Cathay in Talks to Buy Shares in Hong Kong Express

(Bloomberg) -- Cathay Pacific Airways Ltd. is in talks to buy shares in Hong Kong's only budget airline from Chinese conglomerate HNA Group Co., as Asia's biggest international carrier seeks to gain a foothold in the region's booming low-cost travel market.

Cathay is in “active discussions” about an acquisition involving Hong Kong Express Airways Ltd., the marquee carrier said in a statement Tuesday. There can be no certainty that any agreement will be entered into, Cathay said.

The stake purchase would give Cathay a critical foothold in the market for budget-conscious travelers that's eaten into demand for some of its routes as it undertakes a three-year transformation program. Asia Pacific's burgeoning market will probably see the largest increase in air traffic among regions worldwide, with almost 4 billion passenger journeys expected in the next two decades.

“This is part of a very big change in Cathay's strategy,” Steven Leung, executive director at UOB Kay Hian (Hong Kong) Ltd., said by phone. “Competitors are developing budget airlines which have challenged its business. I think this deal will benefit the company in the long run.”

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Cathay rose as much as 3.1 percent in Hong Kong trading, the biggest gain on an intraday basis since Feb. 21. The stock climbed 1.8 percent to HK$13.26 as of 10:40 a.m.

Bloomberg News was first to report last month that Cathay held preliminary talks with HNA about acquiring minority stakes in Hong Kong Express and Hong Kong Airlines Ltd., another carrier backed by the Chinese conglomerate. Cathay's latest statement didn't say whether Hong Kong Airlines is part of the discussions.

A successful acquisition of Hong Kong Express would fill a hole in Cathay's product offering, according to Rahul Kapoor and Chris Muckensturm, analysts at Bloomberg Intelligence. Other parties could also be interested in the budget carrier given capacity constraints at Hong Kong's airport, Andrew Lee, an analyst at Jefferies Hong Kong Ltd., wrote in a note.

Cathay's three-year overhaul -- which has seen it add destinations and cut at least 600 workers amid efforts to reduce expenses by HK$4 billion ($510 million) -- looks to be bearing fruit. The carrier, scheduled to release results on March 13, said last month that it expects to report a profit for 2018, ending a two-year run of losses.

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HNA has been trimming one of China's biggest debt piles by selling dozens of assets from hotels to stakes in aircraft-leasing companies. The conglomerate has also been trying to sell almost a third of its stake in Hong Kong Airlines, a plan that was held up last year after the sudden death of HNA co-Chairman Wang Jian, Bloomberg News reported in August.

Hong Kong Express, which started services in October 2013, operates a fleet of Airbus SE A320 family aircraft. It flies to cities in countries including China, South Korea, Japan and Vietnam.

--With assistance from Jeanny Yu.

To contact the reporter on this story: Kyunghee Park in Singapore at kpark3@bloomberg.net

To contact the editors responsible for this story: Young-Sam Cho at ycho2@bloomberg.net, Lena Lee, Ville Heiskanen

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