HK Express becomes Cathay Pacific's low-cost subsidiary by 31 December 2019

Report by : Gan Yung Chyan
                  / KUCINTA SETIA

Cathay Pacific announced that it has entered into a share purchase agreement with HNA Holdings on the Hong Kong airline's acquisition of HK Express on 27 March 2019. The issued share capital of HK$4.93 billion, including cash of HK$2.25 billion, was paid in cash to HNA Holdings while non-cash transaction amounts to HK$2.68 million, which will be settled through the issuance and replacement of the acceptance loan notes. Upon completion of the transaction on or before 31 December 2019, HK Express Express will become a wholly-owned subsidiary of Cathay Pacific.

HK Express, a low-cost airline affiliated to HNA Group, operates short-haul routes to and from Hong Kong, Southeast Asia and Northeast Asia. At present, it has a fleet of 38 passenger planes operating flights to 24 overseas destinations, 11 of which are located in Japan. The number of passengers increased from 2.9 million in 2016 to the current 4.1 million.

Lin Zhijie, an expert on the Civil Aviation Resources Network, said that the completion of the acquisition will definitely improve Cathay Pacific’s financial performance. At present, Cathay Pacific and Cathay Dragon have a market share of 76% in the Hong Kong air travel market while Hong Kong Airlines and HK Express hold market shares of 16 per cent and 8 per cent respectively. The successful acquisition of HK Express will enable Cathay Pacific to control 84 per cent of Hong Kong's air travel market share and further consolidate its monopoly position. In addition, from the perspective of passengers, this acquisition is not a good thing, as it leads to decrease in competition and price hike of air tickets.

Qiqi, another expert on Civil Aviation Resources Network, believes that Cathay Pacific is acquiring in the context of the accelerated disposal of assets by HNA Group, the original parent company of HK Express, in order to strengthen Cathay Pacific's position in managing short-haul low-cost aviation products. Cathay Pacific focuses on international long-distance routes while Cathay Dragon focuses on connecting China with Hong Kong, and HK Express focuses on low-cost multi-level service in Asia. The acquisition of HK Express will help Cathay Pacific learn from the successful experience of Singapore Airlines Group's multi-brand and differentiated services, shape Cathay Pacific's business transformation and improve its level of profitability.

HK Express's low-cost brand image, flight rights and aircraft are high-quality assets. After the acquisition of the low-cost airline, Cathay Pacific will not rule out handing over its Airbus A320 fleet or competitive routes in Asia and air traffic rights in Asia to HK Express in order to compete against low-cost airlines such as AirAsia and Jetstar.

However, how to effectively integrate HK Express' resources into Cathay Pacific and maintain the original high efficiency operation of HK Express is extremely challenging, and it also tests the wisdom of Cathay Pacific management.