Report: Air China eyes Cathay
 |  Observers are skeptical that Beijing is willing to cede control of Air China. |
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HONG KONG, China -- Hong Kong carrier Cathay Pacific may be taken over by Air China in a deal that would create the world's largest airline, the South China Morning Post has reported.
The newspaper said on Wednesday the deal is "close to completion" and would probably leave Cathay owner and Hong Kong trading house Swire Pacific as the main shareholder in the mainland carrier.
Cathay would take over smaller local rival Dragonair, before being subsumed itself into the Air China group, the report said.
There was no confirmation from the parties, though Swire Pacific said it would release a statement later in the day.
An Air China executive, who declined to be identified, refuted reports of the merger.
"We think the reports are not right, and do not conform with reality. Air China thinks what has been written about our cooperation with Cathay Pacific is not the actual state of affairs," the executive told Reuters.
"What we want at the moment is more cooperation on the business side. That's all it is at the moment," the executive said.
The mooted deal follows on the heels of Cathay Pacific paying $383 million for a 10 percent share of Air China in November.
Cathay Pacific has a market value of $6.5 billion compared to $3.5 billion for Air China.
With the merger, the new company would gain a management stake in Dragonair, pushing the market value to $10 billion, the report added.
But any deal would require the approval of shareholders, including Citic Pacific which holds stakes of a 25.5 percent and 28.5 percent respectively in Cathay and Dragonair.
Cathay returned to the mainland China market in late 2003, traveling to Beijing and Shanghai, after a 13-year absence.
Its entry into the China market posed a threat to Dragonair, which has long specialized in services between Hong Kong and the mainland.
With the merger, Cathay's service would contribute to the already scheduled 15 Hong Kong-Beijing flights a day by Air China and Dragonair.
"From Cathay's perspective, it will be a very good outcome. Cathay needs to somehow tap the Chinese growth," Timothy Ross, an airline analyst at UBS Investment Research, told Reuters news agency.
"It certainly adds long term growth potential to Cathay, which otherwise is staying in a fairly sunset environment."
Citing sources in the companies, the Hong Kong newspaper said Swire may accept Air China shares in return for its stake in Cathay, a move that would make Swire the single largest shareholder in the mainland carrier and place its executives at the core of the new group's operations.
But observers were skeptical that Beijing would be willing to cede control of Air China.
Though the reported merger of Cathay Pacific and Air China would create the largest airline in the world, Air China executives have insisted that they want to develop the domestic market before branching out internationally.
Shares of Cathay jumped 4.9 percent to HK$15 and Air China rose 3.5 percent to HK$2.925, bucking a 0.36 percent decline in the Hang Seng Index. Top Dragonair stakeholder China National Aviation Corp. climbed 9.9 percent to HK$1.78.
Analysts have told CNN that if the mooted tieup proves to be true, it might spark mergers of U.S. airlines, such as Delta and United Airlines, which have struggled against low cost carriers and overcapacity.
Continental Airlines is the latest to be hit, expecting to post "a significant loss" in 2005, according to Reuters reports.
