An Air China Ltd. plane is refueled in Dandong, China, on Wednesday, August 12

Air China, the world’s biggest carrier by market value, will invest US$813 million to raise its stake in Cathay Pacific Airways to 29.99 percent, expanding its foothold in Hong Kong after being shut out of Shanghai.

Beijing-based Air China will boost its stake in Cathay after attempts to build a hub in Shanghai were derailed by China Eastern Airlines Corp.’s planned acquisition of Shanghai Airlines Co. Cathay may benefit from closer ties with China’s biggest international carrier as the country has avoided a global slump in air travel because of a government economic stimulus package.

“Air China must be proactive in expansion, given the fact that it lost the opportunity in Shanghai,” said Jack Xu, an analyst at Sinopac Securities Asia Ltd. “Hong Kong is a good alternative and with the increased stake, Air China may have more say in operations like route planning.”

Cathay, Citic and Air China will all resume trading in Hong Kong Tuesday after being halted Monday pending announcements.

Short of takeover

Air China and Swire both bought as much of Cathay as they could without triggering mandatory takeover offers, Swire Chairman Christopher Pratt said in a Hong Kong press conference Monday.

Cathay, which owns 18 percent of Air China, cooperates with the mainland carrier in areas including cross-selling tickets on each others’ flights.

Air China increasing its stake in Cathay “would certainly reinforce the partnership,” said Damien Horth, an analyst at UBS AG in Hong Kong. He said he was “surprised” by the transaction.

Cathay, previously 40 percent-owned by Swire, fell 1.9 percent on August 14 to HK$11.62 in Hong Kong. It has gained 33 percent this year. Air China, the nation’s largest international carrier, closed little changed at HK$4.57 in the city. It’s up 90 percent this year.

Citic review

Selling the Cathay shares will let Citic Pacific better focus on its main operations, Kong Dan, chairman of parent Citic Group, said in Hong Kong Monday. The company in May said it would review its operations and sell off assets that weren’t efficiently managed or that had low returns.

The move came after the company was forced to seek a state bailout following derivative losses. Citic bought an initial 12.5 percent stake in Cathay from China International Trust & Investment Corporation Hong Kong (Holdings) Ltd. in 1991, according to its website.

Air China said last month it expects to report a 50 percent-plus increase in first-half profit. Its passenger numbers rose 14 percent, as China’s economic stimulus spurred domestic travel. Nationwide passenger numbers rose 20 percent to 100.4 million, according to the Civil Aviation Administration of China.

Cathay’s first-half passenger numbers fell 4.2 percent and sales tumbled 27 percent, as the global recession hammered international travel. The carrier made a net income of HK$812 million following a HK$2.1 billion fuel-hedging gain.

Source: Bloomberg