The Hong Kong-based Cathay Pacific and its ally Air China are expected to make a combined offer for a significant stake in China Eastern Airlines as part of what airline industry veterans are calling 'The battle for Shanghai'.
Cathay was widely expected to confirm its intention to buy shares in China Eastern after close of the Hong Kong stock market on Monday 24 September.
The bid is being seen as a blocking gambit against a $1 billion stake-building exercise launched this month by Cathay rival Singapore Airlines. Cathay's move, which will build on Air China's existing 11 per cent stake in China Eastern, is expected to trigger a bidding war for effective control of the routes owned by China's third-largest carrier.
Sources close to Temasek, the holding company for Singapore Airlines that has jointly bid for a 24-per cent stake, said the company would "inevitably" respond to any blocking move by Cathay.
Cathay and Singapore are both desperate to expand their operations into mainland China, the world's fastest-growing aviation market. Both see China Eastern, which dominates flights in and out of Shanghai, as vital to that gambit.
Since Singapore announced its intention to build a stake in China Eastern three weeks ago, analysts have indicated the possibility that Air China would respond robustly. Sources close to the Swire group, which owns 40 per cent of Cathay, indicated that the HongKong-based carrier was not going to sit around while an asset like China Eastern was in play.
Singapore's purchase has to receive the approval of China Eastern shareholders, at a meeting in December. Air China and Cathay seem to be preparing to thwart it by organising a two-thirds majority vote preventing any stake-sale to Singapore.
Cathay Pacific and its DragonAir subsidiary already control half of the 32 daily flights between Hong Kong and Shanghai. Add China Eastern's 13 to that via code-sharing deals, and Cathay will have near-monopoly status on the route.
On its part, Singapore Airlines would probably use a large stake in China Eastern to turn Shanghai into a hub connecting its international network with a domestic Chinese one.
Despite its strategic importance in the region, China Eastern has been criticised by investors as one of the few airlines that have managed to make a loss despite the booming growth of Chinese air travel. In 2006, lost more than Yuan3.3 billion ($440 million).
Singapore's stake-building bid was widely praised by analysts, who saw it as an opportunity for the airline's well-respected management to shake up a failing one at China Eastern. Others questioned whether a 24 per cent stake would allow Singapore a sufficient degree of management control. Singapore's focus on Asia is expected to lead to the group shedding its 49 per cent stake in Virgin Atlantic.
But Cathay has its own problems. Chinese law prevents an 'overseas' company owning more than 50 per cent in a Chinese carrier. Singapore and Temasek's ambitions are to build a 24 per cent stake, but Air China and Cathay's plans may be to build a holding around twice that size. The issue is, it may itself fall under the ban on overseas carriers owning controlling stakes in Chinese airlines.