Hong Kong Airlines Ltd. expects to win private-equity investment by early next quarter as it prepares for an initial public offering of as much as $1 billion and challenges neighbor Cathay Pacific Airways Ltd.
 
Goldman Sachs Group Inc. is working on arranging a stake sale to private-equity investors, who will become the second- largest group of shareholders behind the investment arm of China’s Hainan province government, President Yang Jiang Hong said in an interview at the carrier’s Hong Kong headquarters on March 10. He didn’t give details on the talks.
 
The airline last week agreed to order 38 Boeing Co. widebody planes to tap demand in Hong Kong and China, the world’s fastest-growing air-travel market. The carrier, with less than 10 percent of Hong Kong’s outbound travel, needs to boost services to lure lucrative corporate flyers from Cathay, said Royal Bank of Scotland Group Plc analyst Andrew Orchard.
 
“If they want to survive, they have to be aggressive,” Orchard said. “Hong Kong is dominated by Cathay.” Orchard, who is based in the city, said he had only flown on Hong Kong Air once or twice.
 
To help pay for expansion, Hong Kong Air plans to hold an IPO next year, where it may raise from $500 million to $1 billion, Yang said. The carrier may also take full control of affiliate Hong Kong Express ahead of the share sale, he said.
 
Profit Forecast
 
Hong Kong Air made a net income of about HK$110 million ($14 million) in 2010, its first annual profit, and it may double that this year, Yang said. Passenger numbers will likely rise to 4 million from more than 2 million, he said.
 
The airline also expects its cargo unit, which started last year, to account for 30 percent of revenue this year from 20 percent, as it adds more freighter flights, he said.
 
Cathay, with a group fleet of about 170 planes, flew 26.8 million passengers in 2010. It boosted profit to HK$14 billion from HK$4.7 billion a year earlier, helped by rising travel and asset sales. The airline ordered 25 Boeing and Airbus SAS planes last week.
 
Hong Kong Air and Hong Kong Express operate a total 18 Airbus A330-200s and Boeing 737-800s planes, including freighters. Hong Kong Air agreed to order 32 Boeing 787s last week, including two for VIP operations, and six 777 freighters. The airline also has 30 A320s and 27 twin-aisle planes on order at Airbus, according to the planemaker’s website.
 
China Network
 
The two carriers fly to nine cites in China, as well as to Moscow and Asian destinations, according to their website. Taipei flights will begin as early as next month, and a second daily service to Singapore is due to begin on June 28. Long-haul routes including Paris, London, Vancouver and U.S. cities will be added over the next two years, Yang said.
 
Hong Kong Air plans to add an all-business class service to London next year after opening an executive lounge at its hub in 2010, Yang said. The carrier is also trying to lure premium passengers by charging as much as 20 percent less than Cathay and by tapping ties with Hainan province’s HNA Group, Yang said. HNA, which owns 45 percent of Hong Kong Air, also controls Hainan Airlines Co. and Beijing-based Grand China Air, as well as investing in airports, hotels and retail.
 
“Compared with Cathay, we know the China market better,” Yang said. “We are in a stronger position to capture the growth.”
 
China’s international air travel may grow 11 percent a year through 2014, almost double the global pace, according to the International Air Transport Association.
 
Cathay Upgrades
 
Cathay is spending HK$1 billion rolling out new business- class cabins and it’s also renovating lounges, incoming Chief Executive Officer John Slosar said last week. The carrier is used to competition from its experience battling international carriers in its home market, he said.
 
“We compete everywhere, everyday,” he said. “Like any business you need to give people a reason to buy your product and we really try to keep focused on that.”
 
Cheaper fares may also do little to help win corporate travelers as employers generally pay for trips, said RBS’s Orchard. Cathay passengers may also be reluctant to give up the chance to earn frequent-flyer points by using a different carrier, the analyst said.
 
“I can’t see why people would want to lose the mileage,” he said. “Cathay has a very good frequent-flyer program.”
 
Oasis Hong Kong Airlines Ltd., which challenged Cathay with low-cost flights to London and Vancouver, collapsed after less than two years of operations in 2008.
 
Hiring Plans
 
Hong Kong Air plans to hire 300 staff this year, including 200 cabin crew and 50 pilots, Yang said. The carrier received more than 2,000 applications from pilots last year, so it isn’t concerned about meeting its hiring targets, he said.
 
The airline also intends to begin hedging as much as 33 percent of its fuel usage after recently acquiring a trading company, Yang said. The carrier had planned to start hedging, which helps guard against jumps in fuel prices, even before crude rose above $100 barrel because of political unrest in the Middle East, he said. Oil prices will likely decline from this level, he said.
 
“The high crude prices are only temporary,” he said. “It’s just because of political reason — not supply and demand factors — and it won’t weigh on our profits.”
 

 
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