HONG KONG (AFP) — Cathay Pacific and Air China's parent company abandoned an attempt to block Singapore Airlines from buying a stake in China Eastern, as the battle for the lucrative Chinese market heats up.
They announced they had given up their own bid for a piece of China's number three carrier, whose Shanghai gateway could now give the Singapore airline a valuable entry into what has become one of the world's top aviation markets.
A spokeswoman for Air China said she did not know why the bid was called off, but a source familiar with the negotiations told AFP that political pressure in China had helped thwart the bid.
Singapore Airlines (SIA) had already received government approval from Chinese authorities for its bid, and is now awaiting the green light from shareholders at an extraordinary general meeting later this year.
Cathay and Air China's parent, China National Aviation Holding Company Limited (CNAHC), said they would not go ahead with an offer aimed at trumping the bid by SIA and the city-state's Temasek Holdings.
SIA and Temasek are planning to buy a combined 24 percent stake in China Eastern for 923 million US dollars, giving them a foothold in the fast-growing Chinese aviation market.
Shares in both Air China and Cathay Pacific had been suspended ahead of any announcement. Their share prices tumbled in Hong Kong on Tuesday following news that the deal was off.
A source familiar with the deal, who did not want to be named, said Chinese authorities had played a crucial role in scuppering the bid, which was being driven by CNAHC.
Joyce Zhang, a staff member at the board secretary's office at Air China, had no comment, and a Cathay spokeswoman also refused to give any reasons for the bid's withdrawal.
But analysts were convinced mainland authorities played a role.
"We believe top regulators in China could have played an active role in persuading Cathay management to abandon the China Eastern deal," said Chin Lim of Morgan Stanley.
The attraction for both airlines was China Eastern's Shanghai service. Sixteen of the 32 daily flights between Hong Kong and Shanghai are operated by Cathay and Dragonair.
With China Eastern operating 13 and Shanghai Airlines three, a deal could have given Cathay a virtual monopoly on the lucrative route.
"Many foreign carriers want to enter China but the market is still sealed off, so they turn to buying stakes in domestic airliners," said Jack Xu, a Shanghai-based analyst with SinoPac Securities.
"Clearly, the authorities want to create competitive airline companies and they have two options: restructuring the companies with capital injections from government or bringing in advanced foreign players to improve the efficiency."
China Eastern has a 35.4 percent share of total weekly airline seats at Shanghai's Pudong and Hongqiao airports, while Air China has 9.1 percent and Cathay Pacific-controlled Dragonair just 3.5 percent.
The Centre for Asia Pacific Aviation, an industry consultancy, said the bid was just the opening salvo in stepped-up competition to win a piece of China's aviation market.
"Asia-Pacific aviation has come within a whisker of a massive power struggle between two of its most influential airlines," CAPA said.
"Even with Cathay's backdown, that new competitive era has now dawned, spurred by China's massive growth and even bigger potential. Control of the key mainland hubs is a prize that will overshadow all else."
Cathay Pacific and Air China already own 17.5 percent stakes in each other, as part of a 2006 move that also saw Cathay take over smaller rival Dragonair.
A spokesman for SIA said Tuesday the deal they were proposing would benefit consumers.
"The partnership between all the parties will contribute to the further advancement of the air transport sector to, from and within China, and will offer competitive choices, products and services for the travelling public."
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