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Cathay Pacific: It's Time To Buckle Up (Int'l Edition)


International -- Intl' Business: HONG KONG

CATHAY PACIFIC: IT'S TIME TO BUCKLE UP (int'l edition)

Cathay Pacific Airways Ltd. has seen better weather. Skyrocketing costs are forcing the Hong Kong carrier to slash expenses. New competition threatens the cozy arrangements that Cathay has long enjoyed on many of its key routes. Delays in building Hong Kong's new airport are hurting expansion plans. And with China set to take over Hong Kong in less than two years, Cathay's position as the territory's unofficial flagship carrier is in jeopardy.

All that has Cathay executives buckling up for what promises to be a rough ride. Talks are continuing with the Chinese in an attempt to establish ground rules for future relations. The airline is tightening its belt by moving many operations out of high-priced Hong Kong. And despite the uncertainties, Cathay is pursuing an up to $9 billion program to upgrade its fleet.

NEW DEAL. In coming to terms with the mainland, Cathay's biggest challenge is from China National Aviation Corp. (CNAC), a subsidiary of China's aviation authority that runs charter flights to Hong Kong. CNAC owns 5% of Cathay, but it has applied to set up a Hong Kong-based airline. If it does, Cathay might have to give up some routes.

Cathay is doing what it can to keep CNAC happy. At China's request, it's negotiating the sale to CNAC of a 10% stake in Hong Kong's Dragon Airlines Ltd., the most active foreign airline flying to China. Cathay and its parent, Swire Pacific Ltd., together own 43% of Dragonair, and Cathay manages the airline under a contract that runs to 2005. The profitable Dragonair is the airline of choice for foreign travelers visiting China. "I think everyone would like to get [the sale] wrapped up this year," says a Cathay executive.

At the same time, Cathay's most reliable Chinese ally is whittling its stake in the airline. Citic Pacific Ltd., the Hong Kong-based arm of Beijing's powerful China International Trust & Investment Corp., reduced its holding from 12.5% to 10% in mid-September. The sale apparently was to raise money for an unrelated property project, but the move by Cathay's biggest Chinese shareholder--at a discount to the market price--is hardly a vote of confidence.

For its part, Cathay management claims to be more worried about costs than politics. To save money, Cathay has just opened a $188 million data-processing center in Australia, and its flight simulators are scheduled to move Down Under as well. Other operations are moving to China. Last year, Cathay's high-paid pilots were forced to accept a 12% increase in work but given only an 8% pay raise. Thanks to such moves, analysts expect Cathay's profits this year to top the $309 million earned on revenues of $3.5 billion last year.

The delay in building Hong Kong's new $20 billion airport hurts. The Chek Lap Kok facility was supposed to be finished before the British hand over the colony to China on June 30, 1997. Now it looks as if the airport won't open until sometime in 1998. With the existing Kai Tak airport running at capacity, Cathay can't expand as quickly as it would like. It's putting off delivery of many new planes until after the new airport opens. But it's pushing ahead with a $130 million upgrade of aircraft interiors, including a TV at every seat.

LOOSE TALK? Politics could abort Cathay's well-laid plans. Most analysts in Hong Kong think Swire Pacific will have to cut its 52% holding in Cathay after China's takeover. John M. Mulcahy, managing director of UBS Securities (East Asia), believes it is "inconceivable" that China would let the British conglomerate control what he calls "the most efficient airline in China."

Such talk by analysts frustrates Cathay executives. "They forget the very unique nature of the deal relating to Hong Kong," says Deputy Managing Director Simon J.N. Heale. In the deal with Britain, China promised to give Hong Kong "a high degree of autonomy." And even analysts bearish on the airline give management high marks for making the best of a tough situation so far. If any airline can fly through heavy weather, it just may be Cathay.

Cathay's Troubled Skies

POLITICAL JITTERS Position as the territory's flagship is threatened by China's '97 Hong Kong takeover

HIGH COSTS Moving some operations abroad to offset skyrocketing costs in Hong Kong

MORE COMPETITION New carriers in the region are hurting margins

CAPACITY CONSTRAINTS Delays in building Hong Kong's new airport will hobble growth for the next several years

DATA: BUSINESS WEEKBy Mark L. Clifford in Hong Kong


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