Facing turbulence?

Fly the Sino-Australian skies

This month saw the launch of a new all-business class service between Hong Kong and London. The daily flight is operated by Hong Kong Airlines, a carrier that’s owned by China’s HNA Group. The hope? To win market share from the dominant player, Cathay Pacific.

Hong Kong Airlines is flying the route with aircraft configured with 34 Club Premier seats (i.e. those that convert to flat beds) and 82 Club Classic seats (those resembling the business class experience of the 1980s­ – bigger seat and better legroom, but not fully reclining). And in its launch promotion, it is offering two companion seats in Club Classic for HK$29,980 ($3,860). That might entice couples reluctant to fly economy on Cathay but hesitant to cough up for full business class fares. After all, a couple will save more than HK$70,000 if they opt for the Club Classic deal over two seats in Cathay’s own business cabin (based on fares for April being quoted on its website).

Yang Jianhong, president of Hong Kong Airlines, is confident that the pricing strategy will lure new passengers. He told the Wall Street Journal that he expects the route to break even in its first six months at a targeted 75% load factor.

The move seems to follow a trend – with Chinese airlines getting more aggressive with fares for international travellers. The Journal says that China Southern “has been the most aggressive in marketing itself” but that all of China’s major airlines are “starting to throw their weight around: by targeting international passengers and freight.

For example, China Southern has started using its Guangzhou hub to offer discounted long haul flights, pricing travel between Sydney and Paris at as little as $1,150, or around half the fare asked by Australia’s Qantas, reports the newspaper.

Undeterred, Qantas announced a new strategic initiative of its own this week – a new airline to be run in partnership with China Eastern, based out of Hong Kong.

The partners say that the airline – Jetstar Hong Kong – will be a low cost carrier (LCC) flying a fleet of 18 Airbus A320s from next year.

The primary passenger focus will be flights into China, focusing on cities currently underserved by other carriers.

Not everyone is convinced that Jetstar will take off. One key issue is whether the proposed airline can even qualify as a Hong Kong carrier, as neither China Eastern nor Qantas can claim the territory as their principal place of business.

Even assuming the regulatory hurdles are met, other industry experts are already querying whether the LCC model will work in Hong Kong. Jetstar spokesmen are predicting operating costs per seat half those of the existing full service carriers. But the problem, says HSBC analyst Mark Webb, is that Hong Kong is a “relatively expensive location” to choose as a base, and at least twice as costly as neighbouring Shenzhen.

Hong Kong’s only other budget carrier Oasis collapsed in 2008, although Hainan Airlines has ambitions to see Hong Kong Express – another of its subsidiaries operating from Hong Kong – emerge more strongly as an LCC operator.

In fact, LCCs have grabbed only about 5% of the passenger market out of Hong Kong, far less than places like Singapore or Australia itself.

Still, HSBC’s Webb thinks that Hong Kong’s two main incumbents – Cathay and its subsidiary Dragonair – have little to fear from the Jetstar anouncement.

“We have difficulty understanding how like-for-like seat costs will be lower than Dragonair’s [which also flies from Hong Kong into China] by 50% in a high jet fuel price environment,” he concludes.

Nonetheless, bosses at Cathay Pacific won’t be impressed to hear the news that Qantas and China Eastern will be trying to muscle in on their home turf.

Qantas especially could have some explaining to do at the next gathering of the Oneworld alliance, the network of partner airlines in which both it and Cathay are founder members.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.