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Cathay shares still frozen amid talks

Shares of Cathay Pacific Airways Ltd and its two biggest owners, Swire Pacific Ltd and Citic Pacific Ltd, were suspended for a second day yesterday amid negotiations over ownership of Hong Kong Dragon Airlines Ltd.

The companies halted trading in their shares on Monday pending announcements on "transactions which constitute price sensitive information," they said in separate statements on Monday. Shares of Air China Ltd and its unit, China National Aviation Co, were also halted for a second day according to the Hong Kong stock exchange.

Cathay Pacific has been in talks with the other four companies about shareholding changes at Dragonair, which has more routes to China than any other Hong Kong carrier. Cathay Pacific may pay at least HK$10 billion (US$1.3 billion) to take complete control of Dragonair the Standard newspaper reported on Monday.

"Control of Dragonair would offer Cathay the direct China market exposure it has effectively lacked," Jean-Louis Morisot, an analyst at Goldman Sachs Group Inc, wrote in the bank's China note yesterday.

Cathay Pacific has an 18 percent stake in Dragonair, as the carrier is also called. Swire, Citic and China National Aviation, 69 percent-owned by Air China, all hold shares in the carrier.

Economic growth has turned China into the world's second-biggest market after the US, measured by passenger traffic. China's passenger traffic will grow at a faster rate than the global average until 2009, according to a forecast by the International Air Transport Association.

To tap that market, Cathay Pacific needs to expand beyond its current routes to Beijing and Xiamen. It also operates cargo services to the commercial center of Shanghai. Dragonair, Hong Kong's second-largest carrier, flies to 23 Chinese cities.

Cathay Pacific handed over its China routes to Dragonair in 1990 under Hong Kong's "One Route, One Airline" policy. To help increase its access to China, Cathay Pacific bought a 10 percent stake in Air China in the Chinese airline's initial public offering in 2004. The two companies sell each other's tickets on flights between Hong Kong and Beijing, and link their frequent flier programs.

Air China has 37 international routes, the most among Chinese airlines.
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