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One of two administrative regions of China, Hong Kong has experienced an advancing aviation industry for a number of years. Hong Kong's only civil airport is Hong Kong International Airport (HKG), a leading passenger gateway in Asia and one of the busiest airports in the world in terms of international passengers and cargo flights. With over 85 airlines, HKG is the hub for Cathay Pacific, Dragonair, Air Hong Kong, Hong Kong Airlines and Hong Kong Express. Although Hong Kong does not have a national airline, Cathay Pacific would be the closest to such. The Civil Aviation Department is the aviation authority in Hong Kong, responsible for providing air traffic control services as well as reporting to the Government.
Airports in Hong Kong
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HK Express, Hong Kong's only LCC, expects to add A321s to its all-A320 fleet, allowing it to grow, despite constraints on traffic rights and slots. HK Express in Oct-2015 will mark two years as an LCC. HK Express should carry over two million passengers in 2015, and end next year with 15-20 aircraft, including 5-10 A321s.
The carrier has cut over from Travel Sky to Navitaire, enabling connecting itineraries and stronger control over ancillary revenue products. Ancillary revenue accounts for approximately 15% of the airline's revenue, with HK Express CEO Andrew Cowen targeting 20%.
Initial connections between HK Express flights could grow to connecting to/from sister carrier Hong Kong Airlines, with later interlines to/from other carriers that want to use Hong Kong's hub position. HK Express moved into profitability in Dec-2014 and was profitable in the first quarter of 2015, projecting a full year of operational profitability in 2015.
The same pressures plaguing it US global network rivals Delta and United are also creating challenges for American Airlines in 2Q2015 as it is projecting a similar passenger unit revenue decline to United of 4% to 6%.
Similar to United, American recently refined its 2015 capacity targets by a half a percentage point as supply-demand imbalance has become a short-term mainstay in most of its markets. And like United, American believes 2Q2015 should be the low point for passenger unit revenue degradation in 2015.
For the moment US airlines are weathering unit revenue decline in part through lower fuel costs. But at some point energy expense will inevitably rise, and a rebound in unit revenues will be necessary to continue the industry’s sustained profitability.
China Eastern Airlines is taking the lead amongst the country's state-owned carriers in developing an LCC presence. This follows Beijing's embrace and active promotion of LCCs, which it sees as spearheading new growth and being in line with the country's increasing austerity and efficiency targets. China Eastern has converted its subsidiary China United Airlines, based at the smaller Beijing airport of Nanyuan.
China United only flies domestically, and mostly to secondary cities, but in Jan-2015 applied to regulator CAAC to expand its business licence to international services. China United is expected to be given the right to fly internationally from its Beijing home but also Shenzhen.
Shenzhen's international development has been stunted – possibly due to lobbying from Air China partner Cathay Pacific, which feeds on the Shenzhen market – and local carrier Shenzhen Airlines has a minimal international presence. Shenzhen Airlines is majority owned by Air China, meaning China United's international expansion could eventually challenge the Air China group at multiple levels. With time there will also be an impact to the Hong Kong market, although crossing the border is still far from seamless.
Finnair is raising the competitive stakes in using its Helsinki hub to offer the quickest connections between Europe and Asia and in 2015 will have about 10 flights a day to North and Southeast Asia. Before Finnair arrived in Asia in 1976, there was SAS, which commenced Asian flights in 1949 and held the title for all sorts of records and unique operations. But Finnair started to catch up, and it – not SAS – was the first to fly non-stop from Europe to China. A decade ago, Finnair had only a slight edge over SAS in Asia but now Finnair has three times the number of flights and four times as many seats as SAS in Asia.
Strong and active unions and an unwieldy ownership structure, together with an inefficient fleet, have hobbled SAS, but it is hoping to make some inroads in Asia, although opportunities will be limited. A new Stockholm-Hong Kong service opens in Sep-2015 while a nascent partnership with Etihad lays the groundwork for closer cooperation in the future and when Etihad commences services to Scandinavia. Emirates and Qatar already serve the region. SAS' Asian network is largely out of Copenhagen, and the airline probably would hope the Stockholm departure for Hong Kong will limit Finnair's poaching of Swedish traffic.
While Cathay Pacific hopes to remain in passenger views one of the world's best airlines, financially it appears to be settling in for a period of mere average performance. Its long-term cost growth remains ahead of passenger yield improvements while cargo yields are low. The situation could be worse – compared say with Singapore Airlines – but the outlook shows more challenges than opportunities. Yield declines are all but certain as transit traffic and near system-wide competition increases, especially in North America (where yields were down 4%). Europe was the only market for yield growth, but this may change with 2015's new routes and competitive growth. Staff productivity is at record lows and ongoing wage negotiations may limit damage rather than give a leap ahead in efficiency.
2014's group profit increased 20% to HKD3.2 billion (USD412 million) while the airline profit before tax figure increased only 1.4% to HKD2.4 billion (USD311 million). The group operating margin was 4.2%. Cathay reported a HKD911 million (USD117 million) hedging loss in 2014 with HKD12.5 billion (USD1.6 billion) in unrealised losses through 2018. Older aircraft retirements are in the final stage, limiting further cost savings, while receiving A350s and 777Xs ahead of competitors will provide a few years of cushion. Cathay is approaching fragility in a harsh industry where changes can be sudden and deep.
Air Canada is maintaining a reasonably positive outlook on demand in early 2015 across all geographies, with the exception of certain pockets of pressure including some areas in Western Canada where the energy sector is a significant economic driver.
The airline’s results in 2014 reflect its business adaption during the last couple of years of increasing its leisure passenger mix and long-haul flying, which pressure yields. But Air Canada stresses the incremental capacity driven by the longer stage lengths and change in passenger composition is low-cost incremental capacity that improves margins and profitability.
Air Canada largely proved the validity of that theory in CY2014 as operating margins and adjusted profits increased for the year. The airline is facing some cost pressure in CY2015 due the falling value of Canada’s currency against the USD, but believes its foreign denominated revenues create some hedge against some of its expenses paid in USD.