Cathay Pacific

HK Express becomes budget airline

PUBLISHED : Thursday, 17 November, 2011, 12:00am
UPDATED : Thursday, 17 November, 2011, 12:00am

Hong Kong Express Airways is to transform itself into a no-frills airline, in a move that could threaten Cathay Pacific's lucrative regional routes.

The city's first low-cost carrier since Oasis Hong Kong Airlines went bust in 2008 is another sign that budget airlines are increasingly being seen as a threat to mainline carriers.

The new carrier will start by serving regional destinations in mainland China, Japan, South Korea and Southeast Asia from July or August next year, said Yang Jianhong, president of sister carrier Hong Kong Airlines. Hong Kong Airlines is owned by the parent of Hong Kong Express, HNA Group, the fourth largest airline group on the mainland.

The new budget carrier will be able to use Hong Kong Express' traffic rights, including routes to Beijing, Shanghai, Kuala Lumpur, Singapore, Taipei, Seoul and Osaka.

Flights to Beijing, Shanghai and Taipei will strike a nerve at Cathay Pacific, as these are among the most lucrative routes for the city's flag carrier, due to the concentration of big-spending business travellers.

It comes at a time when budget carriers in the region are fast being established. Singapore Airlines is launching a low-cost subsidiary, Scoot, serving long-haul routes to Australia and China. Japan, which used to be a highly restricted market for budget carriers, will see three new low-cost airlines next year.

The new Hong Kong budget carrier, which has yet to be named, plans to expand its fleet to 15 Airbus 320s over the next three to four years.

The existing five Boeing 737-8s operated by Hong Kong Express will be transferred to Hong Kong Airlines early next year. The pilots who are now flying for Hong Kong Express can either work for Hong Kong Airlines or retrain for the A320.

Yang said a new management team, including a chief executive who had an extensive background in European budget airlines, would lead the carrier.

The fallout from the collapse of Oasis Airlines and Macau-based Viva Macau, however, underscores challenges facing low-cost carriers in Hong Kong and neighbouring areas.

The operating costs facing a Hong Kong-based budget airline is likely to be higher than other Asian low-cost carriers given there is no budget terminal in the city. Higher labour costs are another problem.

'The new budget carrier will have a tough time competing with AirAsia and Tiger Airways for Southeast Asia destinations because they have relatively low operating costs in their hubs in Singapore and Malaysia,' said Kelvin Lau, transport analyst for Daiwa Capital Markets.

Hong Kong Express, however, has a more immediate reason to adapt to the new low-cost model.

Hong Kong Airlines is undergoing private-equity fund-raising before a planned initial public offering next year. Wary investors are concerned about the overlap and competition between the two related airlines.

'The two airlines will be of distinct positioning after the restructuring ... it can help to ease the concerns of potential investors,' said Yang.