July 6, 2019

HK Express to be acquired

Low cost carrier HK Express is poised to become a wholly owned subsidiary of Cathay Pacific- which had long been reluctant to enter the budget travel market. William Barnes reports from Bangkok

For $628 million in cash, including promissory loan notes to settle existing debts, Cathay will acquire a carrier flying 27 routes covering southeast Asia, Japan and South Korea with some limited services into China and Taiwan.

The fleet comprises 24 A320-family aircraft (eight A320-200s, five A320neos and 11 A321-200s as of January).

Most are leased rather than owned.

The sale by troubled HNA Group was hardly unexpected, as it has been offloading assets to reduce debt, in the wake of Beijing’s clampdown on debt-fueled overseas spending sprees.

The conglomerate has sold $25 billion of assets since early 2018 amidst a flurry of lawsuits.

“This represents an attractive and practical way for Cathay Group to support the long-term development and growth of our aviation business and to enhance the competitiveness of the Hong Kong hub during a time of intense regional competition,” Cathay Pacific said at the time the deal was announced.

It also told local media that “the transaction is expected to be good for the traveling public, good for the Hong Kong hub.

“The respective businesses and business models are largely complementary.”

Major shareholder Zhong Guosong, who indirectly owns stakes in both HNA and HK Express, has challenged the sale, saying that HNA bypassed other shareholders.

The first payment, however, was held up on another matter when Cathay discovered that HK Express  –– to widespread surprise — owned two B-747-400SF freighter aircraft.

The original sale of these has been the subject legal action in the US, regarding third-party payments made on the deal.

Cathay wants HK Express to divest itself of these aircraft to insulate itself from any future lawsuits.

Cathay is in the final stage of a three-year programme to lift profitability, after recording a loss in 2017 under increasing pressure from low-cost rivals, and from ambitious mainland carriers.

The building out of extensive and efficient ground transport networks linking Hong Kong with China, including a $10 billion rail link that connects with Chinese high-speed services, is viewed as presenting a real threat to a dozen Cathay routes.

Aviation analysts agree that the HK Express purchase is a coup that consolidates Cathay’s dominance of the prized Hong Kong hub, adding that the price might be a bit high at 4.5-times net asset value.

Singapore Airlines only paid 2.2-times net asset value for Tiger Airways (since renamed Tigerair) in 2016.

But the deal captures HK Express’s valuable slots at Hong Kong International Airport.

This means that Cathay will have 50% of the airport’s total slots, from the current level of 45%.

A third runway will not be operational until 2024, and  Cathay Group is already planning to expand by adding an additional 100 aircraft to its fleet.

The new acquisition will be run as a stand-alone carrier in part of a group that already includes Cathay Dragon, which has 32 new A321-200neo aircraft being delivered between 2020 and 2023, in a fleet replacement programme.

Most of the aircraft will be flown on China routes.

Including HK Express, there are still only four airlines based out of Hong Kong, although several low-cost operators have wanted to get in, including Jetstar Hong Kong Airways (a joint venture between Qantas and China Eastern Airlines Corporation).

In 2015 Hong Kong’s Air Transport Licensing Authority refused Jetstar Hong Kong’s application for an operating licence.