TNAG-0514-FCO40-579-Purchase-of-wide-bodied-aircraft-by-Cathy-Pacific-Airlines-1974 — Page 46

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CONFIDENTIAL

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by SATD

RECEIVED IN REGISTRY Mo. 7

- 6 MAR 1974

PA

TO PRIORITY WASHINGTON TELNO

OF 4 MAR.

FOLLOWING TELEGRAM NOW REPEATED TO YOU AT REQUEST OF DEPARTMENT WAS SENT TO GOV HONG KONG TELEGRAM NO 227 OF 27 FER.

BEGINS.

TO IMMEDIATE GOVERNOR HONG KONG TELMO 227 OF 27 FEBRUARY 1974/ AND TO BRITISH TRADE COMMISSIONER HONG KONG INFO PRIORITY BCARFE PONG KONG.

18YOUR TELNO 248.

CHOICE OF WIDE BODIED AIRCRAFT BY CATHAY PACIFIC.

1. JOHN SWIRE, ADRIAN WIRE AND JOHN BROWNE CALLED TO SEE SIR PETER THORNTON (SECRETARY AEROSPACE AND SHIPPING) AT THEIR OWN REQUEST THIS MORNING. WARRINGTON AND ROGERS WERE PRESENT.

2. THE VISITORS SAID THAT THEY HAD NO DEFINITE PROPOSITION TO PUT FORWARD AT THIS STAGE. THEIR PURPOSE IN ASKING FOR THIS MEETING HAD BEEN TO LET US KNOW HOW THEY VIEWED THE SITUATION AT PRESENT AND TO BE SURE THAT THEY UNDERSTOOD THE GOVERNMENT'S INTEREST. THE CHOICE BETWEEN THE DC10 AND THE TRISTAR WAS OF FIRST RATE IMPORTANCE FROM CATHAY'S POINT OF VIEW, SINCE A MISTAKE COULD BE DISASTROUS. THEY CONFIRMED THAT, AS REPORTED IN YOUR TEL. UNDER REFERENCE, THE CPA BOARD HAD AGREED TO DEFER A DECISION UNTIL THE NEXT BOARD MEETING ON 16 MARCH. THEY RECOGNISED THAT IF THE DECISION THEN WENT IN FAVOUR OF THE DC10 AND IF DOUGLAS INSISTED ON THE PENALTY MENTIONED IN PARA 2 OF YOUR TELNO 242 OF 22 FEBRUARY THEY WOULD BE DOLLARS U.. 259,500 WORSE OFF THAN AT PRESENT ALTHOUGH THIS WOULD STILL LEAVE THEN WITH MONEY IN THEIR POCKET AS COMPARED WITH THE SITUATION WHEN WE INTERVENED AT THE END OF JANUARY.

3. WE SAID THAT THERE WERE VERY PORTANT BRITISH INTERESTS AT STAKE ON BOTH SIDES IN THIS DECISION. WE RECOGNISED THE IMPLICATIONS FOR CATHAY. ON THE OTHER HAND LOCKHEED AND ROLLS-ROYCE CONSIDERED THAT CATHAY'S CHOICE OF WIDE BOOTED AIRCRAFT MIGHT WELL HAVE A DOMINO EFFECT IN THE FAR EAST, ROLLS-ROYCE HAD ESTIMATED THAT AS

MUCH AS £150M OF BUGINEOS FOR THEH OVER THE NEXT 3 OR 4 YEARS

MIGHT TURN ON CATHAY'S DECISION, THE FACT THAT, FOLLOWING THE

SIGNIFICANTLY REDUCED THEIN OFFERED PRICE INDICATED THAT THEY ALSO REGARDED TWO AS A KEY ORDER. WE HOPED THE CATHAY BOARD MOULD THEREFORE GIVE FULL EIGHT TO OTHER BRITISH INTERESTS IN CONSIDERING THEIR DECISION. WE COULD NOT OF COURSE FORECAST THE ATTITUDE OF THE INCOMING GOVERNMENT: BUT WE FELT SURE THAT IN THE PREGENT ECONOMIC CIRCUMSTANCES OUR NEW MINISTERS WOULD BE KEENLY INTERESTED IN AN ISSUE WITH SUCH IMPORTANT INFLICATIONS FOR BOTH THE AIRLINE AND THE AERO-ENGINE MANUFACTURER.

