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Qantas' Hong Kong capacity increase underscores city's importance to pan-Asian strategies

Qantas will increase capacity from Jan-2012 on its Sydney-Hong Kong service despite the route soon losing traffic as onward passengers to London are forced to transit through Singapore after the Hong Kong-London service ends in Mar-2012. The increase shows the emerging relevance Hong Kong, and its access to mainland China, has to Australia as Cathay Pacific increases competition and Hong Kong Airlines looks to enter the market. Hong Kong also has strategic relevance as a low-cost carrier hub for Jetstar or any other pan-Asian airline – if local incumbent Cathay Pacific loses its fight to keep LCCs out from its home turf.

Even with Qantas A380 up-gauging, Australia-Hong Kong capacity decreasing

From mid-2012 Qantas will up-gauge four weekly Sydney-Hong Kong services from B747-400 to A380 equipment, adding 288 weekly seats. But in Mar-2012 Qantas will end its daily B747-400 Hong Kong-London service as part of its international restructure. The Melbourne-Hong Kong service, which operates onward to London, will be taken over by an A330-300, resulting in a weekly decrease of 567 seats. After the changes take affect, there will be a net reduction of 279 weekly seats from the current period on Qantas' Sydney and Melbourne routes to Hong Kong.

That reduction is small considering most traffic on the Hong Kong-London service – 2,646 weekly seats – originates in Australia (Qantas has fifth freedom rights on the route). While Qantas joint service agreement partner British Airways operates between Hong Kong and London, Qantas does not presently sell capacity on BA's Hong Kong-London services.

Boom town

The Australia-Hong Kong market is increasingly becoming under pressure as Hong Kong's value as a jumping base to mainland China becomes evident. Already Cathay Pacific's traffic has recovered from global financial crisis levels whereas Singapore Airlines, the other big Asian network carrier, has not seen a full recovery.

Qantas could be looking to cement its position: Cathay made Sydney the first destination for its new business class product. (Although the two are in the oneworld alliance, they are competitors. Qantas on 10-Nov-2011 launched AUD760 promotional fares for the A380's deployment to Hong Kong. Cathay responded on 11-Nov-2011 with AUD750 fares.)

Qantas could also be looking to ensure no void is left in the market as Hong Kong Airlines plans to start a Hong Kong-Sydney service in the near future, although faces traffic right delays. Virgin Atlantic, the third and final operator on the market, could potentially increase its frequency, but sooner than that is expected to unveil a new premium product.

In Aug-2011 Qantas had been evaluating where to deploy additional A380 capacity for the forthcoming entry into service of two new A380s and the damaged A380 in Singapore from the Nov-2010 QF32 incident returning to service. It was zeroing in on capacity to Los Angeles, which has leveled out following the 2009 influx of services and now returning appropriate yields. But deployment to Los Angeles would involve a ground wait in excess of 14 hours, decreasing aircraft utilisation. The Sydney-Hong Kong flight in comparison has a layover of two hours.

In Hong Kong Airlines, a competitor but also a suitor

Fending off Hong Kong Airlines' entry into the Australian market is complex. Qantas wants to work with Hong Kong Airlines sister carrier and part-owner Hainan Airlines, based in mainland China. Qantas is understood to want to bring Hainan into its oneworld alliance, a proposition that would not resonate well with Cathay, whose network and business strategy overlaps with Hainan. Cathay, however, takes a hands-off approach to alliances and limits its partnerships with other airlines. Driving that is that any help Cathay gives with mainland China will likely come at its own expense. Hainan, which is developing its network, needs network traffic partnerships.

Hong Kong Airlines is also relevant as being a possible local owner of a Hong Kong-based low-cost carrier started in partnership with Qantas' Jetstar or any of the LCCs pursuing a pan-Asian strategy. Tapping into Chinese growth is critical, but given the ambiguous government policies in mainland China, airlines have so far found it to their advantage to access the market from outside. This proposition would also not resonate with Cathay, which has no intention to launch a LCC but would see market shares decline if a LCC entered. Cathay, with its connections to the government, would work vigorously to keep a LCC out of Hong Kong by having the proposed carrier's ownership scrupulously checked to ensure a board in Hong Kong – not Australia or Singapore – was calling the shots. Given the loose ownership arrangements with some carriers, it would be a valid undertaking.

The message from Qantas about Hong Kong is to batten down the hatches while seeing if there is someone to hold hands with.