HK’s Cathay Pacific Airways to pay HK$4.93 billion to buy budget carrier HK Express

28-Mar-2019 Intellasia | South China Morning Post | 6:00 AM Print This Post

Cathay Pacific Airways will pay HK$4.93 billion (US$628 million) to buy budget carrier HK Express from the HNA Group to become the dominant airline group in Hong Kong.

The city’s biggest airline will acquire 100 per cent of HK Express and will become a wholly-owned subsidiary of Cathay Pacific. The deal is expected to be completed on or before December 31, 2019. Cathay Pacific will put up HK$2.25 billion in cash, and has pledged to repay HK$2.68 billion of debt held by HK Express in the form of promissory notes.

Three out of Hong Kong’s four airlines will now be controlled by Cathay Pacific, leaving the group with control of almost half the runway slots at Hong Kong International Airport.

The Post exclusively revealed on Monday night that Cathay Pacific had agreed to a deal with HNA Group International, the company’s Hong Kong-based unit, to assume control of the city’s only low-cost airline.

“Completion is conditional upon certain conditions being fulfilled, including clearances required from relevant competition authorities,” Cathay Pacific said in the filing, addressing concern over the deal making it the dominant player in local aviation.

The group said HK Express would continue to operate as a standalone airline using the low-cost business model.

“The transaction is expected to be good for the travelling public, good for the Hong Kong hub and good for the Cathay Group as Cathay Pacific and HKE’s (HK Express’) respective businesses and business models are largely complementary,” the airline said.

The transaction is expected to be good for the travelling public, good for the Hong Kong hub and good for the Cathay Group

Cathay Pacific Airways

It went on to say the deal “represents an attractive and practical way for the Cathay Group to support the long-term development and growth of our aviation business and to enhance the competitiveness of the Hong Kong hub during a time of intense regional competition”.

CEO Rupert Hogg sent a near identical note to staff to announce the deal, with one additional line: “A lot needs to be done between now until the completion of the transaction.”

The airline indicated that it faced a challenge from one of the HK Express shareholders, understood to be the airline’s chair, Zhong Guosong, who has resisted selling the stake he controls in his name.

“A firm of solicitors acting for a shareholder of an intermediate holding company of HKE has written to the company indicating an intention to contest the seller’s entry into an agreement for the transaction,” the stock exchange filing said.

Facing competitive pressures from a trio of rivals, namely no-frills carriers, mainland Chinese companies and Middle Eastern airlines, Cathay Pacific was late to jump into the fast-growing low-cost travel market to attract budget-conscious passengers it did not already serve, executives have acknowledged publicly.

The airline is now in a better position to capture the enormous predicted growth in air travel, with the Asia-Pacific expected to see four billion travellers by 2037 almost half of worldwide air travel.

According to the stock exchange filing, HK Express showed HK$141 million in losses last year after achieving a net profit of HK$57 million in 2017.

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Meanwhile, Cathay Pacific Group which includes its flagship long-haul airline and regional carrier Cathay Dragon generated an annual profit of HK$2.03 billion in 2018, to halt two years of back-to-back losses.

Cathay Pacific joins a list of traditional Asian airlines to bolt on a budget airline, following in the footsteps of Singapore Airlines creating Tigerair and Scoot, to Qantas growing the Jetstar brand profitably and Japan’s All Nippon Airways creating low-fare units Vanilla Air and Peach.

At HK$13.68, Cathay Pacific shares were up 2.7 per cent at closing on Tuesday on the news the airline would buy its local budget rival. By the opening of trade on the stock on Wednesday, it rose 0.88 per cent to HK$13.80, its highest level in a year.

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Jefferies analyst Andrew Lee said: “I think Cathay has looked into [the competition and regulatory hurdles]. For them to announce a deal and 100 per cent ownership, price etc., they have probably looked into this regulatory issue, in my view.”

A source familiar with the deal said one of the first major tasks for Cathay Pacific would be to decide on the top team at the budget carrier, with most executives who came from Hainan Airlines or the corporate parent HNA set to leave.

Hong Kong Airlines remains the only carrier in the city not acquired by Cathay Pacific. The HNA-backed airline is under immense financial stress, and the sale of its sister low-cost unit HK Express could help fund a restructuring. This is following HNA’s previous attempts at selling a majority stake in the airline to raise the necessary funds to inject into the carrier.

The HNA Group is shedding $50 billion in assets that were snapped up in a buying binge causing the financial turmoil at the Chinese conglomeratewhich has spread to its various businesses, including in Hong Kong.


Category: Hong Kong

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