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12 August 2019 11:56

Deutsche Bank NYSE:DB Finance

Cathay Pacific in talks to buy stake in rival Hong Kong Express

Cathay Pacific acknowledged the reports that they are negotiating to purchase the budget carrier Hong Kong Express which is owned by the HNA Group, a Chinese conglomerate. The talks show the interest of Cathay in expanding its operations amid the continuously growing competition and demand in Asia's cheaper travel options. It was recently reported that Asia is in need of more pilots to cater to the growing demands of the aviation industry. The analysis by the industry information portal Anna Aero said that Asia's market share for budget carriers by seat capacity increased to 28 percent last year from 10 percent a decade ago. Cathay's other competition in the Asian market, Singapore Airlines, recently expanded into a budget carrier business by purchasing the Tigerair in 2014.

Cathay's plan to purchase the Hong Kong Express comes as it prepares to post its first profit in three years for 2018. Michael Brekelmans, managing director at consulting firm SCP/Asia, said that HK Express is a competitor in Cathay's home market, Hong Kong. He also said that HK Express grown rapidly in recent years and now competes head-to-head with Cathay's wholly owned subsidiary Hong Kong Dragon Airlines, more commonly known as Cathay Dragon, which specializes in short-distance travel within the region. Cathay Pacific also purchased some of its competitors in the past which included the Dragon Air, and Air Hong Kong. Its plan to purchase Hong Kong Airlines from the NHA is not yet confirmed by the Chinese conglomerate.

Its acquisition announcement came at a time when the company seeks new revenue sources after suffering a rough patch in recent years. Brekelmans said that the thinking is that if you don't do it, someone else would do it, especially in a big market like Hong Kong. He also said that the company has realized either we let HK Express grow bigger and become more of a problem, or just acquire it and do it ourselves. Cathay Pacific eyes LCC market in bid for HK Express stake 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. 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. 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. (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. Hong Kong/Singapore: Hong Kong flagship carrier Cathay Pacific Airways Ltd said on Tuesday it is in "active discussions" about an acquisition involving budget airline Hong Kong Express Airways Ltd, although an agreement has yet to be reached. Such a deal would give Cathay exposure to the growing budget-travel market at a time when a lack of slots at Hong Kong International Airport has constrained its ability to follow peers like Singapore Airlines Ltd and Qantas Airways Ltd and set up its own budget brand. The Hong Kong carrier has instead shifted some destinations from its main brand to its regional carrier, Cathay Dragon, as part of a transformation plan designed to cut costs and increase revenue. Cathay said it had decided to go public about the discussions in response to media reports suggesting it may be in talks to acquire shares in Hong Kong Express Airways Ltd and full-service sister carrier Hong Kong Airlines Ltd from cash-strapped Chinese conglomerate HNA Group Co Ltd. An analyst last year estimated to Reuters that HK Express could be worth about $300 million. HK Express in a statement said shareholders have held initial discussions with strategic investors about a potential acquisition but no details had been confirmed and there was not yet any agreement. A person with knowledge of the matter said the companies appeared close to reaching an agreement and noted Cathay's parent Swire Pacific Ltd had historically taken majority stakes when making investments. Cathay is not interested in Hong Kong Airlines because it has both similar routes and full-service positioning, the person said. A second person with knowledge of the matter said Cathay had signed an exclusivity period for discussion but other parties remained interested in HK Express if a deal could not be reached. Given Cathay's dominance of Hong Kong's aviation market, a deal could attract scrutiny from the competition regulator. Daiwa analyst Kelvin Lau said he did not see much value from the acquisition as the two airlines flew similar routes, but also because Cathay would need to undertake significant reform to add a budget wing. Jefferies analyst Andrew Lee however said in a note to clients it would be "positive for Cathay Pacific" as it would give the airline greater access to a different passenger segment in the low-cost market. HONG KONG • Cathay Pacific confirmed yesterday that it is in talks to buy a stake in Hong Kong's sole low-cost airline, as it competes to counter the growth of budget carriers in the region. Asia's largest airline said it was "in active discussions about an acquisition involving Hong Kong Express". "No agreement for the acquisition has been entered into and there can be no certainty that any agreement will be entered into," it added in a statement to Hong Kong's stock exchange. Hong Kong Express is owned by HNA Group, a struggling Chinese conglomerate that has been looking to lower its debt pile. The group also owns Hong Kong Airlines, another Cathay competitor that has found itself in financial difficulties in recent months. Local and international media previously reported Cathay had held preliminary talks to buy stakes in both rivals Hong Kong Express and Hong Kong Airlines. But yesterday's statement only confirmed talks to acquire a stake in Hong Kong Express. Hong Kong Express is the city's sole budget carrier - a sector of the industry that a marquee brand like Cathay has struggled to compete in. Cathay embarked on a three-year plan to overhaul its operations after posting its first loss in eight years in 2016 as it faced stiff competition from budget rivals on the mainland. Hong Kong's aviation market has been undergoing some big changes recently. At this time, the airlines do not only compete against each other but also face competition from the bullet train. China introduced bullet train service from Mainland China to Hong Kong last September. Cathay Pacific is Hong Kong's oldest airline. The airline has struggled in recent years; however, it seems like it might have finally turned things around. The struggles of Hong Kong Airlines While Cathay Pacific seems to have left the worst behind, at least for the time being, Hong Kong Airlines is struggling. Supposedly, Hong Kong Airlines is not able to pay for them at this time. Cathay Pacific thinking about acquiring stakes in Hong Kong Airlines and Hong Kong Express Last but not least, Simple Flying reported the other day that Cathay Pacific is considering the acquisition of a minority stake in Hong Kong Airlines. Cathay Pacific is losing market share in Hong Kong, and the purchase of a minority stake in Hong Kong Airlines might help Cathay Pacific in securing its future in Hong Kong. Additionally, Cathay Pacific has confirmed that it is thinking about the acquisition of a stake in Hong Kong Express, even though it already owns the regional airline Cathay Dragon. Taking part ownership in Hong Kong Airlines and Hong Kong Express would allow Cathay Pacific to eliminate the two competitors in the Hong Kong market. With all the changes, it will be interesting to see what the future holds for the aviation market in Hong Kong. What do you think of the recent changes in the Hong Kong aviation market?