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HK Express plans for 50 aircraft in 2018 as it seeks all-new destinations for Hong Kong

Few low cost airlines have had route pickings as lucrative as those of HK Express. Although its hub airport of Hong Kong has significant slot restrictions and an underwhelming business reception to LCCs, there was significant pent-up demand. This was especially the case to markets in Northeast Asia, where LCC penetration remains lower than in Southeast Asia. HK Express' relaunch as an LCC in Oct-2013 fortuitously coincided with the depreciating Japanese yen and Korean won, further boosting outbound Hong Kong travel. In Feb-2016, 43% of HK Express' seats are to just three cities: Osaka, Seoul and Tokyo.

In Feb-2016 HK Express will operate 13 A320s but plans rapid growth to 50 by the end of 2018, effectively requiring the airline to take one aircraft every month for the next three years. HK Express plans to open four to six new markets in 2016, and at the end of the year will receive its first A320neo and A321ceo. Existing markets could expect additional capacity (frequency increase or replacing A320s with A321s). But as HK Express saturates core opportunities in existing markets, it will need to grow in the more classical LCC sense of stimulating demand in destinations largely new to Hong Kong. Already it plans to open new destinations around Southeast Asia (Laos, Myanmar) and the Pacific Islands (Guam, Saipan). Sister full service airline Hong Kong Airlines also plans to serve Saipan, highlighting the growing challenge of overlap between the two airlines, which do not have a defined dual brand strategy.

HK Express fleet to grow to 50 in 2018 including new A320neos and A321ceos

In Dec-2015 HK Express disclosed its intent to operate 50 aircraft by the end of 2018, up from 13 in Feb-2016. The announcement of 50 aircraft reflects additional growth in the short term but also a more complete growth plan for 2017/2018, which HK Express had only partial plans for. Although Hong Kong is slot-constrained, it is expected that additional slots will be made available. HK Express, Hong Kong Airlines and Cathay Pacific/Dragonair are all confident that their significant aircraft deliveries in coming years will be accommodated.

HK Express' fleet consists of A320ceos, and in 2016 the fleet is due to transition to a single engine type on the A320ceo, and then expand with A320neos and A321ceos. As CAPA last detailed of HK Express' growth plan:

At CAPA's Nov-2015 Asia Aviation Summit, Mr Cowen detailed the big strides the carrier has made in its fleet plan. HK Express operates 13 A320ceos with an average age of 4.6 years, according to CAPA's Fleet Database. In early 2015, HK Express expected to operate 15-20 aircraft in 2016, including 5-10 A321ceos. HK Express planned to return some of its A320s that were part of the launch fleet from Hong Kong Airlines and have different engines.

See related report: HK Express to grow to 15-20 aircraft in 2016, pursuing LCC hybridity with A321s and interlines

Mr Cowen said HK Express will take 12 A320neos and 10 A321ceos. The A320neos arrive in Aug-2016 and HK Express will take four in 2016, 2017 and 2018. "We've been able to take advantage of the emerging over-ordering of neos, which we thought would happen," Mr Cowen told CAPA TV. The A321ceos will be delivered from 2016 to 2018. These will seat 230 in an all economy configuration, 28% more than HK Express' typical 180 seat A320s.

The A321 strategy, as CAPA previously noted, is driven by a few components: slots shortages in Hong Kong and elsewhere (Phuket) andtraffic right restrictions (Tokyo Haneda) mean growth needs to occur through up-gauging rather than frequency growth. In some markets without such restrictions but perhaps limited demand, up-gauging could be more a conservative strategy than adding an additional frequency.

See related report: HK Express begins year 3 as LCC; a greater threat to Cathay than Jetstar Hong Kong would have been

LCCs account for 10% of seats at Hong Kong airport

Low cost airlines account for 10% of seats offered to/from Hong Kong in early Feb-2016, according to CAPA and OAG data. While this is a slight increase from recent years, it is still well below the multiples that have been a feature at Southeast Asian airports, reflecting a few reasons: Hong Kong and Northeast Asia's later adoption of the LCC trend, Hong Kong's limited support for LCC operations, protectionism that resulted in Jetstar Hong Kong being repeatedly delayed and then rejected, and finally local carrier Cathay Pacific not having a low cost subsidiary.

