VZCZCXRO9012
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 
------- 
 
¶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