Airline reshuffle buys political insurance for Swire

Ceding control of Dragonair to Peking may have secured a better future for Cathay Pacific

When Hong Kong's Swire Pacific group buys political insurance it does so big-time. As the owner of Cathay Pacific, the colony's de facto flag-carrying airline, and the big shareholder in Dragonair, its former rival, which mainly flies to China, Swire is acutely vulnerable to the wind blowing from the north carrying the incoming administration from Peking.

At the beginning of the year all the talk in the aviation industry was about how Cathay would be hit as the state-owned China National Aviation Corporation made plans to establish a Hong Kong-based airline. In March Cathay's position looked even more bleak as Citic Pacific, the Hong Kong arm of China's main investment company the China International Trade and Investment Corporation, appeared to be distancing itself from the UK company by removing its most senior officials from the board, while maintaining a reduced 10 per cent holding in the company.

Now it appears that most of what was being said about Swire Pacific was wrong. The ownership reshuffle announced yesterday means that Swire has in effect ceded control of Dragonair to CNAC, and thus pre-empted the Chinese company's plans for a new airline. Meanwhile it has drawn Citic Pacific into a much closer relationship.

Officially there is not a hint that yesterday's announcement had anything to do with politics but there is little doubt that the Swire group had pulled off something of a coup. Arguably it has lost some of its commercial potential by slimming down its stake in Dragonair from a 43 to 25.5 per cent stake because growth prospects for the smaller airline are probably better than those of Cathay. However Dragonair's growth is largely determined by its access to Chinese airspace and airports. If CNAC had started using its political muscle in Peking this access would have been whittled away.

CNAC now says it "will use Dragonair as the vehicle for the development of its airline interests in Hong Kong" and promises to "cooperate closely" with Cathay. This means it will probably withdraw its application for a Hong Kong operating licence and remove Cathay's biggest headache.

Meanwhile Citic will more than double its stake in Cathay to 25 per cent at the cost of HK$6.3bn (pounds 543m), bringing in new capital and a virtual guarantee that China will allow the UK-owned company to retain its pre- eminent position in Hong Kong's aviation industry.

The relationship between Citic and Swire goes back further than most people realise. In the old days when Swire was bigger in shipping than in airlines, one of its customers in pre-revolutionary China was Rong Yiren, the Shanghai millionaire purged in the Cultural Revolution, rehabilitated by the Chinese leader Deng Xiaoping and given the state's blessing to establish Citic.

Mr Rong is now one of China's vice-presidents and his son, Larry Yung runs Citic Pacific in Hong Kong. His father was still in charge when Citic took its first stake in Cathay, encouraging other companies like the Cable & Wireless subsidiary Hongkong Telecommunica- tions to buy political insurance by taking in the Chinese company as a shareholder.

The remarkable thing about the Swire group, which remains London-controlled and sheltered by a special category of 'B' shares that ensures no one can challenge the Swire family's domination over the company, is that it has avoided the opprobrium which has afflicted other British companies in Hong Kong. The most obvious victim of China's dislike of all things British is the Jardine group, which is every bit as much a colonial remnant as Swire, but less successful at keeping out of the political gunfire.

The resolutely low-key leadership of the Swire group has enabled it to retain cordial relations with the Chinese in Hong Kong and expand its business in China. This achievement is all the more remarkable because Swire has not followed the prevailing trend of senior management localisation evident in practically every other company. Its most senior Chinese executive is Baroness Dunn, who is seen as a colonial appendage by the Peking government.

Cathay Pacific, the biggest operating unit within the Swire group, accounts for over a third of operating profit. Although it claims to be operating in an intensely competitive environment, Cathay enjoys access to a range of international routes out of Hong Kong that other airlines would die for. The colony is too small to have a domestic airline market but is a hub for regional traffic and generates an extraordinarily high level of traffic from within.

Challenges to Cathay's supremacy in Hong Kong have been eliminated. Dragonair, for example, was founded by the influential shipping tycoon Sir YK Pao and the Chao family, who remain shareholders, as a challenger until 1990 when Cathay, with its parent, bought a controlling stake in the then loss-making rival for a total of HK$343m. Yesterday it sold almost 18 per cent of its holding for over HK$971m. Cathay also gobbled a smaller cargo airline challenger, Air Hong Kong.

Although the sale to CNAC represents a healthy return on the Swire group's initial investment it has made the sale at a price lower than previously expected when it first started talking to CNAC last year. This does not exactly make it a sweet-heart deal but it comes close. Shareholders in Hong Kong were notably cool towards the deal yesterday, leaving the price of Swire Pacific unchanged. However, as the consequences of the arrangement are digested it should become apparent the British company has secured its presence in the colony. Asked for his opinion on the deal yesterday, Chris Patten, the Governor of Hong Kong, said, "It's not for me to comment." His script could have been written at Swire headquarters where the rule of silence is often golden.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

Sepp Blatter resignation: The beginning of Fifa's long road to reform?

Does Blatter's departure mean Fifa will automatically clean up its act?

Don't bet on it, says Tom Peck
Charles Kennedy: The baby of the House who grew into a Lib Dem giant

The baby of the House who grew into a Lib Dem giant

Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
The future of songwriting: How streaming is changing everything we know about making music

The future of songwriting

How streaming is changing everything we know about making music
William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

Recognition at long last

Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
Beating obesity: The new pacemaker which helps over-eaters

Beating obesity

The new pacemaker which helps over-eaters
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)
Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

Wiggins worried

Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific