China's Hainan Airlines Co. Ltd. is in the process of taking a 70 percent stake in Hong Kong's CR Airways for HK$350 million (US$45 million), a source close to the deal said on Thursday.

CR Airways, a small carrier that is thinking big, signed an initial agreement earlier this week to buy 40 aircraft from Boeing (BA.N: Quote, Profile, Research) with a combined catalogue price of US$3.3 billion.

The carrier now operates just three regional jets.

Hainan Air will hold the stake in CR Airways through a Hong Kong-incorporated company, Grand China Aviation Services, and will not need to forfeit the route rights held by CR Airways after the deal, the source said.

"It is still a Hong Kong company and managed by Hong Kong people," he said.

Earlier media reports have said Hainan would hold 60 percent of CR Airways. Both companies confirmed the talks but declined to comment on the size of the deal.

The new board will have six directors and Hainan Air will have two seats.

New CR Airways Chairman Chen Feng is also chairman of Hainan Air, while Robert Yip, founder and former chairman of CR Airways, is now executive vice chairman. Yip will hold about 30 percent of the company after the deal.

CR Airways has scheduled flights to secondary Chinese cities including Tianjin, Jinan, Nanning, Kunming, Haikou, Sanya and Guilin, competing with much-larger Hong Kong-based rival Dragonair, as well as several mainland carriers. It also has regional routes including Laoag, Subic Bay and Clark Air Base in the Philippines, Malaysia and Vietnam respectively.

The loss-making carrier said it will sign a formal acquisition agreement with Boeing in 2006 on the 40 planes. The company has said that it will raise funds from overseas to help finance the planes. It is also considering an initial public offering but has not set a timeframe.

"The airline will use the first plane delivery to fly Jinan and Tianjin," the source said.

CR Airways plans to use the new aircraft, with the first expected to be delivered in 2008, to expand to longer Asian routes serving markets including Japan and South Korea, and putting it into to competition with dominant Hong Kong carrier Cathay Pacific Airways (0293.HK: Quote, Profile, Research) .

Negotiating additional routes to China would take longer, he added.

CR Airways does not position itself as a budget carrier but its ticket prices are generally 8-10 percent lower than those of Dragonair and Cathay Pacific.

Shanghai-listed Hainan Airlines is 14.8 percent-owned by American Aviation Ltd., a company backed by financier George Soros, who had agreed to invest a further $25 million to double its investment in the Chinese regional carrier, mainland media said in October.

Hainan Airlines, China's fourth largest carrier, has received Beijing's approval to set up Grand China Air, which will hold Hainan's Shanghai-listed unit and other subsidiaries, a state-owned newspaper said last month.

The new company hopes to raise 5 billion yuan (US$620 million) via a private placement by the end of this year and plans to go public in Hong Kong next year, the paper said.

(China Daily/Agencies December 23, 2005)