Of seats at Hong Kong, 78% are to Northeast and Southeast Asia. The balance are largely to long haul markets where LCCs are not nearly as present globally (and are not at all present in Hong Kong). Further, 36% of all seats at Hong Kong are to/from mainland China and Taiwan. Mainland China is still starting an LCC boom, and airlines there are largely focused on the domestic market. International/regional expansion has favoured other markets that are more popular with Chinese visitors and have resulted in local authorities giving greater access to LCCs than Hong Kong offered. Spring Airlines, for example, reduced its Hong Kong operation and is now rapidly growing in Osaka Kansai. Taiwan has two LCCs – Tigerair Taiwan and V Air – and they are expected to be interested in the Hong Kong market, but there are no bilateral allocations for them.

LCC capacity share (%) of total seats: 2007 to 2016 Jan-Feb*

Another qualification is that the 10% of capacity figure for LCCs is for Hong Kong on average. Certain markets experience significantly higher penetration rates. Hong Kong-Tokyo saw LCCs make up 20% of seat capacity in Mar-2015, up from zero a mere 18 months prior. Hong Kong-Seoul grew to 21%.

See related reports:

LCC growth at Hong Kong has largely occurred due to HK Express, directly (its own growth) and indirectly (competitors responding to HK Express' growth). HK Express accounts for 36% of LCC seat capacity at Hong Kong. This is a lower share than what might be expected for a home LCC airline. HK Express' share should significantly increase as its growth over the next few years far outpaces that of foreign LCCs.

Hong Kong LCC seat capacity share by airline: 1-Feb-2016 to 7-Feb-2016

HK Express to open four to six new destinations in 2016. Thinner markets will need to be a focus

At the Jan-2016 announcement of the U-FLY Alliance, HK Express said that it planned to open four to six new destinations in 2016. In mid/late 2015 HK Express announced five destinations for 2015, including two in Myanmar (Mandalay and Yangon), one in Laos (Vientiane) and two in the Pacific Islands (Guam and Saipan).

This destination growth – and others that will follow – reflect HK Express seeking smaller markets, either underdeveloped from Hong Kong or not served from Hong Kong. The general growth of HK Express and Hong Kong Airlines, as well as HK Express' relaunch as an LCC, have meant that the two serve most key destinations from Hong Kong.

Below is a table of the 30 largest cities within 2,200 miles of Hong Kong. This distance is not an exact measurement of HK Express' potential opportunity, but is broadly close. Hong Kong-Sapporo, for example, is under 2,200 miles but HK Express cannot operate it due to strong westbound winds. (Full service sister Hong Kong Airlines does operate to Sapporo.) Guam and Saipan are approximately the same distance from Hong Kong as Sapporo, but HK Express believes it can operate to those two island destinations without the operational constraints that Sapporo faces.

Of the 30 destinations, HK Express and Hong Kong Airlines serve all but seven. Some destinations (such as Manila) may not have slots available for either airline, or may have too much competition to make the market attractive (such as Singapore). There could be opportunities within these seven destinations for growth but both airlines will need to reach deeper. For HK Express this means the classical LCC growth by developing new markets. These will be thinner and require more resources to grow. In comparison, HK Express points like Osaka, Seoul and Tokyo – which account for 43% of HK Express' seats – largely sell themselves.

HK Express' and Hong Kong Airlines' presence on the 30 largest cities (ranked on available seat capacity) within 2,200 miles of Hong Kong (unserved cities in bold): 01-Feb-2016 to 07-Feb-2016

