Size matters in the air

Courtesy Getty Images

Ryanair chief Michael O’Leary predicted that “within the next four to five years you are seeing the emergence of four or five large European airline groups.” He even named the airlines, Ryanair among them in a mix of full-service and low-cost operators: Lufthansa, IAG (International Airlines Group which owns British Airways, Iberia, Aer Lingus, Vueling and Level), Air France-KLM and, probably, Easyjet.

This sentiment has been opined before by others at a time when mergers, assimilations and acquisitions across the industry were trending as competition broke barriers of entry and intensified, and so-called safe niche markets became every player’s game.

Air France-KLM as the name suggests is a merger of the two European airlines in 2004. Rival British Airways (BA) viewed it as a step in the expected direction, predicting further consolidation within Europe. And in 2011 IAG came into being when BA and Iberia merged. BA chief executive Willie Walsh said at the time that the merger would enable the airline to compete effectively with low-cost carriers.

So there came a time when budget carriers began to pose a threat to full-service airlines, with Ryanair leading the pack. Many of the legacy airlines today have adopted the budget model of charging for ancillaries, and introducing a basic economy class to keep cost-conscious travellers from switching. However, many low-cost carriers have become victims of the competition – the reason why Mr O’Leary named only one other carrier, EasyJet, as a probable survivor.

EasyJet, founded in 1995 and headquartered in London Luton, UK, is Ryanair’s closest rival which has grown and spread its wings across Europe. It too has made a number of acquisitions which include Swiss TEA-Basle and Go.
Elsewhere around the world, the vibes are not unfamiliar, New in the circuit is Air Canada’s interest in Sunwing and Cathay Pacific’s interest in Air Hong Kong Express, And where acquisitions and mergers are not on the plate, airlines are working to form alliances that are more than mere code-sharing. Qantas did it in 2013 with its tie-up with Emirates, and now Malaysia Airlines and Japan Airlines have applied for waiver of government restrictions to form an alliance that will enable easier connections between the two carriers.

It looks like size matters in the air.

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Never say never: Cathay Pacific enters budget market

Courtesy AFP

In 2015, Cathay Pacific together with Hong Kong Airlines opposed Qantas’ application to set up Jetstar Hong Kong Airways – co-owned with China Eastern Airlines and billionaire Stanley Ho’s Shun Tak Holdings Ltd. Cathay was particularly vehement about there being no room or need for budget travel in Hong Kong. The authorities were convinced and Jetstar HKG never took off.

Today, Cathay announced its decision to buy Hong Kong’s only budget carrier, Hong Kong Express Airways, for HK$4.93 billion (US$628 million). This expands Cathay’s stable of airlines to three, which includes regional carrier Cathay Dragon. It will boost Cathay’s market share to 50 per cent in Hong Kong.

A Cathay spokesperson said: “We intend to continue to operate Hong Kong Express as a stand-alone airline using the low-cost carrier business model.”

Now what caused Cathay to change its mind?

Cathay is not alone in facing stiff competition in the long-haul and premium market, from not only neighbouring rivals such as Singapore Airlines (SIA) but also Middle east carriers such as Dubai Airlines. Besides, Chinese carriers from mainland China are also fast expanding, flying direct and more services to Europe and North America.

At the same time, Cathay can no longer ignore the encroachment by the flourish of budget carriers in the region, particularly those operating out of mainland China. The Hong Kong authorities too may begin to realise how all this may be reducing Hong Kong International Airport’s hub status, particularly when limited options are resulting in Hong Kong being bypassed.

It could be a matter of timing. In 2017 Cathay reported its first annual net loss in eight years and introduced a three-year transformation program. It was later in that same year that Cathay CEO Rupert Hogg affirmed that Cathay had no plans to start a low-cost carrier. But the debt-ridden HNA Group which owns Hong Kong Express offers a timely opportunity not to be missed even as Cathay posted its first full year profit in 2018 of US$299 million.

