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Hong Kong Express sets 27-Oct-2013 for LCC launch, but strategy details still to be refined

25-Sep-2013

The low-cost carrier focus in Hong Kong is firmly on Jetstar Hong Kong's effort to secure a licence, but much more quietly Hong Kong Express is preparing to re-launch as a LCC on 27-Oct-2013. Hong Kong Express will become Hong Kong's first LCC, and nearly two years after Hong Kong Express first mooted adopting the LCC model.

Its initial network will comprise mainland Chinese as well as Northeast and Southeast Asian destinations, a medley of new cities, previously served ones and actively served ones. Competition will range from light to heavy as it faces formidable full-service and low-cost carriers. Hong Kong Express plans to fly 1.5 million passengers in its first year and have a fleet of 30 A320s by 2018.

Hong Kong Express is clearly not an AirAsia or Jetstar. Its ancillary offering is light and other structural differences, like IT, will make it less robust. This is partially to be expected as it does not have an experienced LCC group to piggyback on, but its launch has hints of being under-whelming compared to what Peach or Scoot achieved.

 

Going forward this will be a challenge as Hong Kong Express looks to make up for lost time and keep other LCCs at bay. Yet its largest challenge may be beyond its control as owner Hong Kong Airlines unleashes a LCC as part of a dual-brand strategy that is accompanied with a weak premium carrier, Hong Kong Airlines, that could suffer as Hong Kong Express gains ground. Ultimately, Hong Kong Express' success as a LCC could give reason for the dual-brand strategy to be dropped in favour of an all-low-cost operation.

New, old and transferred routes to comprise Hong Kong Express network

Hong Kong Express has so far identified seven cities that will initially comprise its route network: Chiang Mai, Kota Kinabalu, Kunming, Osaka Kansai, Phuket, Taichung and Tokyo Haneda. Kota Kinabalu, Kunming and Taichung are existing destinations while Phuket is an existing Hong Kong Airlines destination that will be transferred to Hong Kong Express and placed under the LCC model, so passengers will be charged for checked baggage and meals. The airline is making arrangements for passengers who booked prior to Hong Kong Express taking over the destination. Chiang Mai is a new destination, although it was launched in Sep-2013 prior to Hong Kong Express' official re-launch as a LCC.

Osaka Kansai launches 21-Nov-2013 and Tokyo Haneda on 07-Nov-2013. Hong Kong Express has loaded a Penang service in the GDS but has not yet publicly announced this destination.

Hong Kong Express competition summary: week of 28-Oct-2013*  as of 23-Sep-2013

Hong Kong Express destination Frequency Existing/New Route Competition
Chiang Mai 7x weekly New (launched Sep-2013) Dragonair 5x weekly (3x A320, 2x A330)
Kota Kinabalu 7x weekly Existing

AirAsia 14x weekly (A320)

Dragonair 7x weekly (A320)

Malaysia Airlines 7x weekly (737-800)

Kunming 7x weekly Existing

China Eastern 7x weekly (737)

Dragonair 7x weekly (3x A330, 4x A320)

Osaka Kansai 7x weekly New

Air India 3x weekly (777-200)

ANA 7x weekly (767-300)

Cathay Pacific 21x weekly (8x A330, 7x 747-400, 6x 777-300)

Peach 10x weekly (A320)

Penang 7x weekly New  Cathay Pacific 10x weekly (5x 777-300, 3x 747-400, 2x A330)
Phuket 14x weekly Transferred from Hong Kong Airlines

Dragonair 13 weekly (8x A321, 5x A320)

Thai AirAsia 7x weekly (A320)

Thai Airways 7x weekly (A330)

Taichung 14x weekly Existing 

Dragonair 14x weekly (13x A320, 1x A321)

Mandarin Airlines 21x weekly (14x 737-800, 7x E190)

Tokyo Haneda 7x weekly New

ANA 7x weekly (777-200)

Cathay Pacific (14x weekly (7x 747-400, 7x 777-300)

JAL 7x weekly (777-200)

All routes will see competition with the Cathay Pacific Group, including Cathay and wholly-owned regional subsidiary Dragonair. Only three routes (Kota Kinabalu, Osaka Kansai and Phuket) have an existing LCC operator. In all markets Hong Kong Express will, initially at least, have a minority of capacity. Cathay has already responded to Hong Kong Express by boosting capacity to Chiang Mai.

