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Old August 17th, 2009, 08:29 PM   #1541
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Probably; and Cathay Pacific, or any airline stake, probably isn't something that will make big money in the next few years, given the fact they are not doing that well in this economic. CITIC may as well just sell everything for cash when they can.
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Old August 18th, 2009, 08:20 PM   #1542
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Air China Could Feel Downdraft From Cathay Stake
18 August 2009

HONG KONG (Dow Jones)--Air China Ltd.'s (0753.HK) reasonably priced deal to increase its stake in Cathay Pacific Airways Ltd. (0293.HK) may turn out to be strategically astute, but financially it could boomerang on the mainland airline, especially if Cathay needs to make a cash call.

Under Monday's deal struggling conglomerate Citic Pacific Ltd. (0267.HK) will sell down its 17.5% stake in Cathay to 3%. Air China will take 12.5%, raising its holding to 29.9%, with the balance going to conglomerate Swire Pacific Ltd. (0019.HK) which will remain Cathay's main shareholder with 42%.

Operationally the deal is probably quite good for Air China. The landscape back home has been shaken up by the finalization in July of a merger between China Eastern Airlines Corp. (0670.HK) and smaller rival Shanghai Airlines Co. (600591.SH) creating the largest carrier in China. Getting more earnings and operational exposure to Cathay and its Hong Kong hub may help it counter its new rival.

Price-wise, at HK$12.88 a share, a 10.8% premium to Cathay's stock close Friday, Air China looks to be paying a fair price rather than getting a screaming bargain. The HK$6.3 billion (US$812.7 million) it's paying translates into about 1.2-1.3 times price-to-book, pretty much in the middle of Cathay's trading band over the past five years.

The problem arises from how Air China will pay and what happens if Cathay needs to make a cash call if leverage starts trending higher due to continued weakness in the airline industry and business-class travel.

By raising debt to cover its purchase, leverage would be yanked up to a punchy 305% from an already high 280% using Air China's last reporting period's balance sheet. Unless it has a cracking April-June quarter, Air China's leverage is unlikely to get radically lower, a situation which may in itself require a recapitalization from its own parent, China National Aviation Holding Co.

Then throw in the Cathay rights issue wild card.

To be sure, Cathay has said it has no immediate plans to pursue a rights issue to buttress its finances - but it won't rule one out in the longer term, which is what has some investors spooked.

The company's leverage and short-term liquidity have been deteriorating to historical levels for the past few quarters as money-spinners like business-class travel feel the chill from the global recession.

At the end of the June quarter leverage was up to 111.3% and short-term liquidity, as measured by the quick ratio, had fallen to 0.6x. Neither metric is awful by airline industry standards. Aviation basket case Japan Airlines Corp. (9205.TO), for example, is 530%-levered.

Still, other airlines, arguably less heavily levered than Cathay on some metrics, have gone ahead with follow-on equity raisings. Qantas Airways Ltd. (QAN.AU), for example, raised AUS$500 million in a placement in February when it sported trailing total debt to earnings before interest, tax, depreciation and amortization of 2.5 times versus 9.5x for Cathay.

For Cathay, a company that's always had a reputation of being better than average, current liquidity and leverage may be a worry - and could become even more of one if the outlook for the industry doesn't move in the right direction over the coming quarters.

Ironically, market chatter was that a Cathay cash call would've been hard to execute given the parlous state of Citic Pacific's own finances. Now that buck (if it happens) has been passed to Air China.
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Old August 18th, 2009, 10:27 PM   #1543
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New York is a key business market, so the focus is on more frequencies rather than the using biggest jets in the world. I recall when I flew that route in 2006 summer, I had a very hard time booking the A346 direct flight. My return trip had to go through Vancouver, although it was sunny that day so I got some very memorable aerial shots.
So only one of the three daily flights on the JFK-HKG route is non-stop?

