International -- Int'l Business: HONG KONG
DRAGONAIR IS GETTING ITS WINGS CLIPPED (int'l edition)
A fight with a Beijing-owned line may bode ill for Hong Kong
Whenever he can, Hong Kong-based tour operator Don Cohn flies to China on Hong Kong Dragon Airlines Ltd. The airline has a flawless safety record and offers quality service--including Haagen-Dazs ice cream with its in-flight meals. "I've been incredibly impressed with Dragon," says Cohn.
Now it looks as if Dragon is too successful for its own good. A state-owned mainland rival, China National Aviation Corp., is threatening the airline's privileged position in Hong Kong. CNAC, owned by China's air regulatory agency, is taking on Dragonair even though the airline's largest shareholder is a subsidiary of China International Trust & Investment Corp. (CITIC), itself a powerful Beijing-run company. The uncertainty has forced Dragonair to postpone an initial public offering planned for early this year. Moreover, the assault on Dragon is raising questions about whether other state-owned companies will try similar tactics after the territory returns to China next year.
TURBULENCE. Dragonair's flights to 14 cities throughout China are jammed for much of the year. The privately held company posted profits of $77 million in 1994. Analysts estimate that its revenues and profits both grew at a double-digit clip last year, with earnings estimated at close to $100 million. "Growth has been very satisfactory," crows Chief Operating Officer Philip N.L. Chen.
The years ahead may be more turbulent, however. In CNAC, Dragonair faces a well-connected competitor that plans to use Hong Kong as its hub. For starters, CNAC wants to cherry-pick some of Dragonair's best routes in China, say Hong Kong industry analysts, adding that the carrier plans to muscle in on overseas routes as well. CNAC officials declined repeated requests for comment.
Britain's handover of Hong Kong to China in mid-1997 makes Dragon's prospects even dicier. Cathay Pacific Airways Ltd. and its British parent, Swire Group, own 43% of Dragon, and Cathay is running it under a contract that lasts until 2005. But ties to Britain won't help much after 1997. CNAC's parent, the Civil Aviation Administration of China (CAAC), will control air rights, putting Dragonair in the position of having to fight for routes against airlines owned by the industry regulator. Already, CAAC doles out better treatment within China to the six carriers it owns there. And some analysts believe that Dragon may lose existing routes as China's air-services agreements with other countries come up for renewal. "The best routes will be given to CNAC," predicts CS First Boston analyst Zayong Koo.
"KICK IN THE TEETH." The dogfight already has hurt Dragonair and CITIC. The postponed initial public stock offering, analysts say, likely would have valued the airline at up to $2 billion. The delay of the IPO comes at a time when the Hong Kong stock market is soaring and CITIC needs cash to fund a large real estate project in the colony's central business district. "This is a kick in the teeth for CITIC," says Jim Eckes, managing director of aviation consultants Indoswiss Aviation Ltd. Eckes predicts a showdown in Beijing as CAAC and CITIC slug it out.
Industry sources say that CNAC hopes to get off the ground as early as April. But much confusion still exists. CNAC won't even say what the new airline's name will be, although industry watchers believe it will be called China Hong Kong Airlines. The company is expected to fly Boeing 737s, initially on scheduled charter flights only. CNAC, which now runs charter flights from Sichuan province to Hong Kong, has hired former Dragonair executives to get its airline aloft--a move praised by industry watchers in Hong Kong as evidence of good business sense.
With its China expansion plans on hold, Dragonair is trying to make a virtue of necessity by expanding regionally. But Cathay Pacific has locked up routes to most capitals. That leaves Dragonair flying to secondary markets such as Phuket in Thailand or Dhaka in Bangladesh. They can't match China routes for profitability.
With half the world's population and most of its fastest-growing economies within five hours' flying time of Hong Kong, Dragon isn't in mortal danger. But its future prosperity will depend increasingly on whether it can muster more political muscle in Beijing than its new rival.BY MARK L. CLIFFORD IN HONG KONG