After years of tortuous negotiations, Cathay Pacific has restructured its ownership and gained full access to the lucrative mainland China market.

The Hong Kong carrier is coughing up $1bn, or three times book value, to gain full ownership of DragonAir. Only Cathay, which lacks DragonAir’s access to China and should reap revenue synergies, could justify such a hefty price for a regional airline.

The spending does not end there. As part of the overhaul, Cathay will raise its stake in Air China to 17.5 per cent (assuming a further share issue by the mainland carrier). Air China will take a matching stake in Cathay, but will pay a slimmer premium over the market price than Cathay does for its reciprocal stake. Cathay seals the deal with a $160m special dividend distribution. The operational agreement likewise appears to favour Air China. Cross-border routes where DragonAir currently competes with Air China will move to a 50-50 cost and income sharing agreement, depriving Cathay of the ability to compete on pricing. Nor is Air China offering concessions by, for example, joining Cathay in the Oneworld alliance.

Of course, this was a deal that Cathay had to do and Air China shares some of the disadvantages – for example, it is paying a huge price to privatise another subsidiary.

Perhaps the biggest losers are customers shuttling between Hong Kong and China. Fares are unlikely to fall with a three-in-one giant dominating the route.

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