Airline reshuffle buys political insurance for Swire
Ceding control of Dragonair to Peking may have secured a better future for Cathay Pacific
Tuesday 30 April 1996
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.
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