01/08/09, 00:37:29 UTC

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China Eastern the target in airline dogfight over ‘the battle for Shanghai’

timesonline.co.uk

The Hong Kong-based Cathay Pacific and its ally Air China are expected to make a combined offer today for a significant stake in China Eastern Airlines as part of what airline industry veterans are calling “the battle for Shanghai”.

The Cathay bid will be made as a blocking gambit against a £500 million stake-building exercise launched this month by Singapore Airlines, Cathay’s regional rival.

Cathay’s move, which will build on Air China’s existing 11 per cent stake in China Eastern, is expected to trigger a bidding war for effective control of the routes owned by China’s third-largest carrier.

Sources close to Temasek, the Singaporean sovereign wealth fund that is helping Singapore Airlines with its bid for a 24 per cent stake, told The Times that it would “inevitably” respond to any blocking move by Cathay.

Cathay and Singapore are desperate to expand their operations in China – the world’s fastest-growing aviation market – and see China Eastern, with its dominance of the Shanghai hub, as vital to that.

Since Singapore announced its intention to build a stake in China Eastern three weeks ago, analysts at Citigroup have flagged the strong possibility Air China would respond robustly.

A source close to the Swire group, which owns 40 per cent of Cathay, also told The Times: “It has been clear for some time that Cathay was not going to sit around while an asset like China Eastern was in play.”

Singapore’s purchase has yet to receive the approval of shareholders at a meeting in December. It is understood that Air China and Cathay may be preparing to thwart that approval by organising a two-thirds majority vote preventing the stake-sale to Singapore.

The battle is expected to focus on Shanghai. Cathay and its Dragonair subsidiary already control half of the 32 daily flights between Hong Kong and Shanghai; China Eastern’s 13 would, via code-sharing deals, give Cathay near-monopoly status on the route.

Singapore Airlines, meanwhile, could use a large stake in China Eastern to turn Shanghai into a hub connecting its international network with a domestic Chinese one.

Despite its strategic importance in the region, China Eastern has been criticised by investors as one of the few airlines that have managed to make a loss despite the booming growth of Chinese air travel. In 2006, it plunged more than 3.3 billion yuan (£218 million) into the red.

Singapore’s stake-building bid was widely praised by analysts, who saw it as an opportunity for the airline’s well-respected management to shake up a failing one at China Eastern. Others questioned whether a 24 per cent stake would allow Singapore a sufficient degree of management control to achieve that.

It also remains unclear how far Cathay can go with its bid. Chinese law prevents an “overseas” company owning more than 50 per cent in a Chinese carrier. Singapore and Temasek’s ambitions are to build a 24 per cent stake, but Air China and Cathay’s plans may be to build a holding around twice that size.

A Cathay spokesperson said that “we’ve never claimed to be a mainland carrier”, raising what analysts said was a strong possibility it, too, would fall under the ban on overseas carriers owning controlling stakes in Chinese airlines.

Singapore’s focus on Asia is expected to lead to the group shedding its 49 per cent stake in Virgin Atlantic.

 Printable Version  | published Sep 25, 2007