Express ride to success

A hard headed focus on its market sector - plus a little help from cheap oil - has brought early success to HK Express, Hong Kong’s first budget carrier.

by CHIEF CORRESPONDENT, TOM BALLANTYNE  

February 1st 2016

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It may be only 27 months old, but Hong Kong’s budget airline, HK Express, has carved out a profitable identity among the city’s cost sensitive travelers at a time when many Asian LCCs are struggling to make money. Read More » Said Andrew Cowen, the CEO of the China-controlled no-frills carrier: “HK Express was “very clearly profitable in 2015”. But I won’t beat about the bush. A large part of that was [the low] oil price. It’s the same for every airline and long may that continue,” the South African-born LCC veteran said.

“But you must never forget that as oil prices go down so do things like fuel surcharges. What you gain on the cost side you lose a bit on the revenue side. It’s not a freebie, but it certainly helped. We have moved strongly into profitability.”

CEO HK Express, Andrew Cowen: I won’t beat about the bush. A large part of the profit was (the low) oil price. It’s the same for every airline and long may that continue

Apart from the benefits of lower fuel costs, HK Express’ recent achievements have been the result of reaching critical mass in fleet size and implementing initiatives that have been significant contributors to revenue. “It’s not like two or three initiatives, but hundreds of initiatives,” said Cowen.

“A number of them have come to fruition and more will in coming years. Part of my task from the shareholders is to move HK Express into a position of sustained ongoing profit. History will be the judge of that, but we think we are making good progress.”

That may be an understatement, given the short time HK Express has been flying under a budget flag. In its former life as Hong Kong Express, it had been operating as a sister carrier to full-service operator, Hong Kong Airlines, which was owned by Macau casino magnet, Stanley Ho. Mainland China’s HNA group, also owners of Hainan Airlines, later bought 45% of the struggling airline.

In 2013, the Chinese aviation conglomerate decided to transform Hong Kong Express into a low-cost carrier (LCC). Cowen was part of a team from Mango Aviation Partners, a firm providing expertise in budget airline management, to execute the transformation.

Launched with three A320-200s, its first flight as an LCC was on October 27, 2013, with a five destination network.

Since then, HK Express has definitely been making its mark. It may be a small operator, but it is the fourth largest carrier in terms of slots at Hong Kong International Airport. But as Cowen pointed out, because of the sheer numbers of carriers who fly into Hong Kong, this figure is quite a small part of the airport’s total slots.

HK Express also is the second biggest airline flying between Hong Kong and Japan, only slightly behind Cathay Pacific/Dragonair. “We have more flights between Hong Kong and Japan than All Nippon Airways and Japan Airlines combined. We are a very significant investor in the Japanese market and we have a very significant share of it. Given the popularity of Japan for travelers that’s a good place to be,” Cowen said.

He continued: “We feel we had a great 2015, all things considered. We grew our fleet very significantly. We are at 13 aircraft. We were hoping to be at 15, but two have slipped into the first quarter of 2016.

“We have expanded our network and are at 20 to 23 destinations. We had our second birthday in October and we have carried more than three million passengers since we launched. That’s quite a small number compared with the big guys, but it was an important milestone for us.”

There won’t be any let up in the airline’s expansion. In December, Cowen announced plans to add 10 aircraft to earlier orders for the A321 and A320neo. It has secured 10 more 230-seat A321 aircraft, bringing the airline’s total commitment to 12. The order follows an earlier confirmed commitment for 12 A320neo, which will be leased from aircraft lessor, Arctic Aviation Assets Ltd.

Six new aircraft, four A320neo and two A321s, will be delivered by year end, taking the fleet to 21. Another 10 aircraft will arrive at the carrier from 2017 to 2018, which will expand the airline’s planes to a minimum of 39 by December 2018. Cowen said he has a target of 50 aircraft in that time frame, subject to available slots in Hong Kong.

The fleet plan is about much more than adding aircraft. It is an opportunity to hedge against fuel costs and slot constraints, which Cowen said was his biggest daily concern. “The A321s are obviously a step up in size for us. We will operate them with 230 economy seats. It will give us an extra 50 seats over the current A320s,” he said.