THE SWIRE BROTHERS CONFIRMED THAT ALTHOUGH THE BALAMACE OF ENGINEERING AND OPERATING CONSIDERATIONG WAS SOMEWHAT IN FAVOUR

OF THE DC10 THE MATH ISSUE WAS THE CATHAY BOARD'S LACK OF CONFIDENCE IN LOCKHEED'S FINANCIAL MUSCLE. AS TO THIS, WE SAID THAT SO FAR AS ROLLS-ROYCE'S OWN STRENGTH WAS CONCERNED THE GOVERNMENT HAD CLEARLY STATED THEIR SUPPORT IN THE HOUSE ON A NUMBER OF OCCASIONS. IT WAS INCONCEIVABLE THAT THE INCOMING GOVERNMENT WOULD GO BACK ON THIS. SWIRES SAID THAT THERE WAS A CERTAIN BIAS WITHIN CATHAY IN FAVOUR OF AMERICAN ENGINES SINCE THEIR ENGINEER WERE SO FAMILIAR WITH THEM. BUT THEY EXPRESSED FULL SATISFACTION BOTH WITH ROLLS-ROYCE'S POSITION AND WITH THE ENGINE ITSELF. THEY

MENTIONED THAT THERE WERE SOME PROBLEMS ABOUT SERVICING TO BE IRONED

OUT AND WE UNDERTOCK IF NECESSARY TO ENSURE THAT ROLLS-ROYCE MADE

ADEQUATE ARRANGEMENTS. HE ALSO OFFERED IF NECESSARY TO ARRANGE FOR

BRITISH AIRWAYS ENGINEERS TO ADVISE CATHAY IN THE LIGHT OF THE ARRANGEMENTO THAT THEY THEMSELVES WERE MAKING FOR THE INTRODUCTION OF TRISTARS INTO SERVICE.

5. THIS NARROWED THE DISCUSSION DOWN TO THE FINANCIAL MUSCLE OF

LOCKHEEDS THEMSELVES. HE SAID THAT IT WAS NO CONCERN OF THE

BRITISH GOVERNMENT TO KNOCK ANY OF THE AMERICAN AIRCRAFT FIRMS,

HOWEVER BOENG AND DOUGLAS, RO LESS THAN LOCKHEED, HAD GONE THROUGH VERY DIFFICULT FINANCIAL CIRCUMSTANCES IN THE PAST FEW

YEARS AND THERE DID NOT SEEM TO BE A GREAT DEAL TO CHOOSE BETWEEN

THEM ON THIS SCORC. IS VIE. OF THEIR LARGE AND SUCCESSFUL

DEFENCE INTERESTS, AND WITH THE TRISTAR NO. RECOMING PROFITABLE,

LOCKHEED SEEMED AT LEAST AS FIRMLY BASED AS EITHER OF THE OTHER

TWO MAJOR AIRCRAFT MANUFACTURERS, ONCE THEY HAD RESOLVED THEIR

IMMEDIATE CASH FLOW PROBLEM. A NUMBER OF IMPORTANT AIRLINES HAD

BOUGHT TRISTARS AND SOME PURCHASES HAD RECENTLY EVEN BEEN

ACCELERATED. THESE DECISIONS LUST HAVE BEEN TAKEN IN THE LIGHT OF THE SAME FACTORS AS CATHAY HAD IN MIND. EVEN IF LOCKHEEDS

WERE MERGED WITH SOME OTHER COMPANY - WHICH MOW SEEMED LESS

LIKELY IT WAS HARDLY CREDIBLE THAT THE TRISTAR MIGHT BE

ABANDONED, ESPECIALLY IN VIEW OF THE DEEP INVOLVEMENT OF ANY AMERICAN BANKS

6. THE SUIRE REPRESENTATIVES UNDERTOOK TO BEAR ALL OF THIS CAREFULLY IN MIND. BOTH THEY AND LE ARE EXPECTING THAT LOCKHEED WILL BE

MAKING A FURTHER APPROACH IN HONG KONG TODAY OR TOMORROW TH

A VIEW OF PROVIDING SOME FURTHE REASSURANCE REGARDING THEIR

FUTURE PROSPECTS. JERES UNDERTOOK TO GET IN TOUCH WITH US AGATE

AS SOON AS THEY HAD BEEN ABLE TO DIGEST THIS FURTHER MOVE AND

TO CONSIDER TO WHAT EXTENT IT INSPIRES THE RECESSARY CONFIDEMCC.

ENDS.

DOUGLAS-HOME

LANNE