Hong Kong Connections

The majority of this traffic is likely to come from the Pearl River Delta, which has become the economic powerhouse of China. In this light, Hong Kong International Airport is positioning itself to become a key connecting point to other cities in the Pearl River Delta and other parts of mainland China.

Over the next 20 years, it hopes to attract a larger share of mainland China’s air cargo and passenger markets. In this vibrant environment and despite warnings of over-capacity, start-up airlines continue to emerge, challenging the incumbent carriers Cathay Pacific and Dragonair.

Hong Kong Express, Oasis and Hong Kong Airlines have emerged in the last few years with each carrier having a largely unique network. These airlines are now offering more options between Hong Kong, mainland China and a number of short and long haul international destinations.

Hong Kong Express has focused its network on connecting China’s regional cities to Hong Kong. The airline has focused on providing a point to point service which is bypassing congested hubs to offer direct connections to Hong Kong The airline has also now spread its network out to other regional cities in Asia.

Although a large portion of the passenger growth will be focused on regional and internal flying, there is also adequate scope for new long haul carriers such as Oasis Hong Kong Airlines. There are also hints that big name European low cast carriers are looking to extend their reach to Asia and Australia, joining Jetstar International and Air AsiaX who are pioneering the long haul, low cost market in Asia.

In between Hong Kong Express and Oasis, Hong Kong Airlines is yet another Hong Kong based airline currently serving China’s second tier cities and a few regional centres. With a young fleet of Boeing 737-800s, it has ambitious plans to expand to widebody and long haul operations, including to Australia as well as adding freighter aircraft.

Oasis Hong Kong

Oasis Hong Kong Airways CEO Stephen Miller identified a demand for non-stop flights to Europe at a lower fare than available alternatives. His business model adopts the best of the short/medium low cost model that can be transferred to the long haul.

Oasis has no plans to fly regional short haul. Miller says flying only long haul allows the carrier to get best use out of its aircraft while keeping productivity high.

That combined with cost reduction measures and outsourcing catering and call centres are the key to Oasis’s low prices.

Oasis aims to make long haul travel more accessible and affordable, and to provide passengers with dependably low fares and high standards of comfort and service. Its founder and chairman the Reverend Dr Raymond Lee, and his wife and executive director, Priscilla Lee, are well qualified in business and academia.

They are successful property developers and active philanthropists.

Board members are also well placed in the Hong Kong business world.

Oasis currently operates four Boeing 747-400s with one more to be delivered early this year. The first two are ex Singapore Airlines aircraft and the remaining three are ex-All Nippon Airlines. Lufthansa Technik and the HongKong Aircraft Engineering Company Ltd maintain the aircraft in Hong Kong.

Like Jetstar International, Oasis offers a two class service with economyOasis class offering 32in (81cm) pitch and seatback IFE screens, complemented by businessOasis, which offers a 50in (127cm) seat pitch. Its aircraft are configured with 81 business and 278 economy or 71J and 268Y class seats.

Oasis plans to list its shares on the Hong Kong stock exchange in the next three to five years, and in October announced it had secured a US$30 million infusion of funds from Hong Kong based Value Partners Limited and affiliates. The funds are intended for fleet expansion and extension of Oasis’s route network. The airline plans to have 14 Boeing 747s operating by 2011, servicing eight routes including routes to Europe and North America.

Future services to Melbourne and Sydney have also been mentioned. Destinations are selected for their lower airport charges, easy onward connections and links to low cost airline services.

Oasis started services in October 2006. It now flies ten non-stop services weekly between Hong Kong and London Gatwick and six times weekly between Hong Kong and Vancouver. The four other carriers flying direct between Hong Kong and London – Qantas, Cathay Pacific, Virgin Atlantic and British Airways – are feeling the heat. Some have reduced fares but none have matched Oasis’s low fares.

Oasis carried 350,000 passengers in its first year of operation. To mark the anniversary, it offered a number of one-way economy class tickets to London or Vancouver for US$176 excluding taxes.

The airline has continued to maintain a high profile byoffering a series of special offers, such as two-for-one deals for seniors on the Vancouver service. In a bold move to capture more of the business market, in December Oasis introduced enhanced inflight services to its businessOasis class including a quality ‘restaurant style’ meal service, an amenity kit and noise cancelling headsets.

Throughout 2007, Oasis collected a series of awards from the aviation and travel industries. In September, itwon two awards at the World Low Cost Airline Congress in London – ‘Best Business Class’ and ‘Best New Service’.

And to top off the year, it gained the title of ‘World’s Leading New Airline’, announced at the prestigious World Travel Awards in December.

Hong Kong Express

After the introduction of new trading agreements and relaxation of restrictionson travel out of mainland China, demand for short and medium haul air travel between mainland China and the rest of East Asia burgeoned. The decision to launch Hong Kong Express Airways was taken in this environment. The airline is owned by the family of Stanley Ho, the well-known gambling entrepreneur, and it is managed by CEO Andrew Tse. In December 2007, Ronnie Choi was appointed president of Hong KongExpress, bringing with him 40 years of experience in Hong Kong’s aviation industry in managerial positions at Jardine Airways, Cathay Pacific and Dragonair.

Hong Kong Express was formed out of Helicopters Hong Kong Ltd, which was founded in 1997 to provide regular helicopter services between Hong Kong, Macau and the Pearl River Delta region.

