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SCMP Reporter

FROM near bankruptcy to profitability in just 12 months, Air Hong Kong finally looks set for the growth and prestige its founders had always dreamed of.

  The change came under new ownership, and the company is run in a completely different manner from when it was started by a handful of Hong Kong businessmen a decade ago.

  If you have seen one of the airline's aircraft at Kai Tak airport and wondered what Air Hong Kong was, you could be forgiven. The carrier does not advertise, and has just two old, leased aircraft flying three regular routes, and a staff of about 100.

  But it claims the title of the territory's third international airline, celebrates its 10th birthday in November and has the resources and political clout of Cathay Pacific Airways behind it.

  Cathay bought a 75 per cent stake in the all-cargo carrier for $200 million in mid-1994, and, through internal cost-cutting, route-slashing and a fleet change that will be completed by early next year, it has turned the operation around.

  In 1994, company insiders said, Air Hong Kong lost $74 million - its ninth consecutive year in the red. Sources said the new management put the airline about $40 million in the black last year - a turnaround in just 12 months.

  That is no small feat for the airline, which, until Cathay bought its stake, was at the brink of bankruptcy many times.

  Its original owners had wide eyes, and wanted to expand the fledgling carrier while it was being stepped on by the powerful and well-connected Cathay, which repeatedly opposed its applications to the Government's Air Transport Licensing Authority to fly dozens of routes.

  The airline was launched almost 10 years ago by accountant Thomas Tsang and partners Tenly Lai and Cedric Chan, who both had years of experience in the freight industry.

  The three partners began by selling space on other airlines' aircraft but after two years they acquired their first Boeing 707 Freighter and began charter operations of their own.

  After a tough battle with Cathay and Hong Kong Dragon Airlines (Dragonair), both of which opposed the planned services to dozens of destinations, the airline was awarded licences in 1989 for scheduled services to 15 cities. A second 707 was obtained in June that year.

  The licence approval was seen as a coup for the carrier's owners, who had said they hoped one day to switch to passenger operations. Its first scheduled service was in October 1989 to Manchester, Britain - a route it still serves. Next was a service to Nagoya, Japan. This is to be halted in March.

  Poor management, the lack of a partner airline to help feed its traffic, a global airline recession and badly negotiated leases on its aircraft all made operations difficult, and it was losing money fast.

  In October 1989, Macau gambling and tourism magnate Stanley Ho and his related companies bought a 50 per cent stake for $150 million, giving it the financial backing and the credibility it so desperately needed.

  In mid-1991, two Boeing 747-100 freighters were acquired, allowing it to expand services to Vietnam and Belgium.

  A year later, after an 18-month public hearing, it won permission to service dozens of new routes, and services were expanded further.

  Despite a valiant effort that saved it from being shut down, business never prospered, and in 1993 Mr Ho began looking to sell.

  Cathay began negotiating to buy into the troubled airline. The value of the cash-strapped carrier was significantly increased in early 1994, when Guangzhou-based China Southern Airlines began to show a keen interest in it. That gave Cathay's owners, Swire, the shakes over a possible challenge to its status as de facto flag carrier in the run-up to the 1997 changeover, and it narrowly won the bidding war in March 1994.

  Mr Ho would remain chairman and his Shun Tak group would retain a 25 per cent stake.

  Chief operating officer Stanley Hui Hon-chung recalls that the airline was a mess at the time Cathay took over.

  It had too many pilots, too many unprofitable routes, too many old aircraft on badly negotiated leases and too little realistic forward planning. Today, things are very different.

  Not only has the freight market picked up, ruthless cost-cutting was used to save the airline from being shut down.

  The new Cathay management first slashed unprofitable routes and managed to secure the early return of unnecessary aircraft, allowing the utilisation times of the two remaining freighters to increase to about 12 to 14 hours a day from the previous six to eight hours a day.

  Last March, all flight crew were told they would have to be based either in Britain or Australia in order for the airline to stay alive.

  Salaries of the 41 captains, first officers and flight engineers were cut by as much as 40 per cent, with new salaries in line with those in their home countries.

  Last week, Cathay bought three used Boeing 747-200 Combi aircraft that it will convert to freighters and lease to Air Hong Kong to replace the last two 747s, which have been plagued by technical problems in recent months.

  The new freighters will enter service with the airline in July, August and October. One of the current 747s is to be returned in five months and the other in March next year.

  With better efficiency, range and payload than the current aircraft, it is hoped the replacements will boost profits further this year.

  The airline now only serves Brussels, Manchester and Nagoya, but that will change in the coming months as the Nagoya route will be switched to Osaka, where the airport is open 24 hours a day and the market potential is seen as much greater.

  But the market that is expected to take the airline into a much better financial position is the United States. Services to at least one US city is expected in the coming months.

  A new agreement on air services forged late last year between the US and the territory, after eight years of negotiations, opened up eight American gateways for cargo flights from Hong Kong.

  Chief operating officer Hui said: 'The US market is so big. We are very positive about things now.

  'We are looking to expand in a very prosperous way. There is no sign the market will soften, so we are very confident.' 



Reversal of fortune for Air Hong Kong