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Cathay’s Budget Conversion Won’t Mean Cheap Tickets

David Fickling
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Cathay’s Budget Conversion Won’t Mean Cheap Tickets

(Bloomberg Opinion) -- Budget aviation ain’t what it used to be.

Passengers on Easyjet Plc aircraft can book fares that let them change flight times at no extra cost. Those on Singapore Airlines Ltd.’s Scoot and JetBlue Airways Corp. can pay for business-class seats, and people flying Juneyao Airlines Co. can collect frequent flier points and spend them on flights with Star Alliance members such as Lufthansa AG. These days, no-frills carriers often seem to have as many frills as their upmarket counterparts.

That’s reason for Hong Kongers to temper any excitement about Cathay Pacific Airways Ltd. giving up its longstanding opposition to discount aviation. Cathay will pay HK$4.93 billion ($628 million) to buy Hong Kong Express Airways Ltd. from debt-strapped HNA Group Co., the carrier said Wednesday, giving it control of the territory’s sole low-cost airline.

Those hoping to see the sorts of peppercorn-priced tickets that India’s SpiceJet Ltd. and Ireland’s Ryanair Holdings Plc like to offer are likely to be disappointed. It’s much more likely that Cathay is trying to protect its existing patch than becoming a born-again no-frills carrier.

If you’ve ever had that experience of going to book a flight on a low-cost airline and finding the prices aren’t all that low-cost, you’re not alone.

Indeed, there’s a substantial group of nominally budget carriers that have much more in common with full-service airlines. Per available seat kilometer, the grandaddy of discount aviation Southwest Airlines Co. makes more passenger revenue than Air France-KLM and International Consolidated Airlines Group SA.

It also gets a lower share of revenue from ancillary services like fees and in-flight meals than Delta Air Lines Inc., according to Oliver Wyman. On top of that, it takes a cautious approach to expanding capacity that resembles legacy carriers such as Delta and American Airlines Group Inc. than true, ultra-low-cost airlines, the consultant says.

This blurring of the boundaries between discount and full-service aviation is hardly surprising. For all that the likes of Ryanair Chief Executive Officer Michael O’Leary like to fetishize their spartan approach to customer service, most of the savings for budget carriers come from having simple fleets flying short routes that maximize aircraft utilization and minimize crew costs. Unlike wild proposals like charging passengers to use the toilet, these are savings that can easily be carried across to large parts of a full-service network.

That’s the logical place for Cathay to position Hong Kong Express. As regional peers Qantas Airways Ltd., Singapore Airlines and ANA Holdings Inc. have learned, having a low-cost carrier in your stable can be an effective strategy. By keeping the business in-house, you can ensure that it doesn’t cannibalize your mainline carrier, restricting it to more leisure-oriented routes and times of day.

Having a discount airline with the cost-base to match also provides some ammunition in the event that truly no-frills carriers like AirAsia Group Bhd., Cebu Air Inc. and Spring Airlines Co. move aggressively onto your patch. It’s a lot easier for Cathay Pacific to win a price war using Hong Kong Express’s fleet of Airbus SE A320s and bare-bones services than on its own more premium metal.

Ultimately, this deal will serve only to consolidate Chief Executive Officer Rupert Hogg’s control over Cathay’s home market, especially as HNA’s other local unit, Hong Kong Airlines, shrinks its fleet and network and pulls out of long-haul markets such as Australia and New Zealand.

The low-cost typhoon may still be blowing through the global aviation industry, but Cathay Pacific is hoping Hong Kong can still remain a sheltered harbor.

To contact the author of this story: David Fickling at dfickling@bloomberg.net

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

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