The business climate can change fairly quickly, but unfortunately airlines may be slow in catching up with the changes because of the huge investment and lead time to implement many of the changes, apart from a host of other reasons, some of which could be largely circumstantial.

Many legacy airlines pooh-poohed the threat of budget airlines to their traditional market when it was first mooted, and as many of the carriers fell by the wayside before they could assert any impact.

SIA for one came on the scene later than most others, setting up Tigerair jointly with Ryanair, and then Scoot. Its strategy has changed yet again with the merger of Tigerair and Scoot, and now SIA is in the process of assimilating SilkAir into the parent airline.

One wonders if this is the path that Cathay may take should Hong Kong Express and Cathay Dragon find their services overlap as they expand.

Whatever the reading, it would be discreet to never say never. The question is always if so, when?

Japan Airlines eyes a bigger slice of budget market

Courtesy Reuters

It is taking Japan Airlines (JAL) a long time to launch a budget subsidiary, but it’s never too late if the budget market continues to grow. One may say that the Japanese carrier is treading with extreme caution, and even if the economic arguments are no stronger now than before, there can be no better reason than the Tokyo Olympics in 2020 for the belated introduction.

At home, rival All Nippon Airways (ANA) has been operating two budget carriers, namely Peach and Vanilla (which was the rebirth of a failed joint venture with AirAsia), and has plans to merge the two carriers in preparation for medium-haul international flights.

Foreign low-cost competitors include AirAsia, Singapore Airlines’ Scoot and Hong Kong Express. And, of course, there is Jetstar, the budget arm of Qantas, in which JAL has a minority share. It is therefore not exactly correct to say that the Japanese national carrier has not tapped into the budget market earlier, though not in as big a way as the others.

The yet-to-be-named budget carrier, to be based at Narita International Airport, will commence operations with two jets in mid-2020, offering medium and long-haul flights to Asia, Europe and the Americas. It will operate to some of the destinations already served by JAL.

The timing cannot be coincidental, as this is when ANA is expanding the operations of Peach into the international market. Until then, JAL seems quite content that the competition is limited to the domestic market, but with Peach offering another option for loyal Japanese travellers besides others to fly beyond and into Japan at lower fares, it cannot be taken lightly.

The budget market in Asia is a growing business. JAL director Masaru Onishi said the airline will cater to a broad group of Japanese and foreign passengers, and will take a more experimental approach to its product than the full-service parent carrier. There will be a mix of budget and premium options for meals and seats. The airline aims to be profitable within three years.

JAL may be Johnny-come-lately, but it has ambitious plans for its budget offspring. The competition is set to intensify, not just with compatriot ANA but also with other foreign carriers.

News Update: US carriers abide by China’s Taiwan ruling

https://www.todayonline.com/world/us-airlines-plan-accept-china-demands-naming-taiwan?cid=emarsys-today_TODAY%27s%20evening%20briefing%20for%20July%2025,%202018%20%28ACTIVE%29_newsletter_25072018_today

Refer Much Ado About China’s Geography, June 30, 2018
https://airlinesairports.wordpress.com/2018/06/30/much-ado-about-chinas-geography/

The real battle behind Jetstar HK’s rejection

Courtesy Jetstar

Courtesy Jetstar

IT might well have been a technical inquiry. Jetstar Hong Kong (JHK)’s fate was hanging in the balance as the court debated the definition of “principal place of business” (PPB) which Cathay Pacific Airways and other airlines in the opposing camp so successfully narrowed down to as the sole criterion to decide Jetstar’s legitimacy. They contend that “the task before ATLA (Air Transport Licensing Authority) is the determination of whether JHK meets the PPB requirement now, and not whether 25 other airlines met that requirement at any point in the past.”

The objectors submitted that JHK does not have its principal place of business in Hong Kong, so granting it a licence to operate scheduled air services contravenes Article 134 of the Basic Law. If they had attempted to set the direction of the proceedings, they had succeeded, stating that “the common law meaning of PPB, i.e. that the PPB of an entity where the effective exercise of central and ultimate management control of the entity lies, is thus the intended meaning as it best suits the intended purpose of ensuring that only Hong Kong-based airline may be licensed by the HKSAR (Government of Hong Kong Special Administrative Region) authorities.”

It has been two years since JHK set up its intended base in Hong Kong, initially as a joint venture between Qantas and China Eastern Airlines. Cathay and other home-based airlines – Dragonair, Hong Kong Airlines and Hong Kong Express Airways – were quick to protest, and as it became clear that the PPB clause would be the hot issue of contention, local conglomerate Shun Tak Holdings came on board as the majority shareholder (51%), and its managing director Pansy Ho was named the new company’s chairman. The onus then rested on JHK’s shoulders to demonstrate how that composition, the control and decision making machinery as structured by it, would make the airline a Hong Kong company. JHK contends that it “has entered an arrangement with Jetstar Airways Pty Limited (JAPL) as licensor of the ‘Jetstar’ brand and as a service provider.”

In the end, ATLA decided that was not good enough. It said: “In determining whether the principal place of business of an applicant is in Hong Kong, the answer is not confined to where the day-to-day operations are conducted (but) its activities must not be subject to the control of senior management, shareholders or related parties located elsewhere.” It concluded: “The Panel is of the view that JHK cannot make its decisions independently from that of the two foreign shareholders. The Panel does not have to decide whether its nerve centre or whether its principal place of business is in Australia or the mainland China. The Panel needs only to determine whether JHK has its PPB in Hong Kong. We are of the view that it is not and therefore the PPB requirement is not satisfied.”

Naturally both Qantas CEO Alan Joyce and JHK CEO Edward Lau expressed disappointment at the outcome, but one wonders if they were at all surprised even though they had previously expressed confidence that ATLA would eventually approve JHK’s application. The thing is that technically the state of play is not theirs to win, for as much as Mr Lau insisting that “we genuinely believed that Hong Kong is Jetstar Hong Kong’s principal place of business.” JHK as a branch of the main Jetstar entity and Qantas’s vehicle to extend its market reach is more than just implied in the brand’s genesis, which the objectors made capital of, pointing out that “JHK is related to Qantas via Jetstar International Group Holdings Co. Lrd and through Qantas to JAPL.” They contend that it is all part of a Jetstar Pan-Asia Strategy “to create an integrated Jetstar network in which each Jetstar LCC will, far from operating independently, share aircraft, boarding, airport facilities and a further range of unspecified goods and services.” JHK’s rebuttal that JAPL, in spite of the relationship, is but an outsource partner was not convincing.

To some degree, JHK might have felt straitjacketed by the narrow scope for arguing its case. Mr Joyce said ATLA’s ruling was as disappointing for JHK shareholders as it was for travellers: “At a time when aviation markets across Asia are opening up, Hong Kong is going in the opposite direction. Given the importance of aviation to global commerce, shutting the door to new competition can only serve the vested interests already installed in that market.” That is an issue that the Hong Kong government may have to address separately, as a matter of policy unprejudiced by JHK’s application.

As a key aviation hub in the region, Hong Kong International Airport (HKIA) can only benefit from an open policy and more competition.  Throughout the proceedings were timely reminders of the importance of maintaining “the status of Hong Kong as a centre of international and regional aviation.”

However, Qantas had misread the apparent liberalised aviation landscape in Hong Kong, assuming it to be as open as, say, Singapore. When it once considered setting up an Asia-based premium carrier, Hong Kong was an attractive alternative because of the growing traffic from the China hinterland. Qantas had also failed to anticipate the strong opposition from OneWorld partner Cathay and compatriots, considering the relative ease that it had experienced in setting up the Jetstar brand in other locations such as Singapore, Vietnam and Japan. At some point, the advance is apt to draw awareness of the competition it poses.