Cathay flies the YYZ-HGK with a daily non-stop flight, correct? Is that highly profitable for Cathay?
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Old August 18th, 2009, 10:33 PM   #1544
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So only one of the three daily flights on the JFK-HKG route is non-stop?

Cathay flies the YYZ-HGK with a daily non-stop flight, correct? Is that highly profitable for Cathay?
Two of the three daily flights between HKG and JFK are direct non-stop.

The third one stop-over in YVR. Can't tell is it highly profitable, but its biggest advantage is this is the only evening flight between Vancouver and JFK.
It does carry a lot of JFK<>YVR passengers, even if they are not traveling to/from HKG from JFK.
The last time I flew that flight, the passenger crowd was more like two distinct groups, one group between HKG<>YVR, and then a second group for YVR<>JFK.
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Old August 19th, 2009, 06:10 PM   #1545
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Old August 19th, 2009, 08:35 PM   #1546
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Two of the three daily flights between HKG and JFK are direct non-stop.

The third one stop-over in YVR. Can't tell is it highly profitable, but its biggest advantage is this is the only evening flight between Vancouver and JFK.
It does carry a lot of JFK<>YVR passengers, even if they are not traveling to/from HKG from JFK.
The last time I flew that flight, the passenger crowd was more like two distinct groups, one group between HKG<>YVR, and then a second group for YVR<>JFK.
Interesting.

Do you see any new destinations coming to the US? Would Chicago (O'Hare) be the next logical destination? A major market that's a strong market for business travelers; along with the feed from AA's hub. If so, when do you see that happening?
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Old August 19th, 2009, 09:21 PM   #1547
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Interesting.

Do you see any new destinations coming to the US? Would Chicago (O'Hare) be the next logical destination? A major market that's a strong market for business travelers; along with the feed from AA's hub. If so, when do you see that happening?
Highly doubt it will happen in the passenger sector, especially under this economy atmosphere. CX and AA are already in the code-share/joint venture operation where CX operates flights in Asia, and AA operates flights in the US.
Can't see CX would operate a new route to Chicago and directly compete with AA in the relatively small cross-pacific market as compares to the bigger New York, San Francisco and LA.

On the freight sector, CX does operates freight only service to Chicago, Houston, New Orleans and Miami.
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Old August 19th, 2009, 09:44 PM   #1548
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Highly doubt it will happen in the passenger sector, especially under this economy atmosphere. CX and AA are already in the code-share/joint venture operation where CX operates flights in Asia, and AA operates flights in the US.
Can't see CX would operate a new route to Chicago and directly compete with AA in the relatively small cross-pacific market as compares to the bigger New York, San Francisco and LA.

On the freight sector, CX does operates freight only service to Chicago, Houston, New Orleans and Miami.
Why would CX compete with AA in Chicago? Does AA serve Hong Kong?

Do you feel that CX will add any new destinations in the US (passenger)?
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Old August 19th, 2009, 10:12 PM   #1549
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Why would CX compete with AA in Chicago? Does AA serve Hong Kong?

Do you feel that CX will add any new destinations in the US (passenger)?
Large part of the cross-pacific market for CX is the connections to/from the mainland China and the rest of the SE Asia, HK is relatively small, except may be in San Francisco, Toronto and Vancouver where there are very strong direct connection with Hong Kong.

AA doesn't fly to HK, but it code share with CX.
AA does fly direct to Shanghai from Chicago, passenger can transfer in Shanghai to Hong Kong, rest of China and Asia there.
CX passenger in Chicago can fly to SFO or LAX by AA flights under code share for transfer to HK.
(I don't think the Shanghai route is CX/AA code-shared tough.)

It's more a deal between AA and CX to share the same market pie, rather than one person take all. This may mean either airline not maximizing their possible profit during the good economy; but at the same time, they are also minimizing the risk to lose everything during the bad economy like these days.

