Qatar's $862m Cathay Pacific stake shows globe-spanning ambition

Qatar Airways' surprise purchase of a 9.6 percent stake in Cathay Pacific to gain a foothold in East Asia has damped a long-held speculation among investors that the Hong Kong flag carrier would soon merge with another major shareholder: Air China.

The Middle Eastern carrier will buy 9.6 percent of Cathay from Hong Kong-based Kingboard Chemical Holdings and related companies for HK$5.16 billion (A$862 million), according to a filing to the city’s stock exchange Monday. Chief Executive Officer Akbar Al Baker, confirming the deal, said the investment "further supports Qatar Airways investment strategy.”

“Cathay Pacific is one of the strongest airlines in the world, respected throughout the industry and with massive potential future,” Qatar Airways said in its statement.

The purchase – the first ever investment by a Middle Eastern airline in an East Asian carrier – will make the Doha-based company the third-largest shareholder in Cathay after Hong Kong conglomerate Swire Pacific with 45 percent, and state-owned Air China with almost 30 percent.

Cathay Pacific CEO Rupert Hogg said in a statement on Monday that he looks forward to a “continued constructive relationship” with Qatar Airways, which is a fellow member of the Oneworld Alliance of airlines.

“I don’t see Cathay being excited about this and I wouldn’t expect major changes even in the medium term,” said Will Horton, an analyst at CAPA Centre for Aviation in Hong Kong. “It has the flavor of a passive stake despite the optics appearing significant.”

Air China said it was happy with Qatar Airways’ purchase.

Zhou Feng, board secretary at Air China, said having an airline as Cathay’s stakeholder, rather than Kingboard Chemical, would “bring about better synergy” as an airline stakeholder has a better understanding of Cathay’s strategy and business.

Regarding the relationship between Qatar, Cathay and Air China, Zhou said there is both competition and cooperation and it will depend on how the carriers maintain the balance. Air China is part of the rival Star Alliance.

Cathay has previously denied that it is considering a merger with Air China. Swire said in an email that it is firmly committed to Cathay and it has confidence in its long-term prospects.

Tapping into the Chinese aviation boom

The deal will help Qatar Airways gain a foothold in mainland China, a country set to emerge as the world’s biggest aviation market within a decade.

China has been at the center of many deals with global airlines seeking a piece of the pie as international traffic from the country surges. Delta Air Lines bought a minority stake in China Eastern Airlines in 2015, while American Airlines purchase a minority stake in China Southern Airlines this year.

The International Air Transport Association predicts passengers will nearly double to 7.8 billion by 2036, and Asia Pacific will contribute more than half of the new additions.

Cathay revamp

The addition of another airline as a major shareholder may complicate Cathay’s biggest corporate revamp in two decades.

Cathay is in the midst of the biggest corporate revamp in two decades to help revive earnings after getting squeezed between Middle Eastern carriers such as Emirates and Etihad Airways at the premium end of travel, and low-cost and mainland Chinese rivals at the other. It has announced job cuts and was in talks with pilots over compensation as it reported its worst half-year loss in at least two decades in the six months through June.

The airline’s earnings have been squeezed by Middle Eastern carriers such as Emirates, Etihad Airways and Qatar at the premium end, and by low-cost and mainland Chinese rivals at the lower end. It has announced job cuts and negotiations with pilots over compensation. 

Cathay reported its worst half-yearly loss in at least 20 years in the six months ended in June, partly thanks to competition from China Southern and China Eastern, which have been adding more direct flights to the U.S. and Europe, reducing the need for Chinese travelers to fly via Hong Kong.

The deal comes a few months after Qatar Airways dropped a plan to invest in American Airlines, which rebuffed the attempt.

Qatar Airways also holds a 20 percent stake in British Airways parent IAG, a 10 percent of Latam Airlines Group – the biggest South American carrier – and plans to take a 49 percent stake in minor Italian operator Meridiana.