Cathay up on buying Dragonair

HONG KONG - Cathay Pacific Airways will pay US$1.58 billion ($2.52 billion) to buy Hong Kong's Dragon Airlines and double its stake in Air China, adding 21 routes in the world's second-largest aviation market.

Cathay's stock gained the most in more than two years.

Asia's second-most profitable airline will buy the 82 per cent stake it doesn't own in Dragonair for HK$8.22 billion ($1.74 billion) in cash and stock and pay HK$4.07 billion to increase its Air China stake to 20 per cent, the airlines said yesterday.

Air China will pay HK$5.39 billion for 10.2 per cent of Hong Kong-based Cathay.

Chief executive Philip Chen, who ran Dragonair from 1994 to 1997, will extend Cathay's access to cities such as Shanghai and Tianjin, making it the dominant foreign-controlled airline in China. Cooperation with Cathay may help Air China compete with domestic rivals including China Southern Airlines.

"Buying Dragonair is a natural move for Cathay because it can expand quickly without having to build its own network," said Winson Fong, at SG Asset Management in Singapore. "Air China focuses on international routes and is a good fit for Cathay."

Cathay shares rose as much as 5.8 per cent to HK$13.70 yesterday evening (NZT). Shares of Air China fell 3.2 per cent to HK$3. Shares of China National Aviation jumped 32 per cent to HK$2.60 after Air China said it may privatise the unit. Air China, based in Beijing, is facing more competition as China Southern sets up a hub in the Chinese capital.

British Airways is among international carriers that are adding flights to China as the country opens up.

Cathay, which resumed flights after 13 years to China in 2003, flies to Beijing and Xiamen in the southeast.

Cathay and Air China plan to split sales and costs on common routes between Hong Kong and China and sell each other's tickets, they said. Cathay, which has cargo flights to Shanghai, will also set up an air freight venture with Air China.

Dragonair and China Eastern Airlines are the only carriers that fly passengers between Hong Kong and Shanghai.

More than 2.8 million people travelled between Hong Kong and Shanghai in the year ended March 2005, according to Hong Kong's Civil Aviation Department.

- BLOOMBERG