If you ask me, I don't see CX is going to have additional US destinations in the foreseen future. It may adjust the flight frequency according to the travel demand at existing locations, but certainly not destination in the passenger sector.
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Old August 21st, 2009, 06:30 AM   #1550
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Damage Cathay and you will harm Hong Kong
19 August 2009
South China Morning Post

Cathay Pacific is a symbol of Hong Kong. There are few companies as highly respected or brands as closely associated with our city. The airline vies for the title of the region's best, being hailed for its managerial expertise, quality of service and profitability.

There is understandably unease in some quarters that the mainland carrier Air China will boost its stake to within a hair's breadth of making a takeover bid.

Beijing-based Air China announced on Monday it would increase its shareholding in Cathay to 29.99 per cent by buying a 12.45 per cent stake from the Beijing-controlled Citic Pacific. Cathay's parent company, Swire Pacific, will lift its holding to 42 per cent by taking another 2 per cent of shares from Citic. Both companies will buy as much of Cathay as they can without triggering mandatory takeover offers. The sale raises the spectre of Cathay one day being a mainland-controlled firm.

No state-owned airline on the mainland makes an operating profit. China Eastern's latest results are, like Cathay's, in the black because of hedging on fuel futures. The private, Shanghai-based Spring Airlines is one of the few operators across the border that is genuinely profitable. The key to viability is skilled management and a sound business model - which state airlines are still grappling to acquire.

The "one country, two systems" arrangement that assures Hong Kong's separate identity from mainland China guarantees the city its own flag carrier. Swire, a British company closely associated with Hong Kong's colonial roots, held majority ownership until 1996. That year, with the handover of Hong Kong's sovereignty to China looming, its interest in Cathay dropped below 50 per cent with the sale of a stake to Citic. The questions being raised then have re-emerged with Air China's boosted shareholding.

A sharp dip in Air China's stock value yesterday highlighted concern about its finances. Its resources will be stretched to buy the agreed 491.9 million Cathay shares at the 11 per cent premium of HK$12.88 each. It has to be remembered, of course, that state companies can make financing deals with the government.

With Hong Kong drawing ever closer to the mainland, it appears highly likely, if not inevitable, that Cathay will one day come under state control. When this may happen is a matter of guesswork; the financial instability of mainland airlines would seem to indicate that this could be later rather than sooner. Regardless, Cathay needs the mainland market for development and growth. Air China's moving closer to the airline will further help it with training and understanding of international standards and boost access to global routes.

Swire is reluctant to lose control of Cathay. There would be a good deal of disquiet in Hong Kong if it did; mainland airlines are not highly regarded here. Their safety has improved immeasurably since the 1990s through strict government controls. Nevertheless, management skills and service fall short of the region's market leaders, Cathay, Singapore Airlines and Qantas.

Acquiring Cathay is Air China's goal. From a business and operational perspective, its moving closer makes good sense. But it or any other company eyeing a controlling stake has to be careful. Damage to Cathay's standards, quality and reputation would be damage to Hong Kong.
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Old August 21st, 2009, 06:05 PM   #1551
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Cathay Pacific: New inflight menu features dishes specially designed Hong Kong Chefs’ Association
21/08/2009 17:35 (01:32 minutes ago)

The FINANCIAL -- Cathay Pacific Airways on August 21 announced the launch of new menus for First and Business Class passengers featuring a range of dishes specially created by the Hong Kong Chefs’ Association (HKCA) National Culinary Team.

The airline sponsored the air tickets that enabled the team to take part in the 22nd IKA International Culinary Olympics in Germany last October. The HKCA team brought home four medals from the event and, as a token of their appreciation, the chefs got together to create a special menu for the benefit of Cathay Pacific passengers.

In total the chefs have created around 100 dishes including Western appetisers, entrees and desserts. Some of these were featured on flights from May to July and now a new selection of dishes is being served on the majority of Cathay Pacific flights from Hong Kong in First and Business Class.

The dishes featured in the promotion were specially designed by the HKCA in collaboration with the team at Cathay Pacific Catering Services (CPCS) which produces meals for all Cathay Pacific flights out of Hong Kong. The dishes were created with in accordance with the preferred tastes of the airline’s premium travellers and also took into account CPCS’s ability to reproduce the dishes at high volume on a daily basis.

