Hong Kong Airlines Bets on London Business-Class Flights

Source: Wall Street Journal By Joanne Chiu HONG KONG—The launch of Hong Kong Airlines Ltd.'s all business class long-haul flights to London reflects an unconventional and risky attempt by the startup carrier: it is attempting to break the dominance of Cathay Pacific Airways Ltd. and other international airlines in the city's highly competitive aviation marketplace. The foray by the fledgling carrier, backed by Chinese aviation and leisure conglomerate HNA Group Co., is part of a major expansion drive that involves ramping up its fleet and destination count. The goal is to get investors on board ahead of an initial public offering, expected later this year that will raise up to US$300 million. Hong Kong Airlines President Yang Jianhong said he expects the route to break even in its first six months at a targeted 75% load factor. Mr. Yang told The Wall Street Journal that many celebrities and investment bankers have expressed interest in the London flight, and added that the new route alone will likely account for around 10% of its total passenger revenue after one year. Its revenue for January-September period in 2011 was 2.84 billion yuan ($449.8 million), more than double its 2010 full-year revenue of 1.08 billion yuan. Mr. Yang also said the airline is considering launching similar premium services to Paris later this year. Operating more than 20 Boeing and Airbus jets, Hong Kong Airlines last week began flights to Taipei—one of the world's most profitable commercial air routes—and unveiled plans to hire hundreds of flight attendants to boost its cabin service staff by nearly 60% by the end of this year to meet the needs of an expanding fleet. On Wednesday, the airline inaugurated a daily service from Hong Kong to London's Gatwick airport using Airbus A330 planes configured with two types of business class seating, aiming to capture business and premium leisure traffic between the two international financial hubs by charging lower prices. Since its launch in 2006, Hong Kong Airlines has struggled to compete effectively in its home turf against the much bigger and financially sound Cathay Pacific. The smaller airline resorted to flying to short-haul regional routes between Hong Kong and leisure destinations in Asia. Meanwhile, the city's high cost base—including high wages and airport fees—prevented the carrier from pursuing a low-cost business model, which has been hugely successful in other parts of the region with brands like Malaysia's AirAsia. The move to start all-business class flights underscores the pressing need to carve out a niche for itself. Dozens of companies have in past decades tried and mostly failed to sustain profitable all-premium flights, as they grappled with heavy capital obligations from surging costs as well as inconsistent demand. Short-lived European and U.S. luxury carriers such as Silverjet, Maxjet Airways Inc. and Eos Airlines Inc. all went bust around the 2008 financial crisis. Analysts and industry veterans say Hong Kong Airlines faces similar challenges, especially as fuel prices continue to soar. Compounding the impact on the airline is the need to load large amounts of fuel for each of its long, 12-hour-plus journeys. Competition on the route is rife, with five airlines currently operating nine daily nonstop flights to London from Hong Kong. Reflecting a possible supply glut, Australia's Qantas Airways Ltd. plans to discontinue its daily Hong Kong-London flight from late March. Yet unlike the earlier unsuccessful ventures, Hong Kong Airlines has the backing of a financially robust parent. Hainan province-based HNA Group, which also controls China's fourth-biggest airline, Hainan Airlines Co., has in recent months emerged as one of the most active Chinese companies seeking overseas investment opportunities. Hainan Airlines in December bought a 19.02% stake in Hong Kong Airlines for 842 million yuan, which helped boost the company's financial strength. "With strong Chinese backing, the carrier should have sufficient funds to cope with its expansion plan in the near term, but if the macroeconomic conditions go against its capacity boost in the longer run, its business might be hurt because of excess supply," said Kelvin Lau, an aviation analyst at Daiwa Capital Markets. A person familiar with the situation said Hong Kong Airlines' inaugural London flight, which included VIPs and other guests, was around 70%-80% full. However, the person said bookings for the first month of flights remain under 50% of capacity, highlighting the difficulties to fill all 116 business class seats on each flight. But by selling tickets at a steep discount to traditional business class fares, Hong Kong Airlines hopes to tap a potentially large market for customers who are able to spend more than the average economy fare for a better seat yet are unwilling to fork out the huge difference for typical premium travel. An average roundtrip Hong Kong-London business-class ticket on Cathay Pacific in April, at 51,370 Hong Kong dollars (US$6,586) each, costs more than seven times the average economy fare, according to its website. Hong Kong Airlines charges standard fares of HK$16,640 for each 'Club Classic' seat, and HK$33,640 for each 'Club Premier' flat-beds, which are more comparable to Cathay Pacific's business-class product. Nonetheless, reliability and connectivity remain key concerns for business travelers, with price playing just one part in the equation. Many corporate travelers with membership of mileage clubs won't easily switch to other carriers. "Many business travelers couldn't afford to use an airline (with limited schedules) no matter how cost-effective and comfortable the offering might be. So that favors the incumbents," said Martin Craigs, chief executive at Pacific Asia Travel Association, which represents airlines, hotels and other travel-related firms in the Asia-Pacific region. Mr. Craigs noted that some leisure travelers may accept exceptionally low pricing, but ultimately, they would "want convenience and peace of mind about schedule reliability." "Therefore, no matter what price you offer a flatbed at, people are still going to ask, am I here to get to my meeting the next morning?" from China Travel & Tourism News http://www.chinatraveltourismnews.com/

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