Hong Kong aviation

Mystery Hong Kong investors bet on low-cost start-up carrier Air Belgium

Ambitious airline will launch a budget long-haul service from Brussels to tap into soaring appetite for flights to, from and within China. Its first destination will be Hong Kong

PUBLISHED : Sunday, 11 March, 2018, 2:03pm
UPDATED : Sunday, 11 March, 2018, 10:10pm

A mystery group of Hong Kong investors is backing a new long-haul budget carrier, betting on the rise of low-cost travel despite the wafer-thin margins of the airline industry.

Air Belgium chief executive Niky Terzakis gave little away about his Hong Kong backers, who control a 49 per cent stake, saying only that they were not “airline people”.

“Everyone keeps focusing on [their identities]”, he complained. He added that details of the investors would be in the “public record very soon” and the majority shareholding was “in Belgium and Europe”.

The ambitious start-up, which has not sold a single air ticket yet, aims to launch its first flights this month – from Brussels to Hong Kong – given the soaring appetite for flights to, from and within China, which is on course to surpass the United States as the largest aviation market by 2022.

In an exclusive interview, Terzakis, the former boss at cargo airline TNT Airways, was cautious about success. “It’s no secret, operating an airline in Europe is a complicated thing. Usually it’s airlines that need the money,” he said.

Air tickets to include ferry and connections from Hong Kong

The recent demise of three European airlines – Italy’s Alitalia, UK leisure operator Monarch and Germany’s Air Berlin – and German national carrier Lufthansa taking full control of rival Brussels Airlines last year, placing it under its low-cost long-haul unit, have underscored the volatility of the business.

But Terzakis batted off some concerns, as he said: “Let’s be fair, we are a niche player. The advantage we have is a clean sheet of paper. Now the legacy airlines are highly competitive in some aspects and many are creating low-cost airlines.”

Rising oil prices have been cited as another cause for concern, with jet fuel making up as much as 40 per cent of an airline’s costs. The price of oil fell from nearly US$110 (HK$858) a barrel in 2014 to US$35 two years later, but it has slowly rebounded, closing at US$63 on Friday. The airline would start flying initially with four second-hand fuel-hungry Airbus A340-300 aircraft.

Showers and faster Wi-fi at Hong Kong airport not enough to compete

On top of that, the model of a true low-cost long-haul carrier is starting to show cracks as Norwegian Air displayed in its recent financial results, losing US$38 million in 2017 as traditional airlines fought back.

The upstart Belgian airline, with 360 staff employed by the end of next month, is still waiting for permission from authorities to start flights. Air Belgium also has no domestic or regional destinations to transfer passengers between short- and long-haul routes.

Almost a decade ago, home-grown airline Oasis Hong Kong, which had a business model similar to a budget airline, collapsed with HK$1 billion (US$128.2 million) in debts. It also lacked short-haul routes, which are important to transfer passengers onto long-haul flights and fill planes profitably.

“It’s difficult to tell whether Air Belgium’s strategy is financially sustainable,” associate professor in aviation management at Polytechnic University Achim Czerny said. “The airline business is risky and there is certainly no guarantee that they will survive.”

Air Belgium’s arrival would make it one of the first of a spate of new budget long-haul carriers from Europe or the United States to land in Hong Kong.

Choosing to fly to China was a simple decision as airlines currently only service five Asian destinations from Belgium. Air Belgium is aiming to fly to six destinations in the Greater China market, including Beijing and Shanghai. However, these are some of the most congested airports and difficult to obtain rights to fly to.

Henri Hie, a former executive at Air France and now an aviation professor at PolyU, said the new airline “corresponds to China’s development and real demand for direct and affordable fares for tourists”.

But he doubted whether a low-cost start-up could succeed particularly with home-grown Chinese airlines already launching cut-price flights to Europe.

Best and worst airlines and routes revealed in database of 26,000 Hong Kong flight delays

Travel intelligence company Forward Keys revealed that there would be at least 30 new China-Europe flights per week by June, even before Air Belgium manages to secure flights into mainland China.

Data, based on growth in confirmed air ticket bookings this summer, showed outbound China travel to Europe would grow by 7.4 percentage points to hold a 10 per cent market share, second only to the Asia-Pacific but more popular than the Americas, Africa and the Middle East. Travel into China from Europe would grow 13.2 percentage points to enjoy a 27 per cent market share over other parts of the world.

David Tarsh, a Forward Keys spokesman, said: “The Chinese market is growing healthily … you expect there to be a good market in aviation between China to Europe in the long run.”

Citing solid economic growth contributing to outbound travel, he said “the big picture looks good but it’s much harder to predict what happens in the competitive environment because airlines can choose which routes to fly and you don’t know what the competition will do and how fiercely they will regard you and that could make it more difficult.”

Budget airlines still locked in a battle to find the perfect pricing model

Terzakis described Air Belgium as a “hybrid” budget long-haul airline with a premium business class and no-frills economy service.

“We want to come in with a different product, a fresh view. And, of course, low cost,” Terzakis said.

Typically for a low-cost carrier, Air Belgium would not fly from the country’s main international airport. To save money, it will use Brussels South Charleroi airport, home mostly to budget carriers and located some 60km from the city centre.

“The positioning in the market is quite simple. We want to be a very competitive airline, merging service classes and the low-cost element of it,” Terzakis said. “We intend to offer competitive rates. We think the market wants good choices and good fares.”

Air Belgium is in a race to get its paperwork to launch its flights to Brussels on March 25, the same day that Cathay Pacific Airways launches its four weekly flights to the city.

Terzakis said his airline would not “pretend to compete” with Cathay other than by offering affordable air tickets; however, he declined to give details on pricing.