Across the globe, entering into a joint venture with a local partner provides a convenient channel for a foreign carrier to gain a foothold in the local market, perhaps made easier if the partner were an airline, better still, the national flag carrier. In that connection, Shun Tak might have been viewed by the objectors as a potential local threat to come into its own riding on the back of more experienced operators.

Qantas might also have placed too much weight on the facilitation expected of a name like China Eastern. That became apparent when the court pointed out that “the Central People’s Government (of China) shall give the Government of the Hong Kong Special Administrative Region the authority to issue licences to airlines incorporated in the Hong Kong Special Administrative Region and having their principal place of business in Hong Kong.” It may even be suggested that the relative silence of both Shun Tak and China Eastern in the tussle could only project their passive roles but Qantas’s prime-mover position.

The technicality of Article 134 of the Basic Law as a moot point aside, it cannot be denied that  implicit in the objectors’ presentation is their concern of the competition posed by JHK. They contend that the joint venture aims “to deepen the Qantas Group presence in Asia-Pacific.” Refuting JHK’s claim of “the economic benefits which can be brought by the new airline and its contribution to maintaining Hong Kong as an international aviation hub,” the objectors insist that the Jetstar business model is designed “in the wider interests of all the Jetstar LCCs rather than JHK alone” and that all decisions pertaining to JHK’s operations such as capacity and aircraft purchases “are made with a view to maximising profitability for the Qantas Group.” They argued that through the Jetstar Pan-Asia Strategy, “Qantas is increasing the international competitiveness of a key Australian business by seeking to capitalise on the growth in demand for air travel services in Asia for its own benefit and ultimately the benefit of Australians.”

Indeed, Cathay’s early objection had hinged on the economic aspects of JHK’s proposition, which might have given JHK firmer ground to promote its application. Cathay insisted that unlike other Asian countries, the nature of the Hong Kong market is such that it has no real need of LCCs – that, in spite of the operations of Hong Kong Express and calls made by foreign budget carriers. Why would Cathay, already one of the world’s most successful and profitable carriers, be so threatened by JHK? It is apparent that the rivalry is more specific than general, the wariness of an expanding Jetstar network that is supporting an international competitor.

All’s fair in war as in love even as some observers hint at Cathay’s political sway. What next then for JHK? As at December last year, Qantas has invested some A$10 million (US$7.7 million) in the joint venture. JHK has already sold eight of its nine aircraft. Rather than accept ATLA’s decision as a natural demise of the unborn carrier, Mr Joyce has not ruled out appealing the decision. Consulting experts may already be working at more creative solutions to skirt round the technicality of the Basic Law. Or, as Qantas too had hinted, it might reconsider basing the low-cost carrier in Hong Kong, perhaps elsewhere but close enough where the real market screams loud to be served. No doubt a costly affair, it all depends on how much farther the shareholders are prepared to go.

And as the objectors hailed ATLA’s ruling as “the right decision for Hong Kong” with Cathay corporate affairs director James Tong reiterating that it “ensures that important Hong Kong economic assets, its air traffic rights, are used for the benefit of the people and the economy of Hong Kong,” proponents of more liberal aviation competition may begin to wonder to whom the real victory belongs.

This article was first published in Aspire Aviation.

Qantas’ Chinese connections

EVERY airline looking east (or westwards or northwards depending on where they are based) wants a foothold in China, that huge market with a growing population of air travellers.

Three years or so ago when Australian flag carrier Qantas announced a transformation program, chief executive Alan Joyce identified Asia, in particular China, as the answer to the airline’s woes in the international arena. The rising wealth of Asia’s most populous country makes good reason for Qantas to consider an Asia-based premium carrier near enough to tap into that market, and to set up a budget carrier in Hong Kong, the gateway to China, jointly with China Eastern Airlines and a local conglomerate owned by casino magnate Stanley Ho. While the former proposal was aborted, the latter is awaiting regulatory approval – against the wishes of Cathay Pacific – with ordered planes parked at the Airbus factory awaiting delivery. That, Mr Joyce had said, was not unusual for start-up airlines.

