Hong Kong aviation

Hong Kong Airlines slows growth plans challenging Cathay Pacific, industry sources say

Market forces cited by carrier as analysts point to cash flow pressure and difficulty squeezing profits

PUBLISHED : Saturday, 22 September, 2018, 5:32pm
UPDATED : Saturday, 22 September, 2018, 11:10pm

Hong Kong Airlines is reining in its ambitious growth plans targeting the city’s biggest carrier, Cathay Pacific Airways, industry sources have revealed.

Backed by the debt-burdened HNA Group, the airline will go through a “slowdown” into next year as it fine-tunes its rapid expansion into long-haul travel.

Industry sources indicate it is delaying delivery of several aircraft this year and likely to miss one or both targets of launching flagship routes to London and New York this year until at least 2019. No job cuts appear to be planned.

When the airline debuted in 2006, it flew mainly within Asia. But in recent years it introduced flights to Australia, New Zealand and then the United States and Canada, seeking to take on the much larger, 71-year-old Cathay Pacific.

With 38 passenger planes, Hong Kong Airlines is some way off its plan to grow its all-Airbus fleet to 50 aircraft by the end of this year.

“Things may slow down for different reasons, and a lot has to do with our own adjustments based on market forces and learning from our first year in North America,” a source at the airline said. “At least for 2019, it will be a year characterised by adjustment.”

Hong Kong Airlines’ aggressive expansion of long-haul flights helped it lower fares for travellers and disrupt rivals. Its offerings included Auckland, Cairns and the Gold Coast in 2016, Vancouver and Los Angeles in 2017, and San Francisco and Moscow this year. Its website recently indicated, however, flights to the Russian capital would be axed next summer.

Mangkhut disrupts Hong Kong airport travel for tens of thousands

And the high cost of longer-haul services has exacted a toll.

“As a regional airline, we matured enough. Long haul is a very different ball game,” the source explained. “Also, the way you play it is different than for regional [flights], so we are learning a lot.”

Larger A350 aircraft allowed it to fly to North America and Europe, the carrier said. It operated a short-lived all-business-class service to London Gatwick in 2012.

Cathay pilots’ salaries will be pegged to hours flown under revamp

“We are still exploring the possibility of New York,” an airline spokeswoman said. “The destinations we mentioned previously are still a work in progress.”

“The team are working through all the variables and we only have five A350s at the moment, so we have to plan and cherry-pick which are the best to go to.”

The long-haul expansion and aircraft acquisition would have put significant pressure on cash flow
Will Horton, aviation analyst

Industry sources said the carrier was delaying delivery of four A350 planes that were due later this year and are now being assembled in Toulouse, France. They are not likely to arrive until at least next year.

The privately held airline is once again mulling the possibility of a public listing to raise much-needed cash for the HNA Group, which owns and has majority stakes in a dozen airlines in mainland China. The conglomerate’s 55 per cent stake in the carrier was moved earlier this year to a holding company outside the group named Frontier Investment Partner.

With the group saddled by huge debts, several HNA-owned airlines have delayed taking delivery of dozens of aircraft this year, affecting Airbus and Boeing.

Aviation analysts said Hong Kong Airlines had been forced to temper its ambitions by factors beyond its control.

“Intercontinental flying means long hours and all associated costs,” independent aviation analyst Will Horton said. “The long-haul expansion and aircraft acquisition would have put significant pressure on cash flow.”

Horton said it was clear after the airline axed its flights to Australia and scaled back services to New Zealand that it could not sustain losses there and in North America at the same time.

How Hong Kong Airlines became the world’s most punctual carrier

Corrine Png, chief executive officer of transport research firm Crucial Perspective, said Cathay Pacific could “certainly heave a sigh of relief” as Hong Kong Airlines scaled back its growth in capacity.

She described the carrier’s aggressive expansion, particularly in 2017, as a contributing factor to Cathay Pacific’s net losses, with competition intensifying on the routes the two carriers serve.

Png believed most countries in Asia were not large enough to support healthy profits for more than a single home carrier.