Air China Limited, the nation's flag carrier, firmly denied a newspaper report claiming it is in merger talks with Cathay Pacific Airways.

According to a report in yesterday's South China Morning Post, Air China may take over the Hong-Kong based carrier and allow Cathay's parent, Swire Pacific, a substantial stake and management influence in the company.

"The company has been in close partnership with Cathay Pacific in airline management and flight operations. But there's nothing further beyond our 10 per cent stake relationship with Cathay," Rao Xiyu from the Secretariat of the Board of Directors of Air China, told China Daily.

The Hong Kong-based newspaper quoted an unidentified senior executive with one of Cathay's biggest shareholders, the conglomerate Swire Pacific, as saying the company is "very close to completing a deal with Air China to sell Cathay."

But last night, a statement jointly issued by the Swire Pacific Ltd and Cathay Pacific Airways Ltd said "there are currently no agreements between Air China and Cathay Pacific in relation to Dragonair."

The statement said the Swire Pacific "does not intend to do anything which would require a general offer to be made for the shares of Cathay Pacific under the Hong Kong code on takeovers and mergers."

And it continued: "Swire Pacific does not intend to become the principal shareholder of Air China."

The Hong Kong newspaper said under the deal, Cathay Pacific would first buy out its local rival, Hong Kong Dragon Airlines Ltd before being subsumed into Air China, the mainland' biggest airline.

The newspaper also said if Hong Kong-listed Swire accepted Air China shares in return for its 45.73 per cent stake in Cathay (or 46.14 per cent as is shown on Cathay's website), it would be the single largest shareholder in the mainland carrier.

This would place Swire's mainly British executives at the core of the Chinese airline's operations, the report said.

"This [newspaper] report was just speculation," said Jane Liu, an official from the Christensen International, a consultation company in Hong Kong that helps Air China in terms of market operations.

"As far as I know, there have not been any talks since the deal for Cathay's 10 per cent stake was finalized," Liu said.

In November, Cathay bought a 10 per cent stake in Air China during the latter's Hong Kong listing to expand a bigger presence in the booming mainland market.

Both airlines also signed a deal that includes coordinated schedules and joint marketing efforts that combine Cathay's large network of global and Asian routes and Air China's routes centered around its Beijing hub.

Cathay Pacific is one of the largest airlines in the world but Air China has the main network in and otuside China seen as the path the rapidly developing business and tourism market that the Hong Kong carrier views as the future core of its operations.

Cathay resumed passenger services to Beijing in December 2003 after a 13-year hiatus in the mainland. It now operates daily services to the capital.

Earlier this year, the airline started passenger services to Xiamen in east China's Fujian Province and a freighter service to Shanghai, the nation's business hub.

(China Daily March 17, 2004)