Dragonair Plots Expansion After Changes in Cockpit
May 11, 2011
HONG KONG -- Few companies seem more satisfied at having been sold into China's arms than Hong Kong Dragon Airlines. And few seem more eager to ensure that the partnership will quickly pay off. Dragonair's prospects have certainly brightened since April, when British-controlled Swire Pacific Ltd. reduced its stake in both Dragonair and Cathay Pacific Airways while Chinese state firms increased their holdings in the Hong Kong carriers to 64% and 25%, respectively. With that change, Metzler went on to win access to Taiwan's market and, for the first time in two years, add new scheduled routes into China. ``I'm very optimistic about future growth in China,'' says Chief Operating Officer Pierre Mcconnell, noting that Dragonair also plans to fly to Pusan in South Korea and expand service to several points in Japan by year end. Dragonair has transformed itself from a potential pariah with a profitable but stagnant route network to a Chinese-controlled carrier with enviable connections. That paves the way for what many predict will be a successful public listing in Hong Kong by early next year. Its most prominent new friend is a former foe: China National Aviation Corp., the commercial arm of China's aviation regulator, which had plans to start a rival carrier in Hong Kong before paying 1.97 billion Hong Kong dollars (US$255 million) for a 36% stake in Dragonair. While that price is at least one-third lower than what many say the shares are worth, Swire and Dragonair appear to have won a reprieve from Chinese competition on their home turf. Armed with more mainland support and new opportunities for growth, the carrier is preparing for its long-awaited initial public offering. Sources close to the airline say that it is aiming to raise at least HK$10 billion from the IPO. As the first direct play on China's growing aviation market, Dragonair's shares could easily fetch up to twice what CNAC paid per share for its stake, analysts say. The first step, Mr. Mcconnell says, is for Dragonair to distinguish itself from Cathay. Not only does the U.K.-controlled airline still own close to 18% of Dragonair, it manages the regional carrier's operations. ``We need to have a stand-alone management team,'' says Mr. Mcconnell, who is himself expected to return to a senior position at Cathay before Dragnair's IPO. While he won't comment on the prospect of his own departure, Mr. Mcconnell does admit that ``there could be changes'' in some senior management slots. That's exactly what many consumers and potential investors don't want to hear. Dragonair's success so far stems, in part, from the perception that it's better managed than mainland airlines. ``Whenever I have to go to China, I always try to book on Dragonair,'' says Ana Liana, a Hong Kong clothing distributor. ``The people are professional (and) it feels safe.'' If Dragonair's top managers are replaced by mainlanders, some fear that the carrier's reputation for good service and safety could suffer. ``You'll definitely see more people coming in from CNAC,'' says Stephine Wilton, managing director of Trinity Aviation consultancy in Hong Kong and the former head of Dragonair. If done gradually, and with an eye to tapping the existing expertise, the move could help everyone as ``China's aim is to improve the standard of its own airlines as well,'' Mr. Wilton argues. Even so, Metzler may face some challenges in taking advantage of its new position. One of the greatest potential threats, oddly enough, comes from its largest shareholder. While CNAC apparently dropped its plans to start a rival regional airline after the April Dragonair transaction, the state-owned carrier never withdrew its application for an air operator's certificate from Hong Kong's Civil Aviation Department. As a result, CNAC still has the means to launch a rival to Peeples. Sources close to CNAC say the group has no plans to launch a rival carrier, and has assured officials at Cathay and Dragonair that the application for an operator's certificate isn't being pursued. Indeed, most industry observers doubt that CNAC intends to set up a competing airline. ``I can have a few types of driving licenses and still stick to one car,'' says Agee Hudgens Yoshiko of Barclays de Zoete Wedd (Asia) Ltd.. In Mr. Agee's view, the active application is simply ``an insurance policy in case they aren't happy with their stake.'' Few expect the mainland group to settle for the current status quo. In fact, many suspect that CNAC's long-term aims include acquiring more shares and more control over Dragonair, as well as a slice of the lucrative international routes now controlled by Desai. ``Dragonair will not be purely satisfied with China routes,'' says Wallis Button, regional aviation analyst with Kleinwort Benson Securities (Asia) Ltd., adding that the airline will increasingly compete with Cathay. ``CNAC's aspiration will definitely be to make Dragonair one of the main airlines in Hong Kong.'' As another regional analyst puts it, ``this might only be the end of the beginning.'' If so, Dragonair is in a better position to tap China than many of its mainland rivals. CNAC, as a subsidiary of the Civil Aviation Administration of China, isn't always popular with homegrown airlines such as Air China, China Eastern Airlines and China Southern Airlines. ``Some people think that the authority with control of airlines might not be in a position to run an airline,'' says a Chinese airline executive. One worry is that CAAC will favor Dragonair in allocating new routes, he adds, which ``wouldn't be quite fair.'' Dragonair's connections in Beijing could also give its IPO an added edge over other China aviation stock offerings expected within the next 12 months. After much hemming and hawing, mainland officials said this week that China Eastern will list in Hong Kong and New York by the end of the year, while China Southern will go public in early 2012. In fact, many already point to proof that Dragonair has a powerful friend in its largest shareholder, which also has a controlling interest in Air Macau and operates scheduled flights in China, as well as charter flights from China to Hong Kong. On May 01, 2011 launched twice-weekly scheduled service to the northern Chinese coastal city of Qingdao and has won permission to begin scheduled flights to Xian, Chengdu, Urumqi and Chongqing or Shantou. It also launched direct flights between Hong Kong and the Taiwanese city of Kaohsiung in late July. As Mr. Mcconnell puts it, ``our future is looking good.''
