TNAG-2480-FCO40-3610-Business-matters-in-Hong-Kong-Swire-Group-1992 — Page 31

JOHN SWIRE & SONS LTD

Swire House

59 Buckingham Gate

London SWIE 6AJ

Registered Office

Registered Number 133143 ENGLAND

From Sir Adrian Swire

Chairman

Telegrams:

TEMSELOAF LONDON SW1

Telephone:

071-834 7717

Fax: 071-630 0353

Teler: 888800

Answer back:

SWIRE G

24th April, 1992.

The Rt. Hon. Douglas Hurd, CBE., MP.,

Secretary of State for Foreign & Commonwealth Affairs,

Foreign & Commonwealth Office,

Downing Street,

LONDON, SW1A 2AL.

Dear Secretary of State,

Cathay Pacific Airways

You were good enough to see me a couple of months ago to discuss Hong Kong issues. In particular, I raised the position of Cathay Pacific Airways as set out in my letter of January 15th to the Prime Minister, in which I drew his attention, amongst other things, to the uniquely complex issues which the airline was currently facing.

Cathay Pacific, as you may have seen, have recently made public the decision to order 11 firm and 11 option Boeing 777 aircraft for delivery from 1996 through into the next century. These aircraft will be powered by Rolls-Royce Trent engines. This new order, including options, in total amounts to some £2 bn., about one third of which will be U.K. related. We were particularly pleased that we were able to specify R-R engines on merit.

I will not trouble you with the commercial and competitive reasons why we felt it essential to press the button on this order now, despite the fact that many of the concerns unique to Cathay Pacific remain. The airline is taking a very substantial commercial risk in going ahead with these large forward commitments at a time (a) when the fate of quite a number of Hong Kong Air Service Agreements already negotiated is still not settled and when, due to Chinese sensitivities, a start cannot even be made on the separation of some U.K. agreements or on the negotiation of essential new ones for Hong Kong; (b) when the intentions of the Chinese towards Cathay Pacific in the long run remain somewhat opaque though we continue to get encouraging high level indications and would anticipate at some point an increased Chinese shareholding in the airline; and (c) when the very high cost and conditions of moving the airline's base to Chek Lap Kok are not yet fully assessable.

Cathay Pacific now have total forward orders and options for Boeing 747, Airbus A330 and Boeing 777 aircraft to a value of some £6 bn. running through to the next century, with the U.K. content estimated at some £1.4 bn. There is, of course, no certainty that all the options will be taken up (and to that extent the above figures could in the event prove inflated), but the fact remains that substantial commitments have been made without the long-term security of traffic rights, an exceedingly unusual position for a scheduled carrier to take.