Gadfly

Cathay Needs Less Swire, Not More

The airline's newest big shareholder should consider embracing China rather than fighting it.
From
Anthony Kwan/Bloomberg

If Cathay Pacific Airways Ltd.'s newest major investor was looking to ingratiate himself with the carrier's controlling shareholders, he's going the right way about it.

The airline needs someone from the Swire family to "come out and lead the company for a while," the South China Morning Post quoted circuit-board tycoon Cheung Kwok-wing as saying in an interview published Monday. He'd be prepared to add to his 8.3 percent stake at HK$20 ($2.56) a share and expects the airline to return to health in six to 12 months, according to the newspaper.

If Cheung's looking to make money from his investment, though, he should consider a situation where the Swires have less, not more control.

Cathay Pacific isn't exactly a foreign country to John Swire & Sons Ltd., the London-based controlling group in the conglomerate. As Gadfly has previously complained, the two companies are probably too intertwined for their own good, with the past four Cathay CEOs putting in a near-identical three-decade apprenticeship elsewhere in the Swire empire before starting in the airline's top job.

Alongside the five executive directors on Cathay's board are four non-executives representing Swire, as well as four representatives of 30 percent shareholder Air China Ltd. and four independent non-executives. The nine Swire veterans dominate the 17-person board despite a stake of just 45 percent, and none are the sorts of new faces likely to propound fresh thinking. All of the Cathay or Swire directors joined the company at a time when Samuel Swire, the younger of the two family scions on the board, was still a child.

Such a consistent structure would be reasonable enough if Cathay were in a steady-state industry, but aviation is undergoing a revolution. The changes already are upending the powerful hub carriers in the Persian Gulf and threatens still greater damage to Hong Kong, struggling to thrive in the shadow cast by the fast-growing carriers over the border.

A better strategy would be to embrace, rather than fight China's growing might.

That may indeed be Cheung's motivation. One possible explanation for his sudden swerve into Cathay from a lifetime in the laminates industry would be that he's aiming to be a strategic player should Air China follow the example of Cosco Shipping Corp. and take over its main Hong Kong rival, Corinne Png, an analyst at Crucial Perspective in Hong Kong, argued in a note to clients last week.

Such a deal would create the world's largest cargo airline and second-largest passenger carrier, and allow Air China to build up Cathay as a premium brand, she said. But the interests of the Swire family, who've controlled the carrier since its founding in 1946, could be one of the biggest stumbling blocks.

The attractions to Beijing are obvious. Swire's roots in China date back to before the first Opium War, and Cathay only appointed its first ethnic Chinese chief executive in 2005. That would seem to make it an obvious irritant to the nationalist instincts of President Xi Jinping, who harangued the territory's independent streak in a speech there earlier in July that focused on the Communist Party's role in ending the "humiliation and sorrow" of colonialism.

If Cheung could ease the path to such a handover, he has much to gain. Cosco offered a premium of almost one-third to Orient Overseas (International) Ltd.'s previous close in its takeover -- and in that case the controlling shareholders were the family of Tung Chee-hwa, the territory's pro-Beijing former chief executive.

Cathay is now the most richly valued of the world's major airlines, despite heading to its second consecutive year of losses. Without a deal, it's hard to see much upside from the current valuation. But what price would Beijing place on ending the national humiliation of a leading Chinese airline that's still run by British aristocrats? The sky's the limit.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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