By joining forces, airlines Cathay Pacific, Dragonair and Air China would boast one of the largest fleets in the world

Hong Kong's role as Asia's top aviation hub has been given a huge boost with its flag carrier Cathay Pacific Airlines sewing up a complex HK$8.2 billion (US$1.05 billion) deal to take full control of regional airline Dragonair.

Hong Kong-based Cathay has built a reputation as one of the world's leading airlines but has lacked full access to the vast potential of the rapidly growing mainland China market.

The acquisition of Dragonair, which has developed a niche as an Asia-focused airline with an extensive network in China, will transform Cathay's long-term prospects and make it the largest in Asia outside Japan.

In the process, Hong Kong's long-term positioning as a centre for cargo and passenger traffic for China and the region have been dramatically enhanced.

Cathay is expected to develop Dragonair's China network and use it as a feeder for its international flights leaving from Hong Kong, while passengers and cargo shippers globally will also be attracted by the prospect of now seamless transit through Hong Kong into China.

Pillars of China aviation

The complex five-party deal also involved Cathay deepening its ties with the mainland's flag carrier Air China, creating the promise of much more to come in terms of Hong Kong and Cathay's role as pillars of China's aviation sector.

"Cathay Pacific taking full control of Dragonair and strengthening its partnership with Air China will reinforce Hong Kong's role as the premier aviation hub in the Asia-Pacific region and create one of the world's strongest airline groupings, here in Hong Kong," said Cathay's chief executive Philip Chen.

"It will improve flight connectivity and route management, mean more destinations and greater travel choices for passengers, and strengthen both Hong Kong and Beijing as major aviation hubs."

The pair of cities already operate the two busiest airports in China. In one example, Cathay said, is has found tough competition on fares from rivals flying customers from Sydney to Shanghai, using connections through Bangkok and Singapore. But by taking full control of Dragonair, Cathay will now be able to offer competitively priced Sydney-Shanghai tickets on a shorter route via Hong Kong.

The deal, announced in June and expected to close in August, will result in Cathay increasing its stake in Dragonair from 17.8 per cent to 100 per cent, making it a wholly owned subsidiary.

Strong growth expected

Cathay is by far the bigger of the two. This year, its fleet size will increase to just over 100 mostly long-range airliners and cargo planes, such as Boeing 747 jumbos and Airbuses. By contrast, Dragonair has 34 mainly smaller planes.

"We are positive on the deal for the tremendous growth potential," said Peter Drolet, an analyst with UOB KayHian Securities.

Prior to the deal, Cathay only had routes to Beijing and Xiamen in China. The acquisition of fellow Hong Kong carrier Dragonair gives it access to the smaller carrier's network of routes to 23 Chinese cities.

"The fleets are complementary. Cathay cannot operate economically to smaller mainland and regional cities, whereas Dragonair's fleet of smaller, short-range aircraft can. Each helps the other fill more existing seats in their respective networks, adding many customers and much value," Mr Drolet said.

Perhaps as importantly, the deal will also result in Cathay taking a 20 per cent stake in Air China while Air China will end up holding a 17.5 per cent stake in Cathay. Operationally, the two airlines will be working more closely together, suggesting the Chinese government is keen on seeing its top airline learn from Cathay's international know-how.

"Cathay Pacific's enhanced partnership with Air China will provide access to an even wider national network within China," according to Cathay. "The national carrier's interest in the success of Cathay Pacific and Dragonair also signals a commitment to support the future growth of Hong Kong as a logistics centre."

The combination of Cathay and Dragonair will give a combined fleet of 137 planes, much bigger than Singapore Airlines' 103-strong fleet. If Air China's fleet of 176 planes was added to the combined Cathay-Dragonair, it would give a total of 313 planes - one of the biggest fleets in the world. That's bigger than the 290 planes operated by British Airways and the 280 planes operated by Japan Airlines. Only global giants such as Lufthansa and American Airlines would be able to boast bigger fleets than a merged Cathay and Air China.

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