Sat, Jul 13, 2002 page10

• HK airlines ruling outa price war

  SMOOTH SKIES? Despite new competition along the lucrative HK to Taipei route, Dragon Airlines says steep discounts on air fares aren't likely soon

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  China National Aviation Co (中國航空總公司), which controls Hong Kong Dragon Airlines Ltd (港龍航空), ruled out a price war with Cathay Pacific Airways Ltd (國泰航空) on its new Hong Kong-Taipei route, saying there's enough demand to avoid discounting.

  Dragonair starts flying 22 weekly flights on the route, one of Asia's busiest, starting on July 22. That's little more than a fifth of bigger rival, Cathay Pacific, limiting the impact of Dragonair's additional services, Thomas Tsang, vice president of China National Aviation, said in an interview.

  "Why should we compete?" Tsang said, adding that Cathay Pacific's planes are flying full on the route. Unlike Cathay and Taiwan's China Airlines Co (中華航空), Dragonair also offers onward connections to cities in China, giving it "a niche" to lure business travelers shuttling between Taiwan and China, he said.

  China National may one day emerge as the main rival for Cathay Pacific's role as Hong Kong's dominant carrier, analysts said. In the meantime, China National is preparing to be folded into the Air China group as part of China's policy of creating three big carriers, and build on its links with Taiwan through its controlling share in Air Macau Co (澳門航空).

  "There should be pricing pressure, but I don't expect it to be huge," said Martin Lau, a senior portfolio manager at First State Investments in Hong Kong who helps manage US$150 million at CMG CH China Funds, including China aviation stocks. "It has no economies of scale to cut prices and gain market share."

  Dragonair won rights for its inaugural Hong Kong-Taipei passenger flights in last month's five-year accord between Hong Kong and Taiwan airlines. It will deploy about 15 percent of the total seats offered by Cathay because it will fly Airbus SAS A330 planes, which are smaller than Cathay's Boeing Co 747s.

  The carriers have said they may be allowed to add more flights between Hong Kong and Taiwan before the five years are up if demand warrants it.

  The Taipei route will reduce Dragonair's total yield per revenue passenger kilometer by "a low single-digit" percentage this year, Tsang said. That's "because a lot of the traffic is going to be group" tours, which usually have discounts, he said.

  The yield per revenue passenger kilometer fell to HK$1.014 last year from HK$1.02 in 2000, according to its annual report.

  Dragonair plans to expand its passenger network, focusing on destinations within a five-hour radius of Hong Kong because of the size and range of its planes, Tsang said. He wouldn't name any of the possible new destinations. The carrier will have 29 aircraft by 2005, up from 21 now and 13 at the end of 1999.

  Parent company China National Aviation is in the process of merging with Air China (中國航空), the nation's second-largest carrier, and China Southwest Airlines Co (中國西南航空), as part of China's plan to combine airlines into fewer, larger groups to improve efficiency, raise profits and reduce overcapacity.

  The merger will be one step closer to completion when a new holding company is set up as early as next month, Tsang said. By then, the three groups will have revalued their assets and decided on the shareholding structure.

  The Hong Kong traded arm of the China National Aviation probably won't be used as a vehicle to list the bigger Air China.

  "The likelihood is that they will merge all the airlines under the umbrella of Air China," Tsang said.

  China National Aviation may also transfer assets to the listed arm, such as a stake in a ground-handling venture.
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