Hong Kong Sees Lively Airline Feud Posted on Fri, Jan. 24, 2003 / DIRK BEVERIDGE - Associated Press HONG KONG - The relationship between Hong Kong airline giant Cathay Pacific and the smaller Dragonair long seemed cozy, even nurturing. Dragonair was the "child" of its part owner Cathay Pacific Airways, the de facto local flag carrier and one of Asia's most respected airlines. But those close ties are being strained by an escalating battle over the lucrative passenger market in China, Dragonair's traditional turf. Saying it is "fighting for survival," the smaller airline is trying to stop Cathay's attempts to fly there. Their public slugfest, in which Cathay accuses Dragonair of "crying wolf," is rare in Hong Kong, where business differences normally are resolved quietly and in private. It reflects the yearning, in the airline industry among many others, for a piece of China - where the economy is booming even as the world economy fights a slump. China's passenger market is world's fastest-growing, and Cathay executives see a huge gap in their route system right next to their home base at Hong Kong's state-of-the-art Chek Lap Kok airport. They fear Hong Kong could find itself at a disadvantage to other regional air traffic hubs - archrival Singapore, for example - if the dominant local carrier remains locked out of mainland China. Should Taiwan and China restore air links that were cut more than half a century ago, Hong Kong's position would be further weakened. Cathay and Dragonair tried early on to keep the dispute behind closed doors, but when Hong Kong's Air Transport Licensing Authority made them proceed in public, they came out fighting. While grilling a top Cathay executive on Friday, Dragonair attorney Alan Hoo accused Cathay of violating the trust of two big Chinese shareholders in Dragonair. Hoo said Cathay kept them in the dark beforehand about its request to fly into Shanghai, Beijing and Xiamen. The shareholders, China National Aviation Co. and CITIC Pacific Ltd., own a combined stake of about 73 percent of Dragonair. Cathay's director of corporate development, Tony Tyler, who also is a director of Dragonair, insisted Cathay had made it known it wanted to get into China. Cathay holds a 17.8 percent stake in Dragonair, and Cathay's biggest shareholder, the conglomerate Swire Pacific Ltd., owns 7.7 percent. It remains unclear just how badly relations may deteriorate, but an eventual breakup doesn't seem out of the question. "The existing cooperation or existing environment between them is likely to change one way or the other," said Philip Wickham, an airline analyst at investment bank ING Barings in Hong Kong. For years, the carriers had no overlap in their passenger routes. Cathay focused on longhaul destinations and Asian business centers while Dragonair served mainland China and secondary Asian cities. They have prospered carrying Taiwanese business travelers into China, thanks to a lack of direct links between the mainland and Taiwan, which have been politically separated since splitting amid civil war in 1949. With Hong Kong serving as a go-between point, Cathay flew passengers in and out of the Taiwanese capital Taipei while Dragonair carried them between Hong Kong and the mainland. Cathay was unhappy last year, however, to see Dragonair enter the lucrative Hong Kong-Taipei route, putting the two into competition for the first time. Dragonair's move ended Hong Kong's policy of allowing just one Hong Kong-based airline to serve any one route, clearing the way for Cathay to try for mainland access. An alarmed Dragonair proposed a peaceful solution through a so-called code-sharing agreement, letting Cathay put its CX flight numbers on Dragonair services and sell seats as if they were on Cathay flights. Cathay declined. Dragonair noted that Cathay is embarking on a long-sought deal to code-share with American Airlines - in the United States and Asia and across the Pacific. "If you can do it with American Airlines for the American network, why can't you do it in China with Dragonair?" Hoo asked. Tyler said an arrangement with Dragonair made less commercial sense than it did with American, the world's biggest air carrier. Dragonair found itself revealing business information that companies typically prefer to keep secret, disclosing that, although it serves 18 cities in the mainland, it makes money on just five of the routes. The three Cathay wants are particularly profitable. Cathay jabbed at its smaller partner with a press release that said Dragonair, "as an independent company, is entitled to prop up loss-making routes with profitable ones, even if that defies business logic."