“We also are thinking about ways to utilize slots. We have a fair number of destinations where there is more demand, but it may not make sense to fill that demand with more slots. It’s better to do it with bigger aircraft. So going to the A321 is a very modest, cost incremental or business complexity increment. “It’s also a bit of a hedge against greater, rather than less, slot constraints.”

But when it comes to oil hedges, Cowen is cautious. “We are quite mixed about fuel hedging per se. It can be very expensive and it’s as easy to get it wrong as it is to get it right. A more effective hedge is to take advantage of the surplus of neos that are appearing on the market,” he said.

Cowen believed neos have been over-ordered. “It makes sense for us. We are not a first tier airline. The fact that we can get neos and will be the first LCC in North Asia to have them is an indication, in a way, of that over-ordering.

“This situation gives us extra range - all the valuable fuel efficiency and so on - even at current fuel prices. We also like the idea that we can put another eight seats on the neo and be the first carrier in the world to be a 188 economy seat neo operator.

“An extra eight seats doesn’t sound much, but it provides a little bit more unit cost improvement and a little bit more slot utilization opportunity. It all adds up. That’s part of our restructuring, a series of accumulative little steps that all add up.”

'We were able, using standard tactical low fare offerings, to get an awful lot of people to try us'

Andrew Cowen CEO HK Express

In the meantime, growth has been little short of spectacular. In the twelve months to the end of November, its passenger numbers surged 84% over the same period a year earlier. For the month, passengers increased 58% year-on-year. Last August, which is a peak month, load factor averaged 92.5%. Overall it is in the 80s.

“The big driver is capacity addition. We needed to get our fleet to a critical mass,” said Cowen. “There isn’t a fixed number to this, but it is certainly up to 10 to 15 aircraft. The rule of thumb I tend to use is that each aircraft at an LCC short-haul airline supports approximately two destinations. Straight away you can see 10 to 15 aircraft supports 20 to 30 destinations.

“That tells you that for the Hong Kong consumer, you are flying to most of the places that he or she is interested in. Another critical mass element is unit costs. Obviously, unit costs are quite high with one aircraft, but start flattening out at the 10 to 15 aircraft level.”

Cowen said the airline needed to grow quickly to get to that critical mass and to “hoover up” as many slots as possible at Hong Kong. “We were very aware that slots were starting to become much more constrained at Hong Kong airport. We did not want to get trapped into being too small an airline, which is a really difficult position to be in. So most of that growth is from fleet growth, but year-on-year our load factors have been moving up pretty steadily.”

As for competition – and there is plenty of it in Hong Kong – Cowen takes it as a given. “It’s very competitive. There are 17 or 18 LCCs flying into Hong Kong from other countries. That certainly means there’s lots of LCC choices.

“But also we’ve have most of the world’s significant flag carriers in Hong Kong. They’re not all about business and first. They tend to have extremely large economy cabins. To our mind, the Hong Kong market is certainly one of the most competitive in the world.

“But it challenges us to keep raising our game, although it does leads to one or two sleepless nights. Most good companies, which we aspire to be, thrive on competition.”

A key to HK Express’ success has been its determination, from the start, to cement its position as Hong Kong’s own low-cost, low-fare operator. Cowen conceded there was some brand confusion initially between HK Express and Hong Kong Airlines, partly because of the similarities in the names and its common branding.

The livery issue was resolved in early 2014 when a new Skyline livery was unveiled for HK Express which featured the cityscape of Hong Kong. New crew uniforms were also introduced last year. “We kind of wrapped ourselves up in the Hong Kong flag,” said Cowen.

“Hong Kong people are justifiably proud of their skyline. It’s iconic and representative of their city. It was a positive step. Then we had the advantage of being an LCC. People might have reservations about travelling with you, but they will try you because of the low fares, especially if you offer attractive destinations. We were able, using standard tactical low fare offerings, to get an awful lot of people to try us.” HK Express fares are between 30% and 70% below the local competition.

