Cathay Pacific, Air China could spoil SIA bid for China Eastern


Air China’s parent, China National Aviation Corp (Group) Ltd (CNACG), has wrapped up an extraordinary campaign to block Singapore Airlines and Temasek’s joint bid for China Eastern Airlines. The day before the scheduled vote on the Singapore bid by China Eastern shareholders came the coordinated (but not unexpected) release by its subsidiary, Air China Ltd and its cross-equity partner, Cathay Pacific, of statements that they would “seriously consider” any proposals to participate in a strategic partnership with China Eastern.

Cathay’s potential involvement, in partnership with Air China, is likely to galvanise China Eastern shareholders against the current offer. Shareholders, already concerned by the low entry price of SIA, could consider Cathay a more than capable substitute for the Singapore-based carrier in helping China Eastern reform.

But any CNACG-led bid – which Cathay Pacific and Air China would almost certainly join – would result not in the turnaround of China Eastern over the long-term, but its likely absorption and disappearance.

At stake is the crucial Shanghai hub, where Air China is seeking to build its presence, and the highly lucrative Hong Kong-Shanghai route, which will liberalise from the end of Mar-08 under the recently expanded Hong Kong SAR-Mainland bilateral air services agreement. Cathay Pacific would be seeking to neutralise the competitive impact, while gaining a stronger foothold in the Mainland. Involvement in China Eastern provides an instant solution.

If the bid fails, SIA is likely to return with a higher offer – unless it believes that the cause is lost.

China’s aviation sector is on course for profound structural change, whether the pro-consolidation or pro-competition forces win today’s China Eastern vote. And the resulting changes will have resounding impacts for the rest of Asian aviation.