"Among the appetisers featured in the promotion are glazed tiger prawn with sesame, papaya and cucumber julienne, and smoked peppered tuna Nicoise salad with tonnato dressing. Entrees include braised lamb shank with grilled lamb chop, couscous, asparagus and marinated mixed peppers, and duck confit with dark cherry brandy sauce, sauteed potatoes, braised red cabbage and roasted vegetables. Special desserts for premium travellers include American cheesecake with blueberry and cranberry sauce, and peanut butter cake with mixed berry compote," Cathay Pacific informs.

Cathay Pacific Catering Manager Planning & Concept Design Brendan Duffy said: “We are always looking for ways to keep the inflight menu fresh and innovative, so we were delighted to be able to join together with the Hong Kong Chefs’ Association for this unique promotion. The team features some of Hong Kong’s top cooking talent, and it was great to work with them to create a number of dishes which we think are exciting and different for our passengers to try.”
Source: http://finchannel.com/news_flash/Tra...9_Association/
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Old August 23rd, 2009, 04:28 PM   #1552
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Agence France-Presse - 8/23/2009 3:42 AM GMT
China ready to pilot Cathay Pacific, say analysts

With Air China last week boosting its stake in Cathay Pacific, the globally renowned Hong Kong airline has moved a step closer to becoming a mainland company, analysts say.

By increasing its holding to 29.99 percent, Air China bolstered its position to just a hair's breadth below the 30 percent threshold that would trigger a mandatory takeover offer, while also doubling its presence on the Cathay board to four members.

Yet the move was met with rumblings of disquiet in some corners, amid fears a Chinese takeover may tarnish a carrier regarded as a key emblem of Hong Kong's "One Country, Two Systems" autonomy from the mainland, and even pose an existential threat to the city.

"The sale raises the spectre of Cathay one day being a mainland-controlled firm," said Hong Kong's South China Morning Post, adding that "mainland airlines are not highly regarded here.

"Damage to Cathay's standards, quality and reputation would be damage to Hong Kong."

Although Air China has refused comment on whether or not it plans to launch a formal bid, industry watchers believe that it eventually will.

"I think that an eventual merger is a possibility," said Corrine Png, transport analyst at investment bank JP Morgan.

"This transaction is a positive step towards it," she added, noting that a deal may occur in two to three years time if regulatory hurdles concerning China air traffic rights can be navigated.

Yet Png also warned against reading too much political significance into Air China's stake-building, and argued that little has actually changed.

"People shouldn't see this as Air China doing national service," she said.

"Citic Pacific, who sold the shares, is a state-owned enterprise in China as well, so the Chinese interest has always been there. Air China will bring synergies, whereas Citic was just an armchair investor."

Indeed, if viewed as a whole, says Png, the Chinese interest in Cathay has decreased from 35 percent to 33 percent under the new deal.

Driving last week's sale was Citic Pacific's desire to offload what it considers to be non-core assets in the wake of a foreign exchange scandal that saw its profits plummet last year. The subsidiary of China-based parent company Citic Group therefore sold most of its Cathay stake.

Air China purchased 12.5 percent of it for 6.34 billion Hong Kong dollars (942 million US).

The other counterparty was majority Cathay owner Swire Pacific, a subsidiary of British family-run John Swire & Sons and a remnant of the city's colonial era, seemingly at odds with Air China's communist party-linked board. It bought an additional two percent.

Swire will pay 1.01 billion dollars to raise its controlling stake to just under 42 percent, a position it says it plans to maintain.

"I would stress that the new shareholding will not mean any change in the current strategy and operational and financial management of Cathay Pacific," said Swire and Cathay chairman Christopher Pratt.

Yet for how long is uncertain, say analysts. With Citic's stake now reduced from 17.5 percent to 2.98 percent, there is still potentially enough up for grabs for Air China to play with -- although such a move would need consent from all other parties under the current structure.

