Cathay Pacific, Air China won’t seek stake in China Eastern

By midday on the Hong Kong stock market, Cathay was down 7 percent at HK$21.10 and Air China was down 13 percent at HK$10.22.

China Eastern’s Hong Kong-listed shares were down as well at HK$7.44, a drop of 14.5 percent. On the Shanghai bourse, China Eastern’s shares quickly fell the daily limit of 10 percent to 19.75 Chinese yuan.

Meanwhile, Merrill Lynch downgraded its rating on Air China and China Eastern to “sell.”

Without explaining the decision, Cathay said in a brief announcement late Monday that it “will now not proceed” with the acquisition of China Eastern — the dominant carrier in China’s biggest city, Shanghai.

In the bid, Cathay paired up with China National Aviation Holding Co., the state-owned parent company of the country’s flagship carrier, Air China Ltd.

A person close to the deal said that Air China was the driving force in the bid for the China Eastern stake.

Cathay was going along because it and Air China have cross holdings, said the person, who declined to be named because the source wasn’t authorized to speak to the press.

Acquiring the stake in China Eastern would have helped fulfill the ambitions of senior Air China executives, who want to build one big dominant airline in China, the person said.

Air China said in a separate statement that it would not bid for China Eastern shares for three months. It didn’t say whether it would revisit the proposal after that time.

Both Cathay and Singapore have been maneuvering to tap into China’s double-digit economic growth.

“The acquisition (of China Eastern) is attractive because of Shanghai’s aviation position in China. Shanghai and Beijing are the two major aviation hubs,” said Cho Fook-tat, an analyst with Tai Fook Research Limited.

Despite China Eastern’s strong position in the much-coveted Shanghai market, the state-owned airline has suffered from soaring jet fuel prices and intensifying competition. It reported net losses in 2005 and 2006 and in the first half of this year, according to international accounting standards.

Earlier this month, it was announced that China Eastern and Singapore Airlines struck a deal that would give the Singapore carrier and Singaporean government investment arm Temasek a combined 24 percent stake in China Eastern.

Cathay and Air China were expected to offer a higher premium for China Eastern’s shares. Air China affiliate China National Aviation already holds an 11 percent stake in China Eastern.

It would have been unusual for the rival airlines to engage in such market-based dueling — both are state-controlled and the Singapore-China Eastern alliance had obvious government support.

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