By Chris Devonshire-Ellis
Aug. 20 – The deal of the week has been Air China buying an additional 12.5 percent stake in Cathay Pacific held by CITIC Pacific and bringing its total stake in the Hong Kong-based airline to 29.9 percent. Cathay Pacific is the city’s leading airline and also owns a majority stake in Dragonair.
Dragonair connects Hong Kong to Chinese cities while Cathay Pacific predominantly serves international routes and is widely regarded as one of the worlds leading carriers in terms of service and reliability. The deal doesn’t actually add any further shareholding to the Chinese government.
CITIC Pacific is the mainland government’s investment arm, however, it makes better operational sense for its shareholding to have been transferred to Air China, the latter of course being the mainland’s national flag carrier. Air China’s 29.9 percent stake in Cathay Pacific however is just 0.1 percent lower than the amount under which Air China would be legally bound to launch an offer for all Cathay Pacific shares. A move like that would likely be contested by Swire Pacific, the British-owned majority stakeholder.
Currently Swire holds ten seats on Cathay Pacific’s eighteen man board while Air China now holds four. The acquisition has raised some concerns in Hong Kong that Air China may indeed launch a bid to take over the entire airline. Based on the distance between Cathay Pacific and Air China operations, and the known conservative approach of Air China’s management, there are fears that Cathay’s service could be compromised if Air China takes a more proactive role.
This is unlikely to happen in the foreseeable future. First of all, Swire, although in a good standing with the Chinese government, would view a bid to take over Cathay as hostile. The media and Hong Kong residents would also likely oppose any attempt to seize control of the airline thus creating a huge international public relations headache for Beijing. Swire would likely also demand a massive price to sell its Cathay Pacific stakes.
More logical as a strategy for Air China would be to focus on the increased earnings that Cathay brings to Air China, with its increased shares bringing a possible 10 percent bump to Air China’s annual earnings. Moreover, this combined with the increased exposure to Cathay senior executives and management on how to run two world class airlines would be a more logical reason for accepting the Air China deal as positive. If Cathay Pacific and Dragonair’s business operational procedures can be taught and passed on to Air China, then we may finally start to see a measure of China’s national carrier begin to step up to the plate and provide world class service.
Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates and lived in China for 21 years. He is now based in Mumbai.