Rank City Weekly Seats HK Express/Hong Kong Airlines presence
1 Taipei 82,658 Hong Kong Airlines
2 Bangkok 57,908 Hong Kong Airlines
3 Shanghai 54,963 Hong Kong Airlines
4 Singapore 44,503 neither
5 Seoul 38,922 HK Express
6 Tokyo 35,576 HK Express
7 Beijing 35,188 Hong Kong Airlines
8 Manila 32,007 neither
9 Osaka 22,824 HK Express
10 Kaohsiung 20,017 neither
11 Kuala Lumpur 17,231 neither
12 Denpasar-Bali 12,442 Hong Kong Airlines
13 Jakarta 12,381 neither
14 Hangzhou 10,387 Hong Kong Airlines
15 Phuket 9,370 HK Express
16 Taichung 9,130 HK Express
17 Xiamen 8,948 neither
18 Ho Chi Minh City 8,112 Hong Kong Airlines
19 Chengdu 7,855 Hong Kong Airlines
20 Sapporo 7,671 Hong Kong Airlines
21 Nanjing 7,380 Hong Kong Airlines
22 Fuzhou 7,249 Hong Kong Airlines
23 Nagoya 6,220 HK Express
24 Okinawa 6,009 HK Express
25 Busan 4,969 HK Express
26 Hanoi 4,901 Hong Kong Airlines
27 Chongqing 4,410 Hong Kong Airlines
28 Fukuoka 4,287 HK Express
29 Chiang Mai 4,176 HK Express
30 Wuhan 4,117 neither

Myanmar expansion postponed due to regulatory delays

In mid/late-2015 HK Express announced its intention to open service to two points in Myanmar – Mandalay and Yangon – in early 2016. Dragonair and Myanmar National Airlines serve Yangon-Hong Kong but do not serve Mandalay-Hong Kong. Yangon is the primary international gateway to Myanmar, and nearly a dozen airlines launched service to Yangon during the reform a few years ago. Mandalay however is smaller, with international airlines comprising only Bangkok Airways, Thai AirAsia, China Eastern and Silk Air. Myanmar National Airlines has a very limited international presence at Mandalay.

Myanmar service has now been postponed to late 2016. HK Express disclosed the cause as regulatory delays, which pushed HK Express out of the ideal window to launch service. Myanmar's tourism market is highly seasonal, with a distinct spike over northern winter when it is cooler. As regulatory delays saw HK Express anticipating an off-peak launch, HK Express logically decided to wait until the start of the next peak.

Myanmar monthly tourism arrivals: Aug-2015 to Jul-2015

HK Express did not specify its regulatory problem. However, its approval process coincided with Myanmar's national Nov-2015 election and subsequent change of government. This could have impacted procedural times. The delay gave a head start to Myanmar National Airlines, which entered the Yangon-Hong Kong market in Dec-2015 with three weekly flights.

As testament to the opaque Hong Kong operating environment that HK Express feels that it combats, Myanmar National Airlines was able to secure lucrative daytime slots and a hardstand gate at Hong Kong. Most other new narrowbody flights at Hong Kong have had to use remote stands.

Hong Kong International Airport to Yangon Mingaladon Airport (seats per week, one way): 7-Jan-2013 to 17-Jul-2016

Although the competitive situation with Myanmar national is not ideal, HK Express is not overtly concerned about its competitor. HK Express considers itself as having a local advantage, with an established brand. HK Express will also be able to offer Hong Kong's market the opportunity to fly into one city and out of another, rather than backtrack. Further, HK Express expects to carry some transfer traffic between Myanmar and other Northeast Asia markets (mainly Japan and Korea). HK Express' connecting traffic share is in the single digits, largely a reflection of it having a network heavily tilted towards Northeast Asia (accounting for 82% of available seats), reducing Northeast Asia-Southeast Asia connecting opportunities. Connections are an area HK Express is planning to grow without sacrificing scheduling and utilisation. There could be some reinforcement of connections as part of HK Express' U-FLY alliance, but it is very early days for the alliance.

See related report: HNA Group: four airlines form U-FLY Alliance, world's first LCC grouping, showing HNA consolidation

HK Express seat capacity by region: 1-Feb-2016 to 7-Feb-2016

HK Express also plans expansion to Luang Prabang in Laos

HK Express also announced its intention to open service to Luang Prabang in Laos. As with Myanmar, a launch and fares have not been filed, but unlike with Myanmar there has been no disclosure of any delay. HK Express' service will have the first service of any airline between Hong Kong and Laos. 

Of international seats in Laos, 70% are to/from Southeast Asia. Existing Northeast Asian services are to Korea (17% of all international seats) and mainland China (13%). Mainland Chinese services include a three-weekly Lao Airlines flight to Guangzhou, a city that has some overlap with Hong Kong for catchment area.

