The sale to two Chinese companies, Citic and CNAC, and the reduction of Swire's stake below 50 per cent, brings to an end its 48-year- old hold on Hong Kong's air services.
One local broker commented: "We've commenced the changing of the guard. It's inevitable that China wants to see a decent share of key Hong Kong industries held by local faces." The Chinese are also buying a stake in the 10-year-old DragonAir, which runs a service mainly within mainland China.
The sale by Swire brings to a close the majority control it has held over Cathay since it bought the airline in 1948. Hong Kong's two largest banks, its dominant telephone company and large chunks of its expensive real estate are also owned by British companies.
Swire has owned Cathay since shortly after it was founded in 1946, when Roy Farrell, a Texan airman, started the company with "Betsy", a US Army surplus DC-3 Douglas Dakota. Swire bought control in 1948 when the fledgling airline had six DC-3s.
The deal sees the Chinese companies paying HK$6.3bn (to take its stake in Cathay Pacific from 10 per cent to 25 per cent. At the same time CNAC, a branch of China's aviation regulator, will pay HK$1.97bn for a controlling stake in DragonAir, now largely owned by Swire, Cathay and Citic.
While the sale of new shares is expected to dilute Cathay's earnings per share by 20 per cent this year, the move is widely seen as good news for Cathay's shareholders. By expanding its partnership with Citic, the airline will improve its relationship with the Chinese government and raise cash to expand.
Cathay's shares have lagged the Hang Seng index by 35 per cent since 1991 as investors worried that the Chinese might move against the airline to boost its own indigenous industry.
Swire, which said as recently as 1994 that it had no intention of reducing its holding in Cathay, will cut its stake in the airline from 53 per cent to 44 per cent.
The change at DragonAir gives the government-controlled CNAC the biggest say in the development of the airline, which is valued at HK$5.47bn by the deal. DragonAir, which flies mainly domestic Chinese routes, plans to sell shares on the Hong Kong stock exchange "as soon as practicable" according to a joint statement from the four companies involved.
One fund manager in Hong Kong said: "Swire gave in. This shows that China will be a major player in Hong Kong aviation after 1997."
Political insurance, page 22