With HK Express acquisition, Cathay Pacific gets foot in the door of growing LCC market

Cathay Pacific is buying budget carrier HK Express in full, with the HK$4.9 billion (US$630 million) deal expected to go through by December 31 this year.

The amount comprises a cash consideration of nearly HK$2.3 billion and a non-cash consideration of HK$2.9 billion settled through the issue and novation of promissory loan notes.

In a statement detailing the deal, Cathay Pacific said the purchase of Hong Kong Express represents “an attractive and practical way for the Cathay Pacific Group to support the long-term development and growth of its aviation business and to enhance its competitiveness”.

Cathay Pacific estimated to get 50 per cent marketshare with the acquisition

HK Express will continue to operate as a standalone airline using the LCC model, according to Cathay Pacific.

Some industry observers opine that it would make better sense for the two airlines were to operate separately, unlike in the case of Cathay Pacific integrating Dragonair.

Travelzoo.com, general manager, Kevin Shui said: “After Cathay took over Dragonair few years ago, redundancy or restructure followed. I’m interested to know how Cathay’s go-to-market strategy would look like, and whether HK Express will operate separately. It would make more sense to run a dual-band mode in future as each targets different audience.”

EGL Tours, executive director and co-founder, Steve Huen, told TTG Asia: “This is a good deal for Cathay because most mainstream airlines in the region are tagged along with an LCC subsidiary. When Cathay bought Dragonair a few years ago, we wonder why it did not operate Dragonair as an LCC.

But unlike Shui, he opined that Cathay Pacific and HK Express may not be going after such disparate consumer sets.

“Not all LCC passengers are budget conscious and LCC doesn’t mean cheap – airfare is (determined by supply and) demand. For instance, it costs me HK$5,000 for a same-day return ticket on HK Express’ Hong Kong-Osaka route while Cathay Pacific asked for HK$7,000. I chose the former because if offered the best time slot.”

He added: “Cathay Pacific may (be interested to) keep and build customer rapport for the budget market as customers may eventually move up to fly full-service (Cathay Pacific or Dragonair).”

Huen also pointed out that the acquisition could be to preempt the potential intensification of LCC competition in the future.

“Saturated capacity of the Hong Kong International Airport (has thus far been) the stumbling block of LCCs development. However, the completion of the third runway in 2024 is expected to spark off the entrance of new LCC players. Cathay Pacific may have realised this.”

He further speculated that once the deal completes, some existing HK Express routes may be slashed after reviewing passenger loads and performance.

“I reckon it’d not just crave Japan destinations but also South-east Asia.”

Meanwhile, Arrow Travel, managing director, Tommy Tam said there is concern within the travel trade about Cathay gaining bargaining power. If it goes through, the acquisition could give Cathay over 50 per cent market share.

He said: “This means that HK Express’ airfares will be less competitive than before. Still, HK Express employs direct marketing and consumers mostly skip agents and book directly, so I don’t foresee big impacts on agents.”

A Morning Star Travel Service spokesperson also said that the agency seldom uses HK Express, claiming that for group travel, there is no big difference in LCC and FSC fares.

“Even though HK Express publishes low fares, quantity is limited. It is still early to comment if airfares will be increased, and whether more tickets will be allocated to FITs or groups. As a homegrown LCC, hopefully it will be managed in a better way under Cathay’s umbrella in future.”

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