updated 6/8/2006 8:33:42 PM ET 2006-06-09T00:33:42

Cathay Pacific Airways Ltd. says it has reached a $1.05 billion deal to buy out Hong Kong Dragon Airlines Ltd., paying cash and stock for the majority stake it did not already own.

The deal will drastically reshape the Hong Kong-China aviation market by giving Cathay, Hong Kong's de facto flag carrier, greater access to the booming market in mainland China, which has been a key focus for Dragonair.

Cathay said it would pay Dragonair shareholders $105.6 million in cash, with the rest of the acquisition funded by new Cathay shares.

Announcing the results of extended negotiations between five top players in the Hong Kong-China aviation market, Cathay also said it would pay $605.5 million to increase its stake in Air China by another 10 percent, for 20 percent total.

Air China will pay $694.4 million for 10.16 percent of Cathay, and the two carriers will team up to form a Shanghai-based cargo airline, Cathay said in a published notice.

Cathay said that Dragonair will keep its own brand for six years as part of the deal. Cathay previously held 17.8 percent of Dragonair.

As part of the deal, the shareholding of Cathay will change, with parent Swire Pacific Ltd. seeing a decrease in its stake to 40.0 percent, from 46.3 percent.

Chinese conglomerate CITIC Pacific Ltd. will see its stake in Cathay decrease to 17.5 percent, from 25.4 percent.

China National Aviation Co., which has been Dragonair's parent, will now hold 7.34 percent of Cathay. CNAC previously didn't have any stake in Cathay.

Currently, Cathay can offer passenger service into just two mainland cities, Beijing and the southeastern city of Xiamen, although it has lobbied unsuccessfully to serve the lucrative Hong Kong-Shanghai route.

Dragonair can fill in those gaps in Cathay's passenger route system, which has focused on long-haul flights to the Americas and Europe as well as regional flights into key Asia-Pacific business centers.

Dragonair's key turf is China, with more than 20 routes between Hong Kong and mainland cities. It also serves secondary destinations around Asia.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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