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Joint Press Release - Changes In Shareholding Structure Builds New Aviation Partnerships In Greater China

09 Jun 2006

The boards of Air China, Cathay Pacific, China National Aviation Company (CNAC), CITIC Pacific and Swire Pacific today announced an agreement to realign their shareholding structures and create one of the world’s strongest airline groupings. These far-reaching changes will also deliver significant benefits for the Chinese aviation industry and its customers, and strengthen the position of Beijing and Hong Kong as key hubs in the region.

The four most significant results of the restructuring are that: (i) Air China will make a strategic investment in Cathay Pacific; (ii) Cathay Pacific will increase its strategic investment in Air China; (iii) Hong Kong Dragon Airlines (Dragonair) will become a wholly owned subsidiary of Cathay Pacific; and (iv) Air China and Cathay Pacific will enter into an Operating Agreement that will include implementing reciprocal sales representation where Air China will be exclusively responsible for Cathay Pacific’s passenger sales in Mainland China while Cathay will be exclusively responsible for Air China’s passenger sales in Hong Kong, Macau and Taiwan; the extension of code share arrangements between Hong Kong and Mainland China; the implementation of joint venture routes, that will operate under profit sharing arrangements, between Hong Kong and key cities in China; cargo joint venture in Shanghai; maintaining Dragonair as a principal airline for at least six years; and the strengthening of business cooperation in a number of other areas.

To achieve these objectives, the boards of the five companies have reached agreement to undertake the following actions:

- Air China will acquire a 10.16% shareholding in Cathay Pacific from CITIC Pacific and Swire Pacific, at HK$13.50 per share, representing a total consideration of approximately HK$5.4 billion. In aggregate, Air China and its subsidiary, CNAC, will own 17.50% of Cathay Pacific.

- Cathay Pacific has agreed to subscribe in cash for 1.179 billion new Air China H-shares at HK$3.45 per share, increasing its shareholding in Air China from 10% to 20%, at a total cost of approximately HK$4.1 billion.

- Cathay Pacific will acquire the remaining 82.21% shareholding in Dragonair that it does not already own from CNAC (43.29%), CITIC Pacific (28.50%) and Swire Pacific (7.71%) and others (2.71%) for a consideration of HK$8.221 billion, making it a wholly owned subsidiary. This will be settled by a combination of the issue of 548 million new Cathay Pacific shares at HK$13.50 each and cash.

- Swire Pacific and CITIC Pacific will further reduce their shareholdings in Cathay Pacific to 40.00% and 17.50%, respectively.

Swire Pacific will remain the principal shareholder in the enlarged Cathay Pacific group. Dragonair will continue to operate under its own brand, but under Cathay Pacific management. The agreement is subject to appropriate shareholder and regulatory approvals.

The stronger shareholding ties between Air China and Cathay Pacific and the Operating Agreement will assist both companies in realising the aims originally agreed in October 2004 prior to Air China’s initial public offering in Hong Kong in December 2004. The companies believe that these changes will bring significant benefits to both companies and offer opportunities for a closer operational partnership.

Air China: Chairman Li Jiaxiang said “This is an exceptional deal for Air China both in terms of valuation and strategy. Air China, Cathay Pacific and the Chinese aviation industry have much to gain, and our long term position, both in the domestic and international markets, will benefit significantly from the Operating Agreement between Cathay Pacific and Air China.”

Cathay Pacific: Chief Executive Philip Chen said: “Cathay Pacific taking full control of Dragonair and strengthening its partnership with Air China will reinforce Hong Kong’s role as the premier aviation hub in the Asia-Pacific region and create one of the world’s strongest airline groupings, here in Hong Kong. It will improve flight connectivity and route management, mean more destinations and greater travel choices for passengers and strengthen both Hong Kong and Beijing as major aviation hubs.”

CNAC: Chairman Kong Dong said: “This is a great deal for CNAC, in terms of value, and at the same time it will maximise Dragonair’s potential, and ensure its future growth and success.”

CITIC Pacific: Chairman Larry Yung said: “The transaction provides an attractive exit price for our shares in Dragonair. CITIC Pacific will sell shares in Cathay Pacific at above the most recent closing market price and will retain a 17.50% stake to share in the benefits of the combination of Cathay Pacific and Dragonair and operational cooperation with Air China. We intend to hold the Cathay Pacific shares as a long term investment.”

Swire Pacific Chairman Christopher Pratt said: “We very much appreciate the support and hard work of all our partners in this landmark transaction. Swire Pacific remains committed to the long term development of the aviation industry in Hong Kong and on the Mainland.”

Complementary Passenger Networks (PDF File 889KB)
Air China:
Rao Xinyu, General Manager of Investor Relations at (86) 10 6458 2211
Diana Footitt, CEO Asia of Financial Dynamics at (852) 9183 0667
Julie Wang, Associate Vice President of Financial Dynamics at (852) 9805 6062
Cathay Pacific: Carolyn Leung, Corp Comm Mgr, Public Affairs at (852) 2747 5393
CNAC: Patrick Li, Company Secretary at (852) 2862 7411
CITIC Pacific: Stella Chan, Director-Company Secretariat at (852) 2820 2184
Swire Pacific: Maisie Shun Wah, General Manager of Group Public Affairs at (852) 9192 9889