"Swire had little choice but to tip in further funds, to prevent its stake being diluted and to avoid the mandatory offer trigger," said Derek Sadubin of consultancy Centre for Asia Pacific Aviation.

Of the remainder of Citic's holding, "it will be interesting to see who picks up this stake, given Air China's position at the limit of its shareholding in Cathay," he said.

JP Morgan's Png notes that any potential combination between the two would create Asia's largest airline by market capitalisation, fleet size, assets and passenger traffic. Air China is already the world's largest by market capitalisation.

However, she adds that further integration "could be an issue given their different management culture."

Both carriers, which currently cooperate on code sharing for some routes, owned 17.5 percent stakes in each other prior to the deal as part of a 2006 move that also saw Cathay take over smaller rival Dragonair.

The deal may also have raised eyebrows given the financial strife of China's loss-reporting aviation sector in 2008, but Hong Kong's flag carrier has also been hit hard by the global economic slump, and in July reported a 27.1 percent tumble in revenue for the first half of the year.

Air China, on the other hand, said it expects to return to profit in the first half of the year after announcing a net loss of 9.3 billion yuan for 2008, official news agency Xinhua reported recently.

Analysts therefore see any potential tie up as mutually beneficial.

"Cathay Pacific's assets are attractive to Air China as it can help Air China's ambition to be an international super carrier," said Li Lei, Beijing-based aviation analyst for Citic Securities.

"(Cathay) reached a bottleneck in development as its businesses targeted at high- and medium-end passengers have been dragged down by the global financial crisis," he said.

"A deeper tie with Air China can boost Cathay's shares of the mainland travel market."
Source: http://news.id.msn.com/business/arti...mentid=3543246
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Old August 25th, 2009, 08:34 AM   #1553
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Air China presence in Cathay to show contrast in corporate cultures
Contrast in corporate cultures seen at Cathay

22 August 2009
South China Morning Post

When Cathay Pacific Airways executives joined the board of state-owned Air China after the carrier took a stake in the mainland airline in 2006, they were in for a rude awakening.

Instead of discussing fuel costs, cargo loads or routes, the mainland directors had a much more pedestrian concern - the type of shoes they were wearing.

"The board meeting was conducted in a very informal way and some of the directors were comparing their shoes and exchanging information about the brands," said a transport analyst, who was told about the exchange by a senior Cathay executive.

The incident underscores the huge cultural gap between Cathay - a British colonial icon considered as one of the best-run airlines in the world - and the bureaucratic Air China. While Cathay directors actually have a say in the running of the carrier, directors at mainland airlines are often no more than a rubber stamp for their masters in Beijing.

With Air China this week announcing it would lift its stake in Cathay to almost 30 per cent as part of an eventual plan to take control of the Hong Kong carrier, those differences are about to be writ large. Two more Air China directors are expected to join the Cathay board, bringing the representation to four.

Cathay and Air China come from two radically different corporate worlds. One of the most noticeable differences is the remuneration for top people. Air China chairman Kong Dong has pocketed HK$327,000 from sitting on Cathay's board since May last year - 1.7 times his annual salary at the mainland carrier, according to the company reports.

Zhang Lan, a senior vice-president at Air China, received a HK$529,000 director's fee from Cathay last year. Details of her salary at Air China are not available.

By contrast, Christopher Pratt and Philip Chen Nan-lok, the Cathay executives sitting on Air China's board, received no fee from the mainland carrier. At Cathay, Mr Pratt earned HK$3.46 million as chairman last year while chief executive Tony Tyler received HK$15 million.

Poor compensation at state-owned enterprises is not the only problem for mainland directors. Boards at state-run companies really only have one function - to say yes to the decisions passed down from the ultimate owner in Beijing.

Andrew Tse, who founded Hong Kong Express Airways in 2004, had first-hand experience of this top-down management style after HNA Group, the fourth-largest mainland aviation group, became the carrier's single largest shareholder in 2006.

