Qatar Airways Ltd.’s surprise purchase of a 9.6 percent stake in Cathay Pacific Airways Ltd. to gain a foothold in East Asia has damped a long-held speculation among investors that the Hong Kong flag carrier would soon merge with another major shareholder: Air China Ltd.

Qatar Air on Sunday agreed to buy the stake for HK$5.16 billion ($662 million) from Hong Kong-based Kingboard Chemical Holdings Ltd. and related companies, which have been steadily amassing shares in the Asian airline for the past year. The purchase, the first by a Middle Eastern airline in an East Asian carrier, makes the Doha-based company the third-largest shareholder in Cathay after Hong Kong conglomerate Swire Pacific Ltd. with 45 percent, and state-owned Air China with almost 30 percent. Cathay’s stock fell the most in more than three months.

“Cathay will have three major shareholders, all with different and potentially conflicting interests,” said Corrine Png, chief executive officer of Crucial Perspective, which focuses on research in Asia transportation equities. “We still think it makes more economic sense for Cathay and Air China to merge longer term, but given this new development with Qatar Airways in the picture, it is going to become more complicated for all three parties.”

Behind the investment is the battle for better access to China, which is expected to become the world’s biggest aviation market within a decade. U.S. carrier Delta Air Lines Inc. bought a minority stake in China Eastern Airlines Corp. in 2015, while American Airlines Group Inc. purchased a minority stake in China Southern Airlines Co. this year.

“Cathay Pacific is one of the strongest airlines in the world, respected throughout the industry and with massive potential future,” Qatar Airways CEO Akbar Al Baker said. Cathay CEO Rupert Hogg said in a statement on Monday that he looks forward to a “continued constructive relationship” with Qatar Air, which is a fellow member of the Oneworld Alliance of airlines.

Zhou Feng, board secretary at Air China, said having an airline as Cathay’s stakeholder, rather than Kingboard Chemical, would “bring about better synergy” as an airline stakeholder has a better understanding of Cathay’s strategy and business. Regarding the relationship between Qatar, Cathay and Air China, Zhou said there is both competition and cooperation and it will depend on how the carriers maintain the balance. Air China is part of the rival Star Alliance.

Cathay has previously denied that it is considering a merger with Air China. Swire said in an email that it is firmly committed to Cathay and it has confidence in its long-term prospects.

Qatar Air’s Al Baker said the purchase “supports Qatar Airways’ investment strategy.” The Doha-based airline has been buying minority stakes in airlines around the world, including a 20 percent stake in British Airways parent IAG SA and a 10 percent share of Latam Airlines Group SA, the biggest South American carrier. It also made a failed attempt to gain a slice of American Airlines Group.

Oneworld Stakes

Its investments have rarely been passive. Most have been in airlines that, like itself and Cathay Pacific, are part of the Oneworld group. With IAG, it set up a joint business that enables the two groups to code-share on flights, operating a joint timetable and sharing revenue and costs on services between London and Doha.

The Middle East carrier is expanding abroad as it faces problems at home. The emirate has been under a blockade since June by a Saudi-led group of Arab states. Four neighboring countries barred the carrier from their airspace, forcing it to redeploy part of its fleet.

“Qatar Airways has an ambitious global strategy and has aircraft orders that will more than double its existing aircraft fleet,” said Png. “The Saudi-led blockade is driving Qatar Airways to accelerate the broadening of its links with other airlines and countries.”

Qatar’s attempt to buy a stake in American Air didn’t go as well. The U.S. company’s chief, Doug Parker said he wasn’t keen on having the Gulf carrier as a shareholder. American has publicly opposed the growth of Middle Eastern airlines in the U.S., saying they’ve benefited from $50 billion in illegal aid.

Cathay Revamp

In Hong Kong, the addition of another airline as a major shareholder may complicate Cathay’s biggest corporate revamp in two decades. The airline’s earnings have been squeezed by Middle Eastern carriers such as Emirates Airline, Etihad Airways PJSC and Qatar at the premium end, and by low-cost and mainland Chinese rivals at the lower end. It has announced job cuts and negotiations with pilots over compensation.

Cathay reported its worst half-yearly loss in at least 20 years in the six months ended in June, partly thanks to competition from China Southern and China Eastern, which have been adding more direct flights to the U.S. and Europe, reducing the need for Chinese travelers to fly via Hong Kong.

Under the terms of Monday’s deal, Qatar Airways will buy about 378.2 million Cathay shares at HK$13.65 apiece in cash, a 3.4 percent premium over Friday’s closing price.

Kingboard Chemical, a diversified group that makes laminates, glass yarn and copper foil, said the deal is an opportunity to “realize its investment in Cathay Pacific” which it said has yielded a profit of about HK$800 million. Kingboard’s shares have more than doubled this year.

“The market has seen Kingboard as a front for someone trying to take over Cathay,” said Geoffrey Cheng, head of transportation and industrial research at Bocom International Holding Co. “If there are investors that have been betting on carriers on the Chinese mainland taking an interest in Cathay, today’s news has surely dimmed their expectation.”

©2017 Bloomberg L.P.

This article was written by Kyunghee Park from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

Photo Credit: Cathay Pacific aircraft. Middle East airline Qatar Airways has bought a stake in the carrier. Cathay Pacific