Vientiane does not offer the same range and size of options as Bangkok, a popular quick getaway for the Hong Kong market (and likewise in reverse for Bangkok residents visiting Hong Kong). Vientiane, however, is still underserved and could become a popular market - it is closer to Hong Kong than Bangkok; it is lower cost than Bangkok; it has a greater range of nature-oriented activities and is new to the Hong Kong market. Previously connections from Hong Kong to Laos were highly circuitous. HK Express, however, will need to build awareness of Laos.

Laos to North East Asia (seats per week, one way): 19-Sep-2011 to 17-Jul-2016

Pacific Island growth for HK Express to Guam and Saipan

Guam and Saipan's largest markets are mostly to Japan and Korea. Saipan's second largest market is mainland China (largely owing to visas on arrival, an easier immigration formality for Chinese than in other markets). Mainland Chinese capacity to Saipan is larger than to Guam; most other markets have more capacity to Guam than Saipan.

There is no service between Saipan and Hong Kong, but between Guam and Hong Kong United Airlines offers four weekly flights as part of its micronesia network. United's flights are often expensive and do not need to be promoted; there is opportunity for HK Express to stimulate the market, but again with a need to build awareness. 

Guam seat capacity by market: 1-Feb-2016 to 7-Feb-2016

Saipan seat capacity by market: 1-Feb-2016 to 7-Feb-2016

Hong Kong Airlines also plans Saipan service, highlighting dual brand challenge

HK Express' announcement to serve Saipan was awkwardly followed by Hong Kong Airlines' application to US authorities to open Hong Kong-Saipan service in 2Q2016 with four weekly A330 flights. The US application, which is part of the involved process to operate to the US, appears to indicate Hong Kong Airlines is further along than HK Express in its plan to serve Saipan. HK Express flagged Guam and Saipan for an unspecified time in northern summer 2016. Hong Kong Airlines still appears intent on serving Saipan.

However, there is industry speculation that Hong Kong Airlines may not want to serve Saipan, but approval by US authorities would allow Hong Kong Airlines to serve any point in the US. This would allow Hong Kong Airlines to launch trans-Pacific services to the continental US on a shorter time frame than if it had to start with an all new application. This would not give competitors as much notice of Hong Kong Airlines' exact plans for trans-pacific service. Hong Kong Airlines intends to serve the continental US with A350s, although there are questions about how many destinations could be reached with the A350-900's range. Hong Kong Airlines' long haul network commenced with charter service to Australia's Cairns and Gold Coast, which has been converted to regular, year-round service.

See related report: Hong Kong Airlines expands its regional network ahead of long haul growth to Australia, N America

Hong Kong Airlines' application for Saipan includes the Saipan service and also requests approval for general US service, i.e. all points. The application says: "Hong Kong Airlines seeks authority to engage in scheduled foreign air transportation of persons, property and mail from Hong Kong, via intermediate points, to points in the United States and beyond, to the full extent permitted by the U.S. - Hong Kong Air Services Agreement".

HK Express and Hong Kong Airlines do not overlap on any market and Saipan is the closest they have (publicly) come to overlapping. Whatever the outcome or intent on Saipan, HK Express and Hong Kong Airlines will need to confront their lack of coordination. Some existing markets of each airline could be better served by the other, while closer integration will help as both grow and seek connections. Hong Kong Airlines will particularly need help with regional Asian transfers for its long-haul operation.

HK Express' growth to Southeast Asia and Pacific Island markets could also be a beneficial connecting opportunity for Hong Kong Airlines' core mainland China source market. Northeast Asia – mainly in the form of flights to Japan and Korea – was an easy and profitable win for HK Express. It has been overexposed on Northeast Asia, which showed some impact during the brief MERS upset in Jun/Jul-2015. Although it is welcome for HK Express to diversify its network away from Northeast Asia, growth will not be as easy as it has been – relatively speaking (slots and other challenges have been significant hurdles). Implementing a dual brand strategy could be even more challenging, but necessary.

There is major competition for HK Express and Hong Kong Airlines to deal with. They do not need to fight against each other.

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