Cathay Pacific eyes LCC market in bid for HK Express stake

March 06, 2019 14:51
Cathay Pacific is seeking to enter the low-cost carrier market as part of efforts to enhance its financial performance. Photo: Bloomberg

Cathay Pacific Airways (00293.HK) is seeking to enter the low-cost carrier market, a booming sector in the travel industry, as it confirms that it is in "active discussions" to acquire a stake in Hong Kong Express Airways (HK Express), the budget carrier owned by Chinese conglomerate HNA Group.

“No agreement for the acquisition has been entered into and there can be no certainty that any agreement will be entered into,” the airline said in a statement.

The company did not disclose the size of the stake it wanted to buy but only said further announcements will be made when appropriate.

Cathay’s stock price jumped more than 2 percent on Tuesday following the news.

The planned acquisition suggests that the Hong Kong flagship carrier is aiming to enter the low-cost carrier (LCC) market as part of its efforts to enhance its financial performance.

It posted a loss of HK$1.26 billion (US$160.5 million) in 2017, its biggest in nine years, but forecast last month that it would swing to a profit of about HK$2.3 billion for 2018.

While there have been media reports since last year that Cathay is eyeing stakes in HK Express as well as Hong Kong Airlines, also owned by HNA Group, Cathay did not mention anything about the latter in Tuesday’s statement, the Hong Kong Economic Journal reported.

Since last year, there has been talk that HNA Group wanted to sell its stakes in the two carriers to ease its debt burden.

Cathay does not appear interested in Hong Kong Airlines, however.

HK Express could be worth around US$300 million, Reuters reported last year, citing an analyst's estimate.

The companies appeared close to reaching an agreement and Cathay’s parent Swire Pacific Ltd. (00019.HK) had historically taken majority stakes when making investments, the news agency quoted a person with knowledge of the matter as saying.

Cathay had also signed an exclusivity period for discussion but other parties remained interested in HK Express if a deal could not be reached, Reuters said, citing another source.

A Cathay spokesperson told media that there is a certain degree of demand for LCC services, which can be complementary to the company’s current operational model, such as helping it increase its capacity in flight connections to and from Hong Kong.

In a statement, HK Express said its shareholders have held initial discussions with strategic investors about a potential acquisition, but stressed there was no certainty of an agreement.

Commenting on the potential deal, Credit Suisse said acquiring HK Express will be good for Cathay’s long-term business development as the deal can bring in lower-end customers, enhance cost-effectiveness and consolidate its leading position in the Hong Kong International Airport.

That said, the investment bank pointed out how much synergy can be achieved from the deal will depend on concrete execution details, management of overlapped routes, internal price competition and the size of the stake that Cathay ends up acquiring.

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