Cathay Pacific in talks to acquire Hong Kong Express Airways, potentially swooping in on lucrative low-cost market
- Potential deal would leave city’s flagship airline with a third city-based carrier and about half the airport’s runway slots
- No mention of discussions with struggling Hong Kong Airlines, which is also backed by mainland China’s HNA group
Cathay Pacific Airways plans to acquire budget carrier Hong Kong Express Airways, capitalising on debt trouble at mainland China’s HNA Group and potentially facing off with rivals in the booming low-cost market.
Hong Kong’s flagship airline said on Tuesday it was “in active discussions about an acquisition involving [HK Express]”, but did not disclose how much of a stake it was seeking in the HNA-backed airline or how much it would pay.
If completed, the deal could leave Cathay Pacific with a third city-based carrier and about half of the airport’s runway slots. Cathay Pacific said no agreement had been reached and there was no certainty of a deal.
There was no mention of Cathay Pacific’s potential interest in a stake in Hong Kong Airlines, of which HNA is also the biggest shareholder.
Analysts said buying HK Express would be a better move for Cathay than launching a budget carrier of its own.
“It is the first time Cathay Pacific is venturing into [the budget market] at a relatively low cost,” said K Ajith, director of Asia Transport Research at investment bank UOB Kay Hian.
“It is best for Cathay to acquire a stake in HK Express, rather than Hong Kong Airlines, at least in financial outlay.”
Cathay had been stung by competitors – such as Singapore Airlines and Qantas – who got in on the low-cost market. No-frills airlines, such as AirAsia, had lured away passengers and forced Cathay to sell tickets below cost, contributing to two years of financial losses.
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The potential growth of the Cathay Pacific Group – adding HK Express to its namesake airline and Cathay Dragon – could raise competition concerns.
But analysts did not expect competition watchdogs to stand in the way, given recent trouble at Hong Kong Airlines, which is undergoing a restructure.
“I think the authorities will approve it,” Ajith said.
Cathay’s plan to acquire HK Express was revealed in a listed company statement at the Hong Kong stock exchange. The company said the statement was in response to reports about its discussions to acquire Hong Kong Express and Hong Kong Airlines.
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Bloomberg reported in late February that Cathay held preliminary talks with HNA about acquiring minority stakes in HK Express and Hong Kong Airlines, quoting people with knowledge of the matter.
Cathay said on Tuesday it would make further announcements when appropriate.
Andrew Lee, an equity analyst at Jefferies, said Cathay was potentially getting ahead of rival airlines that were clamouring for more access to Hong Kong International Airport (HKIA).
“We believe this could be positive for Cathay Pacific giving it different passenger markets [because] Hong Kong Express is a low-cost airline,” he said in an analysts’ note.
“We believe other parties could be interested in Hong Kong Express given the capacity constraints at Hong Kong airport.”
HKIA handled 74.7 million passengers in 2018, and would operate at full capacity until 2025 when a third runway could allow more flights.
Cathay had considered the launch of its own budget airline around 2025 to take advantage of the extra slots, making Tuesday’s news something of a turnaround.
We believe this could be positive for Cathay Pacific given different passenger markets as Hong Kong Express is a low-cost airline
Cathay Pacific and Cathay Dragon control approximately 45 per cent of the runway slots at HKIA, operate a combined fleet of 201 passenger and cargo planes, and fly to 232 destinations in 53 countries and territories. HK Express, in comparison, had about 5 per cent of HKIA’s runway slots.
A deal for HK Express would push Cathay’s control of runway slots in line with the dominance some other large airlines have in their home airports, such as British Airways at London Heathrow and the Singapore Airlines Group in the Lion City.
Although HK Express and Hong Kong Airlines have the same major shareholder in HNA, the airlines have competed for passengers, unlike Cathay Pacific and its regional full-service sister carrier, Cathay Dragon.
HK Express flies from Hong Kong to 24 Asian destinations, and operates 24 Airbus narrow-body planes.
Cathay Dragon uses the same types of plane as HK Express, and overlaps on 14 destinations.
Cathay Pacific is rebounding from two years of losses.
Last week, the company updated its full-year profit guidance for 2018, stating it was expected to record an annual profit of HK$2.3 billion (US$293 million), double analysts’ estimations.
On the back of the potential acquisition, Cathay Pacific shares jumped 3 per cent to HK$13.42 on Tuesday morning, before steadying at HK$13.30 at the close of trading. The airlines shares had gone up 17 per cent so far this year.
