March 27, 2019

Cathay Pacific confirms HK Express acquisition

Cathay Pacific Airways will buy low-cost airline Hong Kong Express (HK Express) for $628.2 million as the flag carrier moves to counter competition from the increasing number of low-cost operators in the region.

HK Express is owned by struggling Chinese conglomerate HNA Group, which has been looking to lower its debt pile.

HNA also owns Hong Kong Airlines, another Cathay competitor that has found itself in financial difficulties.

The move marks Cathay’s initial foray into the low-cost sector and will leave Cathay controlling three of the four airlines at one of Asia’s busiest airports at a time of huge growth in the region’s air industry.

Cathay’s interest in the low-cost segment comes amid increasingly fierce competition and growing demand in Asia for cheaper travel options.

Negotiations coincide with the carrier’s posting its first profit in three years for 2018.

Preliminary estimates put earnings at $293 million.

HK Express competes with Cathay in Hong Kong and the acquisition will serve to take out competition and prevent future entrance into this market.

HK Express has grown rapidly in recent years and now competes head-to-head with Cathay’s wholly owned subsidiary Hong Kong Dragon Airlines (Cathay Dragon) which specialises in short-haul travel within the region.

This is not the first time Cathay has sought to snap up homegrown rivals.

Past purchases have included Dragon Air and Air Hong Kong. Cathay faces tougher competition over flights to and from Hong Kong, as other airlines seek to attract wealthy Chinese passengers.

Cathay also lacks a strong position in the domestic Chinese market; the airline is not permitted to serve Chinese provincial cities directly from locations other than Hong Kong.

Cathay, together with Cathay Dragon, currently offers passenger and cargo services to 212 destinations across 53 countries and regions and the carrier plans to expand its fleet of 206 aircraft to 284 by 2024.

HK Express, which began operating in 2013, offers flights to 25 destinations in nine countries and regions in Asia.

Demand for cheap air travel is booming in Asia, with the market share of low-cost carriers by seat capacity climbing to 28% in 2018 from 10% a decade ago.

Singapore Airlines already has expanded into the low-cost business with the takeover of Tigerair in 2014.

Letting go of HK Express is seen as a potential blow to HNA’s long-term development, given the fast growth of the low-cost airline operator, as well as overall market potential.

HNA announced in November 2018 plans to sell some real estate and other assets to boost liquidity and comply with Beijing’s request for companies to deleverage.