There are two explanations – one official, one unofficial – for Air China's decision to buy more shares in Cathay Pacific, raising its stake from 17.5 per cent to 29.99.
State-owned Air China would have investors believe the HK$6.3bn (£810m) deal is a rational use of capital. And it is, in purely economic terms. The Hong Kong-based airline is trading inexpensively – 1.2 times book value is just shy of its 12-year average, as Citigroup notes. The premium to Friday's close is an undemanding 11 per cent, reflecting the fragile status of the seller, Citic Pacific. And Cathay's average return on equity since 2002 is a third better than Air China's own.
But increasing exposure to Cathay – still firmly under the thumb of Swire Pacific, which is buying another 2 per cent from Citic to bring its stake to 42 per cent – is hard to reconcile with Air China's long-cherished ambition of becoming an international super-carrier. The Beijing-hubbed airline had wanted to merger with China Eastern of Shanghai – now merging with Shanghai Airlines – which would have given a dominant position in the mainland's two key markets, and a real platform for global growth. Rather than mopping up shares in Cathay, Air China should now be turning the screw in a rebounding domestic market.