Hong Kong Express, which is losing millions of dollars a month, applied for a licence to operate a new air-cargo business last month over the objections of Mr Tse, who was concerned the carrier lacked the resources to start freight operations.

"There is no discussion at all {hellip} Whoever is the majority shareholder makes the call," said Mr Tse, who still owns 14.7 per cent of the airline.

In Hong Kong, directors are elected by shareholders at annual general meetings and the management of the company is then appointed by the board. The appointment of senior executives at state-owned enterprises is solely controlled by Beijing.

That may explain the unease being felt at Cathay about the prospects of an Air China takeover. Middle management were more willing to initiate new policy or challenge their bosses if they found decisions were not in the best interests of the company, said one Cathay manager who declined to be named. Such a system would be anathema to a state-run airline.

The cultural differences extend to day-to-day matters. A former executive at Hong Kong Express recalls senior managers communicating with their colleagues by passing around fax paper with notes in red ink. The executive still cannot figure out why the mainland managers did not use the office intranet.

The corporate peculiarities got even stranger earlier this year when cabin crew at Hong Kong Express and sister carrier Hong Kong Airlines were asked to memorise and recite a company creed on command. Staff who failed to recite correctly faced punishment.

While Cathay remains in the hands of Swire Pacific, staff can rest assured they will not be forced to recite a creed anytime soon. But whether Swire remains in control over the long term remains to be seen.

Air China is keen to get its hands on Cathay to boost its international presence and take advantage of the Hong Kong carrier's experience in training and services.

John Slosar, the Putonghua-speaking chief operating officer of Cathay, has reassured staff and investors that the strategy and management would not change despite Air China's increased presence.

At the moment, Air China would probably have to dig pretty deep to further increase its stake in Cathay.

"It remains the firm intention of Swire to remain the single largest shareholder in the airline, as indeed we have been for the past 60 years," Mr Pratt, the chairman of both Swire and Cathay, said last week. "Swire is wholeheartedly committed to the long-term development of the aviation industry in Hong Kong and on the mainland."

Cathay also claims it has a legally binding agreement that Air China has to get the written consent of Swire if it intends to increase its stake to more than 30 per cent.

But in the volatile world of aviation, one should never say never. Swire could change its mind if Cathay encounters another once-in-a-lifetime crisis like the current one it has just flown through. If that crisis was so big that it had to raise funds from its shareholders - Air China and Swire - all bets could be off.

Air China, a state flag carrier with unlimited access to low-cost funding, could easily dilute Swire's holdings if Cathay is in need of a huge amount of capital to pay down debt.

The carrier's net-debt-to-equity ratio increased to 81 per cent from 69 per cent in the first half of the year. Cash outflows of HK$1.2 billion were incurred in the first half because of a HK$2.9 billion cash settlement for fuel hedging losses. The situation is not alarming right now, but if there is any significant reversal in oil price movement, losses could start to mount.

"We have to face the reality that the airline industry is a tough one with very thin profit margins," said Mr Tse, an industry veteran. "The mergers and acquisitions involving airlines in the United States and Europe show that."

Without support from a state-backed carrier, Cathay could lose out under the "open skies" policy that seeks to liberalise routes around the world. Cathay is already losing the one-route, one-carrier privilege on many mainland routes, a protection that was passed down from Hong Kong's former British government.

Hong Kong Dragon Airlines, a subsidiary of Cathay, has a comprehensive network on the mainland but it is reportedly operating at a loss amid fierce competition from mainland carriers.

State-owned mainland carriers have deep enough pockets to increase their fleet and expand their network as part of Beijing's goal of stimulating the nation's economy.

"The room for a purely commercial airline to survive is getting narrower than ever," Mr Tse said.

The mainland is considered one of the aviation industry's growth engines and it would appear Cathay is on the doorstep of a hugely lucrative market. But the cosy position Cathay held in colonial days is truly over.