Courtesy Qantas

Courtesy Qantas

All that did not stop Qantas from building up its Chinese connect ions through codeshare services. In a recent agreement with China Southern Airlines, Qantas customers can gain direct access to four destinations within China including Guangzhou from Sydney, Melbourne, Brisbane and Perth. China Southern customers will similarly gain access to domestic destinations across Australia as well as beign able to fly between Sydney and Auckland.

Qantas International CEO Simon Hickey said: “Partnerships are at the core of our strategy in Asia and together with our airline partners, we’re pleased to now offer customers access to 179 flights to 12 cities in Asia each week, with fares available to over 120 additional Asian cities.” He added: “The Qantas Group has never had a stronger presence in Asia. More than one sixth of our total revenue now comes from flights to and within the region, and we plan to keep opening up new travel opportunities.”

This can only mean high alert for rival airlines, particularly those which by fifth and six freedom rights have been routing travellers through their home bases.

Qantas already has a codeshare arrangement with China Eastern Airlines between Australia and China via Singapore.

None of the mainland China-based airlines are members of the OneWorld alliance to which Qantas belongs. That may be of little consequence, considering that codeshare partners Chna eastern and China Southern are both SkyTeam members. Air China and Shenzhen Airlines are members of the Star Alliance. Out of Hong Kong, Qantas` Jetstar may face stiff competition from Hong Kong Airlines and Hong Kong Express, both carriers owned by the Hainan Airlines Group, besides Cathay’s Dragonair. Note however that Hong Kong Airlines and Dragonair are by definition regional and not budget carriers.

If there is any indication of China’s growing demand for air travel, it is Shandong Airlines’ recent order of 50 Boeing 737 aircraft to the tune of US$4.6 billion. At the same time, however, Air China warned that its first quarter profits would be 65 per cent lower compared with that last year because of the falling yuan. A statement issued by the airline said: “The financial expenses of the company substantially increased as compared with the corresponding period of 2013 due to the exchange losses.” Fellow competitor China Southern issued a similar warning on falling profits. These are but minor blips that will not deter foreign airlines from connecting with the China market.

HK Express expands as Cathay fumes over Jetstar Hong Kong

Who says Hong Kong is no place for low cost carriers? If it works for Singapore, it should also work for Hong Kong, which is situated at the doorstep of the large China market.

300px-Hong_Kong_Express_Airways_Logo.svgSo while Cathay Pacific Airways rallies to stop Jetstar Hong Kong – a consortium of Qantas, China Eastern Airlines and a local investor – in its track, Hong Kong Express is not wasting time to expand its network. (See Ryanair and Cathay Pacific face the same woe: Competition, Sep 12, 2013) The low cost carrier will commence daily operations in October to Kunming in mainland China, Taichung in Taiwan, Tokyo (Haneda) and Osaka (Kansai) in Japan, Chiang Mai and Phuket in Thailand, and Kota Kinabalu in Sabah, Malaysia.

Cathay probably finds less ground to oppose HK Express, whose parent is Hainan Airlines, than Jetstar Hong Kong, whose main driver is Qantas, a foreign entity. Besides, Hong Kong Express is already headquartered in Hong Kong before its transition into a low cost carrier. Ultimately it is about competition. However, the competition is likely to be more direct between HK Express and Jetstar Hong Kong. Of course, Dragonair – the regional arm of Cathay – may too feel the pinch.

Take a leaf from HK Express deputy chief executive officer Andrew Cowen, who said: “Competition is not an issue for us. We welcome competitions and though there are issues slots and airport constraints, we have no issue with that.”