Hong Kong International Airport to Chiang Mai International Airport (seats per week, one way): 25-Jun-2012 to 16-Mar-2014

As part of the change to being a LCC, Hong Kong Express will transfer some current routes to Hong Kong Airlines to be served under the full-service banner. 

Hong Kong Express public route map: from Oct-2013 as of 23-Sep-2013

Osaka and Tokyo added back to the group but mainland China de-emphasised, for now at least

This network slightly differs from that stated by Hong Kong Express in Jun-2013 when announcing it was adopting the LCC model. At the time it emphasised mainland China destinations, including Chongqing, but has removed that to focus on Northeast and Southeast Asian destinations. Chongqing also sees very limited leisure traffic from Hong Kong. Hong Kong Express' initial focus remains on point-to-point routes.

See related report: Hong Kong Airlines embarks on dual-brand strategy with Hong Kong Express to become LCC

Amongst the new destinations, the Japanese ones are particularly notable. Osaka was previously served by Hong Kong Express and Tokyo by Hong Kong Airlines (although the service was interchangeable) but both cancelled partially due to a China-Japan territorial dispute seeing traffic drop. Hong Kong Airlines served Tokyo from Narita whereas Express will serve Tokyo from Haneda. Hong Kong Airlines also had daylight flights to/from Tokyo but Hong Kong Express will have overnight services from Tokyo back to Hong Kong. This will help improve utilisation and reduce unit costs. This will be one of the few overnight services initially offered by Hong Kong Express. The overnight service from Tokyo dictates that Hong Kong Express use Haneda, which is open 24 hours whereas Narita closes at 2300. Osaka Kansai is open 24 hours, but Hong Kong Express will have a daylight service to/from Osaka.

Peach is ramping up Osaka-Hong Kong to a double daily service while Tokyo-Hong Kong is likely a contender once Jetstar Japan commences international operations in mid/late 2014. Or Jetstar Hong Kong could serve the route in lieu of Jetstar Japan. A few of the Hong Kong Express management consultants worked on the Peach launch and so would be familiar with the un-tapped potential of the Japan-Hong Kong market, where yields run high.

Hong Kong Express offers no USD0 lead-in fares, but still low fares for the market

Hong Kong Express in Sep-2013 announced its first sale as a LCC. There were no USD0 fares or other almost-zero fares as might be found at other LCCs. But this is partially the result of Hong Kong being captive to high fares, so only a smaller discount is needed to generate buzz and bookings. The fares offered were still low by any standards. Fares, as to be expected, were partially based on distance (Japan was more expensive than Thailand) but also demand as competitive Kota Kinabalu was priced lower than Chiang Mai (with only one other operator) despite Chiang Mai being closer to Hong Kong than Kota Kinabalu.

Hong Kong Express fares (return from Hong Kong excluding taxes and surcharges): 23-Sep-2013

Hong Kong Express destination Hong Kong Express lead-in fare Hong Kong Express regular fare, 23-Sep-2013 for Nov-2013 travel Other lowest fare in market, 23-Sep-2013 for Nov-2013 travel
Chiang Mai USD68  USD138  USD322 (Dragonair)
Kota Kinabalu USD29 USD54

USD201 (AirAsia) 

Kunming USD38  USD72  USD167 (China Eastern) 
Osaka Kansai USD92 USD180  USD266 (Peach)
Phuket USD47 USD90   USD338 (Dragonair)
Taichung USD41  USD77   USD161 (Dragonair)
Tokyo Haneda USD98  USD191  USD547 (ANA)

Hong Kong Express maintains a lead over publicly available fares. Even when Dragonair released very limited super "fanfare" tickets to Chiang Mai, they were USD153, USD15 more than Hong Kong Express, albeit with catering and luggage but on limited dates and in limited quantity. This indicates Hong Kong Express will be able to retain pricing traction on public fares, but in Hong Kong most fares are sold through consolidators, with whom Cathay has a strong relationship. This can either see Cathay release cheap fares to Hong Kong Express destinations or pressure partners not to sell Hong Kong Express tickets. Web distribution in Hong Kong is low despite the prevalence of mobile devices and some of the world's fastest internet speeds.  