With cash-rich mainland airlines breathing down its neck and the city's airport seeking closer co-operation with airports in the Pearl River Delta, the road could be even more bumpy ahead for Cathay.

Cathay may be Hong Kong's most recognisable brand. But the world is changing and cultural differences not withstanding, Cathay's future lies more and more across the border.
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Old August 25th, 2009, 03:14 PM   #1554
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That's just sounded like another Sino-British deal in the aviation industry.
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Old August 25th, 2009, 08:53 PM   #1555
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Those chinese mainlanders are crazy, to put it lightly. As if they don't know they suck at airlines management, or management in general....... This whole transaction reminds me a chinese phrase: 要死一齊死! how do you translate it into english? It seems to me that if the chinese mainlanders failed at certain aspects, they have to drag you along too, they want to take over CX just so they could choke it to death with their own bare hands.
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Old August 26th, 2009, 07:07 PM   #1556
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Those chinese mainlanders are crazy, to put it lightly. As if they don't know they suck at airlines management, or management in general....... This whole transaction reminds me a chinese phrase: 要死一齊死! how do you translate it into english? It seems to me that if the chinese mainlanders failed at certain aspects, they have to drag you along too, they want to take over CX just so they could choke it to death with their own bare hands.
Fortunately, Swire isn't going to sell CX to CA on a short term basis, but who knows what will happen in the long term.
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Old August 27th, 2009, 11:57 AM   #1557
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By lawrence0654 from HKADB :

















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Old August 27th, 2009, 12:11 PM   #1558
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Quote:
Originally Posted by caelus View Post
Those chinese mainlanders are crazy, to put it lightly. As if they don't know they suck at airlines management, or management in general....... This whole transaction reminds me a chinese phrase: 要死一齊死! how do you translate it into english? It seems to me that if the chinese mainlanders failed at certain aspects, they have to drag you along too, they want to take over CX just so they could choke it to death with their own bare hands.
Didn't Air China just report profits?

I don't understand, it takes 2 hands to clap and if CX is going down, there's definitely some part of the company that is willing to let Air China increase shareholding.
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Old August 27th, 2009, 05:45 PM   #1559
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Air China seeks HK$5.25 billion loan

HONG KONG, Aug 27 (Reuters) - Air China Ltd is seeking a HK$5.25 billion ($677 million) loan to help fund an $808 million deal to raise its stake in Cathay Pacific Airways , banking sources said on Thursday.

Air China, the world's most valuable airline and the largest of China's trio of major carriers, sent a request for proposals to banks in Hong Kong last week, asking potential lenders to submit responses by the end of August 28, the sources said.

Price talk for the all-in three-year term loan is in the 100s in basis points.

Last year, Air China got a $40 million three-year term loan from Mizuho Corporate Bank, BayernLB and Svenska Handelsbanken. That deal has a 1.5-year put option, which gives banks an 80 basis points extension fee if exercised. Based on the put not being exercised, banks get a top-level all-in of 150 basis points via a margin of 100 basis points over Libor.

Air China agreed to buy a 12.5 percent stake in Cathay from conglomerate CITIC Pacific Ltd for HK$6.3 billion ($808 million) earlier this month, lifting its stake in the Hong Kong-based airline to 29.99 percent.

Air China's request comes amid increasing tailwinds for Hong Kong's syndicated loan market, where sentiment has been improving and banks are looking for new deals to join, bankers said.

"Liquidity is available in Hong Kong, it's just that there has not been sufficient deal flow to cater to all the pent-up demand," said a Hong Kong-based loan banker.

Air China's upcoming deal can also serve as a test to see if momentum can be sustained for the rest of 2009 in Hong Kong's loan market, after the market saw a slump in the first half.

Due to a lack of primary loans, Hong Kong's syndicated loan market volume plunged 32 percent year-on-year to $6.8 billion with just 19 deals in the first half of the year.

In March, Air China mandated BNP Paribas and SG for a $300 million 10-year aircraft financing.

