Hong Kong’s flagship carrier Cathay Pacific Airways Ltd reported on Tuesday it is in “active discussions” about acquiring discount airline Hong Kong Express Airways Ltd, also known as HK Express ( 香港快運航空).

Buying HK Express would be a game changer for both Cathay Pacific and the region of Hong Kong. Cathay has been hit by competition from Air Asia and Qantas low cost subsidiary Jetstar and has been forced to price discount. The airline has had two consecutive losses for the first time in 71 years. This deal, if successful, would allow Cathay to gain a fully established low cost subsidiary at a far cheaper price than establishing it from scratch.  The combined Cathay group would own three of the four airlines at HK airport (Cathay Pacific, Cathay Dragon and HK Express) and control 45% of the airport’s runway slots. No doubt the mainline carrier could drop some routes in favour of the low cost carrier.

Hong Kong Express, itself, was incorporated in March 2004. China’s Hainan Airlines Group (HNA) group took a 45% stake in the company soon after in 2006. In 2013, HK Express adopted its current name and philosphy. The HNA group was founded in 1989, and expanded fast (funded by debt). HNA has bought airlines, and other related transport companies and even a German  bank. Since 2017, the Chinese conglomerate has sold more than $US20 billion of assets to pay down debt. HNA have made no secret of their desire to sell HK Express, for some time.

HK Express currently operate a fleet of 24 modern Airbus A320, A320-neo and A321 aircraft and flies to 28 destinations across Asia (China, Japan, Korea, Cambodia, Myanmar, Vietnam, U.S. Territories, Taiwan and Thailand).

Why I am interested in this is through my recent experiences with the other HNA Hong Kong based subsidiary Hong Kong Airlines. Having never encountered them prior to three months ago, I have now flown HKA four times. All of the trips have been a great experience but Hong Kong Airlines have been under a significant cloud. They have been losing money, many of their management team have left, their insurer is no longer covering them if they go bust and the HK government were investigating if they were financially viable amidst fears they would be gone by February, 2019. The Chinese government owned China Development Bank bailed out HK Airlines at the last minute with a $US550m rescue package.

Cathay Pacific is reportedly not interested in HK Airlines because they have too many overlapping routes  with each other. I think Cathay would be happy to sit it out and watch HK Airlines eventually run out of cash and support.  I would be keen to see HK Airlines continue. They have a good product and I like the idea of competition in HK. Not sure who the right buyer would be. Perhaps one of the other Chinese airlines such as China Southern or Juneyao Airlines might be interested? A few years ago, I would have said Etihad would have been an option. Both Etihad and HNA are investors in Virgin Australia which partners with HK Airlines but I cannot see Etihad moving in this direction today. As of now, the future of HK Airlines may be bleak beyond mid 2019.

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