had issued a statement on April 10
confirming that "discussions are taking place about
operational cooperation between Cathay Pacific and Air China
and about the realignment of shareholdings in Cathay Pacific,
Air China, and Dragonair."
HONG KONG 00002335 002 OF 002
CENTRAL ISSUE: ACCESS TO MAINLAND CITIES
--------------
4. (U) Cathay is primarily a long-haul carrier with a global
network centered on Hong Kong, but its mainland routes are
limited. It presently flies passengers only to Beijing and
Xiamen and has just one mainland cargo route, to Shanghai.
Dragonair, by contrast, flies to 23 mainland cities. With
many international carriers seeking to expand service to
China, Cathay is under competitive pressure to do the same,
and the Dragonair deal is seen as a good fit.
5. (C) Negline told us that he believes all of Dragonair's
rights would transfer to Cathay. He anticipates that with
several PRC-connected entities involved in the deal, China
would have a "very pragmatic attitude" about Cathay expanding
service to Dragonair's network.
OTHER IMPLICATIONS
--------------
6. (U) Media speculates that a Cathay-Dragonair tie-up would
create back-office and fleet management efficiencies. Cathay
is also already providing management support to Air China for
cabin crew, engineers, and other staff. Expanded ownership
of Cathay by that mainland carrier could expand the basis for
existing business collaboration.
7. (C) While there is some discussion in Hong Kong of
"monopoly" issues arising from a Cathay-Dragonair deal,
Negline was dismissive. He said there are enough airports
and airlines within and serving the Pearl River Delta region
that it would be hard to make a case to Hong Kong or mainland
authorities that consumer choice had been restricted
significantly.
Cunningham
SIPDIS
NOFORN
SIPDIS
STATE FOR EAP/CM AND EB/TRA
STATE PASS USTR
USDOC FOR 4420
E.O. 12958: DECL: 06/06/2031
TAGS: ECON EAIR PREL PGOV CH HK
SUBJECT: CATHAY PLUS DRAGONAIR EQUALS ASIA'S LARGEST AIRLINE
Classified By: EP Chief Simon Schuchat; Reasons: 1.4 (b/d)
SUMMARY
--------------
1. (C) A JP Morgan transportation analyst told us that he is
confident that media reports are accurate regarding plans for
Cathay Pacific to take over Dragonair. He anticipates the
deal will be announced tomorrow (June 7). If true, Cathay
Pacific would become the Asia-Pacific region's top carrier by
revenue, ahead of Qantas and Singapore Air, according to a
Morgan Stanley estimate quoted by media. Cathay is presently
a long-haul carrier with a Hong Kong-centered route structure
but with very limited access to mainland China. The
motivation for the takeover appears to be acquisition of
rights to serve the 23 mainland cities now covered by
Dragonair. END SUMMARY
BUYOUT OF MAINLAND STAKES; BUY-IN FROM AIR CHINA
-------------- ---
2. (C) JP Morgan Transportation Analyst Peter Negline told us
that he is confident that media reports are accurate
regarding plans for Cathay Pacific to take over Dragonair.
He anticipates the deal will be announced tomorrow (June 7).
Press reports suggest that Cathay will pay USD 1 to 1.3
billion in cash and stock for the 72 percent of Dragonair now
owned by China National Aviation Corporation (CNAC) and Citic
Pacific, both of which are Hong Kong red chips, i.e., locally
listed companies that have significant ownership ties to PRC
government entities. If true, Cathay Pacific would become
the Asia-Pacific region's top carrier by revenue, ahead of
Qantas and Singapore Air, according to a Morgan Stanley
estimate quoted by media. Although Cathay had a controlling
stake in Dragonair from 1991 to 1996, it divested ahead of
the Hong Kong handover and now holds only 18 percent. As a
result, the two airlines are competitors, especially on Hong
Kong-Taiwan flights.
3. (SBU) The media reports suggest that direct mainland
holdings in Dragonair may disappear, but the contemplated
deal is not that simple. Along with Cathay's takeover of
Dragonair would come changes to Cathay's own holding
structure. Presently, the largest shareholder in Cathay is
Swire Pacific, linked to the UK's Swire Group, with second
place going to Citic Pacific, one of the red chips whose
stake in Dragonair Cathay is buying. Current speculation is
that Air China would now take up some of the holdings of
Swire and Citic Pacific. What remains to be seen is whether
the two (mainland) entities would have a combined
shareholding greater than (British) Swire's.
A COMPLICATED WEB OF INVESTORS
--------------
4. (U) The anticipated deal actually involves five listed
Hong Kong companies, all of which have a complicated web of
cross-holdings in each other, and all of which have suspended
trading since June 5 as a result of reports of the deal:
o Cathay Pacific, the Hong Kong-based airline, which owns
17.8 percent of Dragonair and 10 percent of mainland carrier
Air China.
o Swire Pacific, a Hong Kong-listed entity of the British
conglomerate Swire Holdings. The firm holds the largest
single stake in Cathay, 46.33 percent, as well as 7.71
percent of Dragonair.
o Citic Pacific, a Hong Kong-listed red chip of the mainland
financial conglomerate Citic. The firm owns 25.42 percent of
Cathay and 28.5 percent of Dragonair.
o China National Aviation Company Ltd, the Hong Kong-listed
red chip, which owns 43.29 percent of Dragonair, and is 66.36
percent held by Air China.
o Dragonair, which is 97.39 percent owned by the four noted
entities.
The five entities had issued a statement on April 10
confirming that "discussions are taking place about
operational cooperation between Cathay Pacific and Air China
and about the realignment of shareholdings in Cathay Pacific,
Air China, and Dragonair."
HONG KONG 00002335 002 OF 002
CENTRAL ISSUE: ACCESS TO MAINLAND CITIES
--------------
4. (U) Cathay is primarily a long-haul carrier with a global
network centered on Hong Kong, but its mainland routes are
limited. It presently flies passengers only to Beijing and
Xiamen and has just one mainland cargo route, to Shanghai.
Dragonair, by contrast, flies to 23 mainland cities. With
many international carriers seeking to expand service to
China, Cathay is under competitive pressure to do the same,
and the Dragonair deal is seen as a good fit.
5. (C) Negline told us that he believes all of Dragonair's
rights would transfer to Cathay. He anticipates that with
several PRC-connected entities involved in the deal, China
would have a "very pragmatic attitude" about Cathay expanding
service to Dragonair's network.
OTHER IMPLICATIONS
--------------
6. (U) Media speculates that a Cathay-Dragonair tie-up would
create back-office and fleet management efficiencies. Cathay
is also already providing management support to Air China for
cabin crew, engineers, and other staff. Expanded ownership
of Cathay by that mainland carrier could expand the basis for
existing business collaboration.
7. (C) While there is some discussion in Hong Kong of
"monopoly" issues arising from a Cathay-Dragonair deal,
Negline was dismissive. He said there are enough airports
and airlines within and serving the Pearl River Delta region
that it would be hard to make a case to Hong Kong or mainland
authorities that consumer choice had been restricted
significantly.
Cunningham