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April 3, 2019

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Cathay’s life well traveled now comes at a discount

Cathay Pacific’s purchase of rival HK Express was an inevitable plunge into the no-frills market as the premier marque belatedly faces the reality that it can no longer ignore the budget sector.

Asia’s biggest international carrier has historically eschewed the low-cost sector, even as the region’s rising middle class has fueled an unprecedented boom in air travel and demand for cheaper routes.

But last week it finally bit the bullet, announcing it was buying HK Express for US$600 million from the debt-laden Chinese conglomerate HNA Group.

The move allows Cathay to take over the city’s only budget carrier and gifts it much needed slots at one of the world’s busiest transport hubs — prompting many to ask why it had taken the airline so long to make such a move.

Analysts say Cathay’s reluctance to embrace the budget model was a result of its conservative way of thinking, in much the same way Nintendo was dragged kicking and screaming into the mobile gaming market after years of weak earnings.

But it is not too late for the airline, they say.

“It’s more like catching up rather than changing the landscape,” Jackson Wong, said analyst at Huarong International Securities, adding that Cathay realized it had to “face reality” that the budget market was something it needed to embrace.

Asia Pacific is now the world’s largest market for low-cost carriers, accounting for nearly 600 million seats in 2018, according to the CAPA Centre for Aviation.

And thanks to the region’s booming middle classes, seat capacity has quadrupled over the past decade.

During that time Cathay resisted moving into the low end of the market, even as their rivals did the opposite — Singapore Airlines formed Tigerair in 2003 and Qantas followed up with Jetstar Asia.

Now Asia’s skies are littered with budget carriers: Air Asia, Scoot, Nok Air, IndiGo, Lion Air, VietJet, and the list keeps growing.

For a while Cathay’s intransigence worked, it remained an avowedly premier — and profitable — brand.

But as the regional budget scene grew, airlines in China and the Middle East began competing on longer haul flights and the more luxury frills Cathay offered.

By March 2017 Cathay reported its first annual net loss in eight years and announced a three-year overhaul to cut costs and improve efficiency.

Under new chief executive officer Rupert Hogg the move appears to have paid off. Last month the airline announced it had swung back into the black after two years of losses.

Brendan Sobie, chief analyst at CAPA, said HK Express was too good an opportunity to pass up.

“It’s in their home market, they have to look at it, and quite frankly they’d be silly not to do it,” he said.

Sobie said structural constraints and limited airport slots made it difficult for Cathay to establish a separate low-cost carrier, which was why it had said it would not think about a no-frills carrier until Hong Kong airport’s third runway opens in 2024.

He said the lack of space at home was also a limitation for competitors, making the move into the sector less urgent for Cathay, which had opposed budget airline Jetstar’s application to operate in Hong Kong in 2015.

But the purchase was not a financial “slam dunk” for Cathay, Sobie warned, given the small margins of budget airlines in the region and the fact that HK Express reported a net loss of US$18 million in 2018, according to Cathay.


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