Cathay Pacific in talks for local LCC Hong Kong Express

by WILL HORTON  

March 1st 2019

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Cathay Pacific Chairman John Slosar often talks about “irresistible propositions”. Read More » His latest may be HK Express.

Cathay disclosed it is in talks to acquire an undisclosed stake in the HNA unit, saying the LCC is complementary. “We believe that HK Express captures a unique market segment,” a spokesman says.

There are no active talks between Cathay and Hong Kong Airlines, the sister of HK Express. HNA is understood to have wanted to sell the two together, leveraging HK Express’ appeal for the more challenged Hong Kong Airlines.

Combined, Cathay and HK Express flew 54% of passengers at Hong Kong airport in 2017. Their impact is even greater in short-haul markets, such as Japan, which accounts for about a fifth of all outbound Hong Kong travel.

Cathay appears to be seeking government support by arguing an acquisition will help Hong Kong. Cathay and HK Express “could multiply connection opportunities through Hong Kong, therefore further strengthening Hong Kong International Airport as a hub during a time of intense regional competition”.

HK Express has mostly been a point-to-point airline. Shifting to transfer traffic could decrease options for Hong Kong taxpayers or incoming visitors who contribute to the economy.

More pragmatically, Cathay may be concerned HNA would reinvigorate HK Express or sell it to another group, either of which would mean more effective competition. Short-term growth opportunities are not the prime consideration. Cathay earlier this decade intentionally over-grew to amass a slot portfolio it would later optimise. Even without HK Express, Cathay’s growth may be too high.

Longer term, HK Express gives Cathay a ready-made LCC in advance of Hong Kong’s third runway opening around 2024. The additional runway will bring more competitors and perhaps a new home competitor.

HK Express could gain a sturdy shareholder. Yields could rise from Cathay cross-selling or offering some frequent flyer perks. HK Express does not have particularly valuable traffic rights while its slots are off-peak and scattered throughout the day. Yet Cathay and HK Express could benefit from slot trading.

Cathay would also gain macro positioning. The airline has increasingly felt out of touch with its home market as the expanding leisure market flies HK Express.

Cathay has long argued against establishing a LCC subsidiary since widebody aircraft with dense seating and cargo payload enable low fares. What has clearly changed is the availability of HK Express.

While Cathay has had weak finances in recent years, its reserves are significant and the opportunity extraordinary.