Established airlines around the world have had to deal with the challenge posed by budget airlines, although the lack of a ready secondary airport has kept them from taking off in Hong Kong - thus far. However, China's airline industry deregulation could bring them a step closer, with new Chinese airports giving Hong Kong and its flagship carrier, Cathay Pacific, something to think about. Singapore Airlines' commencement of flights to Shenzhen Airport this week, permitting passengers to be picked up or deposited in Guangzhou, Hong Kong or Shenzhen airports, looks like a direct assault on Hong Kong's hub status. Guangzhou also has Air France and Lufthansa shortly beginning direct flights, ahead of a new international airport opening in June. How many airlines will follow is uncertain. China's airline deregulation now seems to be encouraging a broad based liberalisation, allowing multiple domestic airlines into the international arena. Last weekend the mainland's regulator, the General Administration for Civil Aviation of China (CAAC), revealed it was considering giving the go-ahead to new budget airlines. What extras China's airlines can cut back on is questionable, but it looks like prices will go lower. Up until now China's airline deregulation has been largely positive for Cathay with a recently opened route to Beijing soon to be followed up by Shanghai. But deregulation could be bittersweet if it also brings the prospect of renewed pricing pressure on existing routes. Chinese airlines may be easier to tackle, but new airport hubs could be potentially more problematic. Will the airline industry be the latest sector where China now sets the price? Competing on service quality is one thing, but if the market changes and price, not service, becomes the key yardstick, will Cathay be able to swim against the tide of lower fares? European experience shows that customers find low ticket prices hard to ignore. If Londoners are willing to travel between Heathrow and Luton Airports for cheap flights, Hong Kong residents may consider jumping on a bus to Guangzhou or Shenzhen. The upshot of the British experience was that entrenched players either responded by establishing their own low cost airline or reducing fares. Cutting costs one way or another looks inevitable. Cathay's management announced they had targeted cutting costs by another 10 per cent before 2007. The challenge is to keep costs dropping faster than yields. Other airlines in the region such as Singapore Airlines have dealt with the downturn and low-cost carriers by setting up their own discount airlines. Opening a new budget airline such as Singapore Airline's Tiger is not a panacea. It still risks confusing customers over branding and may only cannibalise existing routes. One dilemma - if the budget airline is eschewed - is that cutting costs on a full-service offering risks damaging a premium brand. After all, lucrative business-class passengers, who can pay up to 10 times economy fares, also travel on the same aircraft as the less-loved economy passenger. And some business travellers also fly economy at times. Going forward, the changes in China's airline industry present both huge challenges and opportunities. Time will tell whether Cathay competes with this new competition with one face or two.