Some weak elements as aircraft seat only 174 with limited ancillaries offered

Hong Kong Express is being brave, entering the big boy territory filled with the likes of Cathay Pacific and AirAsia despite Hong Kong Express having a weak offering initially. While Hong Kong Express' A320 aircraft will be more dense with 174 seats (albeit more than Dragonair), this is less than the 180 maximum used by AirAsia and Peach, amongst others. Hong Kong Express' website in Sep-2013 sells checked luggage as its sole ancillary revenue stream. There is not yet an option to pre-purchase meals, seat assignments, in-flight entertainment, miscellaneous goods or even partner plug-ins to purchase activities, hotels and car rentals. And so far checked luggage seems to be a flat rate rather than dynamically priced based on distance and other factors, although this is still somewhat new to some airlines.

Weakness is partially to be expected as Hong Kong Express is a new LCC encumbered by having to switch over systems rather than start from scratch. But looking at some of the recently launched LCCs unaffiliated with a LCC parent offers a contrast. Peach and Scoot offered greater services from their first day of sales than Hong Kong Express. A new AirAsia or Jetstar subsidiary from day one could tap into the parent's experience, product and infrastructure to offer a much more robust proposition from the start.

And as an AirAsia or Jetstar-affiliated LCC grew, it would likely have the entrepreneurial mindset to come up with new ancillary streams and other tactics to boost the business. Both Peach and Scoot have also demonstrated this. Scoot as well as AirAsia and Jetstar affiliates are helped by their selection of Navitaire, used by many of the world's LCCs. While Hong Kong Express could look to have a better IT infrastructure, this would require a cutover and additional time.

Hong Kong Express has some measure to go to prove it has shaken its legacy HNA Group heritage and can be a robust player. There is much potential for Hong Kong Express and it is early days, but so far the result is underwhelming.

This partially underscores why Hong Kong Express has objected to Jetstar Hong Kong's application: Jetstar would bring not just competition in terms of routes, but smartness and agility Hong Kong Express could not match for some time at least. And Cathay Pacific is partially pleased with Hong Kong Express, as the latter's mere existence allows Cathay to argue Hong Kong already has a LCC and so does not need Jetstar, which would prove a much larger competitive threat. Going forward, Hong Kong Express is the lesser of two evils to Cathay.

Isolating Hong Kong Express from Hong Kong Airlines limits city-pairs, demand

Where Hong Kong Airlines and Hong Kong Express were once interchangeable and the distinction puzzling to many, the new dual-brand strategy of the group calls for Hong Kong Airlines to serve full-service markets and Hong Kong Express low-cost ones. But this strategy still has to prove itself. So far Hong Kong Express and Hong Kong Airlines will not operate alongside each other the way Scoot and SIA both operate to Taipei or Jetstar and Qantas both fly Melbourne-Sydney. This so far means Hong Kong Express cannot capture the low-cost market to popular tourist points like Bangkok and Taipei. Jetstar Hong Kong will not have such constraints and will target key destinations, bilaterals and its own approval permitting. 

Not serving popular cities will stunt Hong Kong Express' potential, further exacerbated by Hong Kong Express and Hong Kong Airlines so far not selling each other's tickets on their websites. So a passenger for example cannot book a ticket flying into Bangkok and out of Chiang Mai since Bangkok is served by Hong Kong Airlines and Chiang Mai by Hong Kong Express. (Hong Kong Airlines/Express do offer one-way fares, but at a premium, unlike AirAsia or Jetstar, which generally price round-trips as two one-ways.)

This becomes more problematic when considering mainland China. There are large transfer traffic volumes, which Hong Kong Airlines and Express already see, but isolating Hong Kong Express and Hong Kong Airlines from each other will limit their available city-pairs and thus passengers they can take. So a passenger from Beijing (served by Hong Kong Airlines) could not transfer to Kota Kinabalu (served by Hong Kong Express).

Hong Kong Express does plan to eventually offer a transfer service with Hong Kong Airlines, other HNA Group carriers and non-HNA airlines (no timeframe is given). But HK Airlines-HK Express transfers will likely represent significant amounts of traffic and be confusing to passengers as one flight will be full-service and another low-cost despite the flight times being similar and airline names almost identical. (Hong Kong Express has mooted it could re-brand later.)