It operates five Sikorsky S-76s. The company was renamed Hong Kong Express in early 2005, with the launch of its fixed wing jet service on August 3 2005. It was granted approval to operate scheduled services between Hong Kong and five second-tier cities on the mainland – Guangzhou, Hangzhou, Chongqing, Nanjing and Ningbo.

The Embraer 170 was chosen to service those routes and Hong Kong Express became the launch customer in Asia for the 76-seater. Its first scheduled flight to Guangzhou took place on September 8 2005.

The airline’s initial focus was on the needs of business travellers with flight frequencies designed to meet the business travel market.

In August 2006, China’s HNA Group, the parent company of Hainan Airlines, acquired a 45 per cent share in Hong Kong Express. By buying into the Hong Kong carrier, along with its similar investment in Hong Kong Airlines, HNA has gained a significant foothold in Hong Kong from which to expand its international network.

According to figures for May to September 2006 on the airline’s website, passenger numbers peaked in August and fell away sharply in September. Over the five month period, the passenger load factor was just over 50 per cent. The drop in numbers was attributed to softening in demand at the end of the summer season, suggesting that leisure travel rather than business was the main driver. This may have contributed to a major change of strategy and the decision to phase out the Embraers in favour of Boeing 737s, the first of which was delivered in January 2007.

The arrival of the first Boeing coincided with a major rebranding exercise including new aircraft livery, new crew uniforms, a new tagline – ‘Fly. To discover’ – and a new logo. The new fleet of aircraft is intended to add capacity on existing routes and enable the introduction of new destinations.

The four 737-800s currently in service are configured for 156 economy class seats and eight business.

Hong Kong Express has shown remarkable flexibility in recognising market realities and moving quickly to amend its business model.

With more economy class capacity, it is now competing in the mainstream regional market while establishing itself as a major short haul carrier serving China’s second tier cities. It is also well placed to take advantage of a recent liberalisation of the Hong Kong-mainland aviation market, in January winning access to become the third carrier on the lucrative Hong Kong-Beijing and Hong Kong-Shanghai routes.

“2008 will be a landmark year for Hong Kong Express Airways,” said Ronnie Choi in announcing the Beijing and Shanghai flights. To operate the new double-daily services to both cities from the end of March, and to cater for other expansion, the airline will introduce a further six 737s into service by the end of the year.

Today Hong Kong Express serves the mainland China cities of Guiyang, Chengdu, Hangzhou, Ningbo and Xian, while late last year it began flying to Kathmandu in Nepal, Yangon in Burma, Bangkok and Kuala Lumpur.

Hong Kong Airlines

Hong Kong Airlines began operations in 2003 as CR Airways to link Hong Kong and nearby Macau with Sikorsky S-76 helicopters, and soon introduced Bombardier CRJ200s and 700s.

Like Hong Kong Express, Hong Kong Airlines is now 45 per cent owned by the HNA Group. The airline’s first Boeing 737-800 was delivered in June 2006 with the last CRJ retired shortly afterIts current fleet of seven new 737-800s is configured for eight business class and 156 economy passengers.

Hong Kong Airlines offers full service on scheduled routes connecting 13 Chinese cities, as well as Hanoi and Ho Chi Minh City in Vietnam, operating from HKIA’s new Terminal 2. It plans to expand its fleet of 737s to enable it to include services to South Korea, Japan, Singapore and Thailand. In September 2007, it started operating charter flights between Hong Kong and three Japanese destinations to run through the winter season. The airline envisages further expansion having recently signed an MoU with Airbus for 30 A320s and 20 A330s to boost existing routes and open longhaul services to Australia, the Middle East and Europe.

In September 2006, Hong Kong Airlines established its own cargo department utilising belly capacity in its 737s.

However, with China’s expanding cargo trade, in October 2007 it announced a five year plan to develop a fleet of six to eight medium size freighters such as the Boeing 757-200F to establish itself as a regional cargo operator. It plans to tap into Hong Kong’s position as a transshipment hub for cargo, distributing and on-forwarding freight from major long haul cargo operators. The airline has also secured a contract with the Chinese Post Office to ship mail between Fuzhou and Hong Kong, and hopes to gain further services of this type.

Hong Kong Airlines’s strategy to diversify into freight could be a wise move given that, despite China’s growth, competition among established and new airlines is likely to be fierce.

Outlook

IATA chief Giovanni Bisignani recently observed that Asia would drive the international aviation industry forward and that, by 2010, intra-Asia traffic will be the largest market in the world. IATA predicts that new capacity and routes will boost international passenger growth to an average of 5. 7 per cent between 2006 and 2010 with China likely to average over eight per cent.

Further opening up of the China market is evidently the key to overall growth in the sector. Conversely, Asian airlines could see profits decline due to increased competition in the region as a result of this liberalisation, aircraft deliveries increasing capacity, and new entrants to the industry.

In November, the International Energy Agency warned that China and India would consume world oil supplies faster than earlier estimated and oil prices would push above the $US100 a barrel reached recently. A supply-side crunch between now and 2015 cannot be ruled out and prices could escalate until production capacity catches up. Consequently, airfares could rise sharply, especially among those airlines without adequate hedging protection.

The combination of stiff competition and rising fuel prices should be of particular concern to recent startups such as Oasis and Hong Kong Express, providing an interesting challenge for their so far niche business models. Nevertheless, being on the doorstep of aviation’s fastest growing marketplace is its own hedging strategy.

Said Cathay Pacific CEO Tony Tyler in a recent TV interview on the uncertainty created by the high price of fuel: “if you have to be anywhere in the world in 2008, I think Hong Kong and Greater China is a good place to be. ’’