Cathay Pacific's purchase of rival HK Express was an inevitable plunge into the no-frills market as the premier marque belatedly faces the reality that it can no longer ignore the budget sector, analysts say. Asia's biggest international carrier has historically eschewed the low-cost sector, even as the region's rising middle class has fuelled an unprecedented boom in air travel and demand for cheaper routes.
But last week it finally bit the bullet, announcing it was buying HK Express for $600 million from the debt-laden Chinese conglomerate HNA Group. The move allows Cathay to take over the city's only budget carrier and gifts it much needed slots at one of the world's busiest transport hubs - prompting many to ask why it had taken the airline so long to make such a move.
Analysts say Cathay's reluctance to embrace the budget model was a result of its conservative way of thinking, in much the same way Nintendo was dragged kicking and screaming into the mobile gaming market after years of weak earnings. But it is not too late for the airline, they say. "It's more like catching up rather than changing the landscape," Jackson Wong, analyst at Huarong International Securities, told AFP, adding that Cathay realised it had to "face reality" that the budget market was something they needed to embrace.
Asia-Pacific is now the world's largest market for low-cost carriers, accounting for nearly 600 million seats in 2018, according to CAPA Centre for Aviation. And thanks to the region's booming middle classes, seat capacity has quadrupled over the past decade. During that time Cathay resisted moving into the low end of the market, even as their rivals did the opposite - Singapore Airlines formed Tigerair in 2003 and Qantas followed up with Jetstar Asia.
Now Asia's skies are littered with budget carriers: Air Asia, Scoot, Nok Air, IndiGo, Lion Air, VietJet, the list keeps growing. For a while Cathay's intransigence worked, it remained an avowedly premier - and profitable - brand. But as the regional budget scene grew, airlines in China and the Middle East began competing on longer haul flights and the more luxury frills Cathay offered.
By March 2017 Cathay reported its first annual net loss in eight years and announced a three-year overhaul to cut costs and improve efficiency. Under new chief executive officer Rupert Hogg the move appears to have paid off - last month the airline announced it had swung back into the black after two years of losses. Brendan Sobie, chief analyst at CAPA, said HK Express was too good an opportunity to pass up once it became clear the troubled HNA Group was looking to sell.
"It's in their home market, they have to look at it, and quite frankly they'd be silly not to do it," he told AFP. According to Sobie, structural constraints and limited airport slots made it difficult for Cathay to establish a separate low-cost carrier, which was why it had previously said it would not think about a no-frills carrier until Hong Kong airport's third runway came into operation in 2024.
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