Beijing-backed conglomerate CITIC Pacific will reduce its minority stake in Cathay Pacific Airways and Hong Kong Dragon Airlines if a merger between the territory's two main carriers goes ahead.

This was indicated by the firm's managing director Henry Fan, according to The Standard.

CITIC Pacific recently said it plans to focus on three core areas of business - property, steel and power in China - and will gradually divest non-core assets. As per the information available, CITIC Pacific owns a 25 percent stake in Hong Kong's dominant carrier Cathay Pacific Airways Ltd. It also owns about 29 percent of Dragonair Airlines Ltd.

Industry analysts said the possible consolidation of the two carriers would create one of the world's largest airlines by market value, and an Asian powerhouse that could feed an international customer base into greater China's most comprehensive route network. According to the report, Karen Chan, a local aviation analyst for Credit Suisse, believes a consolidation will make economic sense and, in the current environment of industry liberalisation and high oil prices, the two airlines may either flourish together or risk stagnation.

The publication reported: In industry source said CITIC has been trying to play a balancing role between the mainland's China National Aviation Company, which owns a 43.29 percent stake in Dragonair, and Britain's Swire Pacific, the major shareholder in Cathay, as well as a minority stakeholder in Dragonair.

It is a political issue,a source, close to Air China, parent of CNAC, has been quoted as saying. He said that, at least in the short term, there are no plans for such a merger, but confirmed that CNAC would like to gain a majority stake in Dragonair.

Last year, media reports claimed Cathay was in talks to take control of Dragonair, and that its parent Swire Pacific would subsume Air China. In 2004, Cathay snapped up a 9.9 percent stake in Air China, but merger rumors were quickly denied by Air China, Swire and Cathay Pacific.

In a complicated share structure - caused in part by the mainland's desire to own a portion of the SAR's flag carriers ahead of the handover - CITIC currently owns 28.5 percent of Dragonair, and has a 25.5 percent stake in Cathay. In turn, Cathay, which is 46.3 percent owned by Swire, holds a 22 percent stake in its smaller rival,added the report.