($1 = HK$7.750)
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Old August 27th, 2009, 08:31 PM   #1560
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So, does it mean Air China hasn't completed the buy out from CITIC?

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Air China's Growth Strategy: One Dragon, Two Nests

There has been some buzz about Air China (AIRYY.PK) spending US$812.8 million to buy an additional 12.5% stake in Cathay Pacific Airways, Ltd. (CPCAY) from CITIC Pacific, another state-owned enterprise. That's a lot of greenbacks to lay down at a time when the world economy, rising fuel prices, and the spectre of an influenza pandemic hover over the airline business.

Of course, as both a government-owned business and the national flag carrier, Air China doesn't need to worry as much about empty coffers as, say, EasyJet (EJETF.PK) or Southwest Airlines (LUV). So the cash issue is a bit of a red herring.

The Hong Kong Squeeze Theory

The Wall Street Journal piece about it raises an interesting issue. As UBS analyst Damien Horth noted, Air China is most concerned in the near term about "promoting its base in Beijing as a major travel hub. 'Anything [Air China] can do to reinforce the position of that hub is critical, by limiting competition from Hong Kong.'"

No conspiracy theorist or long-term China resident could resist the speculation Mr. Horth's remarks seem designed to arouse. "Hmm," one might think: "could it be that Air China wants to control Cathay Pacific in order to restrict its growth, and by extension, the growth of Hong Kong International Airport as a regional or global hub?"

Living but a stone's throw from Air China's opulent new headquarters just west of Beijing Airport, not only would I not be surprised if this were so, I might even be inclined to be sympathetic.

Sadly, I doubt this is the case. Instead, I think Air China has wisely made other plans for Hong Kong.

The Second Hub Theory

First, Air China still sees the heart of its long-term opportunity as leadership in PRC domestic air travel, where demand looks set to grow for the foreseeable future. Armed with leadership at home, it can then fill planes to overseas destinations with Chinese who are starting to travel with increasing frequency.

With that in mind, you can understand why Air China sees its nearest rivals not as Cathay Pacific or Dragonair, but Shanghai-based China Eastern Airlines (CEA) and, especially, Guangzhou-based China Southern Airlines (ZNH).

As the Journal points out, Air China was rebuffed last year in its attempt to buy its way into a hub in Shanghai. The idea behind that was to either secure Shanghai as a second hub for itself, or deny it to a rival.

Unable to take on one of its domestic rivals directly, Air China is now pursuing the indirect approach, this time taking on not China Eastern in Shanghai, but China Southern. If Air China can lock down control of a Hong Kong hub either directly (by dominating the airport with its own flights) or indirectly (through its ownership/influence/control over Cathay), it effectively "flanks" China Southern with a south China hub for outbound international traffic.

And for such a large country, that is going to be essential. While Beijing makes for an excellent hub feeding into Europe, Russia, and North America, it does not make sense for over two-thirds of China's population to fly through Beijing to get to the Middle East, Africa, South Asia, Southeast Asia, Australia, Hong Kong, Taiwan, and the South Pacific.

Other Fish

Air China is better off letting Cathay worry about Hong Kong for now. The flag carrier needs to turn its attention elsewhere, optimizing its domestic route structure to feed into its international hubs, improving the efficiency of its fleet and it operations, and continuing to improve service on the routes it has.

A partnership with Cathay leaves China free to concentrate on the areas that will make it the most money in the long run, while building the route system and the know-how to compete against global carriers. Even better, Cathay remains the competitive foil to sustain pressure on the other premium Asian carriers while Air China matures.

None of which is to say that at some point in the future, keeping Air China, Dragonair, and Cathay running as independent airlines will stop making sense. But for now, each of these three operations - and their attendant brands - are doing well in their own space.

Which is exactly why any concern about Air China putting the squeeze on Hong Kong is overblown. For now.
Source: http://seekingalpha.com/article/1585...agon-two-nests
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