For Hong Kong Express to succeed, Hong Kong Airlines must move up-market

Hong Kong Express will have limited achievements by serving secondary points or accessing primary points only by a codeshare or interline with Hong Kong Airlines. Keeping that strategy largely relegates Hong Kong Express to being a leisure, low-yielding off-shot of Hong Kong Airlines. That could see accomplishments, but none on the order of what LCCs in other markets have achieved when given freedom. For Hong Kong Express to reach its potential, it will have to serve key destinations. Allowing Hong Kong Express to serve Hong Kong Airlines' destinations could also bring greater profit to the group than if Hong Kong Airlines served the destination exclusively. Hong Kong Airlines may be forced to give Hong Kong Express more markets as other LCCs enter; Bangkok-Hong Kong will surely be an attractive route for the new carriers starting in Thailand.

See related reports:

But for Hong Kong Express to operate successfully alongside Hong Kong Airlines, Hong Kong Airlines must move up-market. Hong Kong Express will cover the low-cost segment, leaving Hong Kong Airlines to capture higher-yielding traffic. But Hong Kong Airlines has so far not cultivated an image of being a premium, full-service carrier. It has put in product investments, briefly eclipsing Dragonair until Dragonair finally revamped its own product. Hong Kong Airlines' lack of recognition is largely due to insufficient marketing, characteristic of mainland Chinese carriers in foreign markets.

Without higher-yielding traffic, Hong Kong Airlines will depend on the leisure, very price-sensitive segment that Hong Kong Express will better capture. That will result in Hong Kong Express succeeding partially at the expense of Hong Kong Airlines rather than the two having their main target segment albeit with some overlap. History has not been kind to LCC off-shoots that have cannibalised the full-service parent's traffic: Delta folded Delta Express and Song; British Airways broke off from Go; and United folded Shuttle by United as well as Ted, to name a few examples. The risk is Hong Kong Express becoming divisive within the group rather than as an effective tool to make the group more competitive.

Dual-brand strategy may not be right for Hong Kong Airlines/Express

Hong Kong Airlines' dual-brand strategy comes as it is increasingly against the grain to have a full-service model on short-haul services. Full-service short-haul is effectively dead in Europe and North America. In Asia, Thai Airways is experimenting with hybrid Thai Smile. Other carriers are able to sustain full-service short-haul units due to their premium brand and long-haul transfer traffic – but Hong Kong Airlines has neither. Long-haul services are on the cards for the future, but that alone does not justify full-service short-haul services. Even airlines that have full-service short-haul networks see routes that are unprofitable.

See related report: Thai Airways uses Thai Smile to expand in China and Laos but domestic focus remains 

Hong Kong Airlines would still need to move its brand up-market, raising the question if it is more pragmatic to take costs out of the business or invest heavily to move up-market in a competitive space. The real question, however, may be if Hong Kong Airlines and its owners are willing to shed their ambition to be full-service and instead follow what will make them sustainable and allow for growth. Hong Kong Airlines is not alone in Asia in facing this question. Indeed, heavyweights in Europe with fleets much larger and histories much longer are still coming to terms with this. Low-cost may not be sexy, but there is no pride in losing money. And Hong Kong Airlines is not known for posting profits.

In the short term, a dual brand strategy will likely be very complex for Hong Kong Airlines to manage and succeed at. Any success will come with notable confusion from passengers. In the long-term, a dual-brand strategy will still have to prove itself, especially as the full-service short-haul concept loses favour. Asia's growth is young and there are opportunities for an airline to find a new permutation that works, but the bet is not on Hong Kong Airlines being the one to pull the rabbit out of the magician's hat. There is no need to impress when there are already suitable examples out there and aviation is complex enough.

An intriguing scenario is converting the entire group to a highly hybrid carrier that can carry the group's limited premium passengers as well as economy passengers. AirAsia X, Cebu Pacific and Scoot are showing success with regional operations on highly dense widebodies (parts of Scoot's network are profitable). Aircraft re-configurations do cost considerable sums, and the challenge is as much the money as the fact that the outcome – low-cost service – may not be liked even if it is backed by business analysis. But again, human capital will be wanting. Few have succeeded with a hybrid operation.

Merely having this discussion reflects the tremendous positive change that has already occurred at Hong Kong Airlines. Lessons have been learnt from the all-premium London service and the group is boldly exploring the low-cost segment with a LCC. Unlike the London service, there is a clear and positive future for Hong Kong Express. Network and ancillaries need to develop, but these will surely eventually occur. The LCC will be intrinsically tied to Hong Kong Airlines, so if it fails it will more likely be the result of Hong Kong Airlines than any matter under the control of Hong Kong Express. The best case outcome is Hong Kong Express representing not just the start of a new division, but the start of the rest of the Hong Kong Airlines Group's future.


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