The airline named its first batch of aircraft after various local dim sum dishes. “That works very well. You have all these passengers climbing the stairs to the aircraft and often they’re posing for selfies and photos by the name. That’s going off to Instagram or Weibo or Facebook or whatever. It builds the relationship,” Cowen said.

In another innovation, HK Express accepts the Octopus card, used by everyone in Hong Kong to pay for transport, food, parking and other services, to buy onboard meals and duty free products.

“We receive very, very good customer satisfaction scores. Our last customer satisfaction survey, to October 31, 2015, showed 94% of our passengers were happy, very happy, satisfied or very satisfied with our onboard service. If you have low fares, exciting destinations and it’s very nice on board, that’s great,” said Cowen.

Before HK Express was launched, it surveyed where Hong Kong people wanted to fly. The answer was North Asia - Japan and Korea - and Southeast Asia. The responses shaped the network which now includes Hiroshima, Fukuoka, Osaka, Nagoya and Tokyo in Japan; Seoul, Busan and Jeju in South Korea and Chiang Mai, Phuket and Da Nang in Southeast Asia.

It also flies to Taichung in Taiwan and Lanzhou, Wixi, Ningbo and Kunming in China. Yangon and Mandalay will be added this month, with Luang Prabang in Laos, as well as the Pacific islands of Guam and Saipan being considered for later this year. The airline also serves several Chinese destinations with seasonal charter flights.

About 70% to 75% of HK Express passengers are from Hong Kong, although marketing efforts are underway to attract more inbound traffic. There also has been a huge shift to on-line sales. Before the airline was converted to an LCC, between 10% and 15% of its business came from online bookings. The figure is now more than 85%.

“That’s important. If anything goes wrong, feedback comes back to us very quickly, either through social media or direct channels, and it can be acted on speedily,” he said.

Critical to customer satisfaction has been the airline’s impressive record for on-time performance (OTP). It boasts the best on-time statistics in Hong Kong, beating out its bigger competitors with an average of near 80% on time departures, according to independent flight statistic monitoring website, Flightstats.com.

The superior results are no accident, explained Cowen. HK Express strategy, from the time of its initial it’s restructuring, was to be a complementary carrier to sister airline, Hong Kong Airlines. The full service carrier flies mostly between Mainland China and Hong Kong,

As a result, HK Express has relatively few Mainland destinations, which meant it has less delays from the airport and ATC congestion that dogs Chinese aviation.

“Having stripped away that very large ATC issue, which dominated the on-time performance statistics, it revealed the smaller causes of delays, which were anything from late fuel trucks to late buses - all the usual things. We had much more visibility about these problems and were able to systematically address them rather than have them lost in the wider, primarily ATC, delay issue,” he said.

“We knew we had to get the fundamentals right to succeed in Hong Kong. First and foremost was a safe and secure airline. You’ve got to have that. Being [owned by] a long standing airline meant we had a safe and secure operation. We also had attractive fares and destinations.

“But this means nothing if you are always late. OTP was the next thing we had to get right, not only for the customer, but from a fleet utilization perspective.

“High aircraft utilization drives down costs to support low fares. You can’t sustain high aircraft utilization unless your aircraft are consistently on time. If delays creep up then your system breaks down.”

Cowen said HK Express did not want to assume the position of Hong Kong’s LCC. “We wanted to earn it by right. So it was very important for us to have a very robust on-time performance and build that reputation,” he said.

Like all airline chiefs, he keeps a close eye on economic conditions, including the slowdown in China, but he believed HK Express could withstand any challenges.

“In a slowdown, particularly in a deep and protracted slowdown, personal and business travel budgets are cut, but people need and want to travel while also being careful with their money. This is when the LCC model can be very resilient,” he said.

“Secondly, if there is weakening demand, it tends to flow through to lower fares and LLCs have the cost base to weather that.”

Cowen said the Hainan parent group is very supportive of HK Express. “They are long-term investors. They can see the market opportunities both for LCCs and also for being in Hong Kong. They are encouraging us very strongly to take advantage of these circumstances. The fleet announcements and the new destinations are a manifestation of that investment,” he said.