Hong Kong Airport & Cathay Pacific: Low growth trajectory but air cargo, 3RS bring hope

29 June 2017, Hong Kong – 1st July 2017 will mark the Hong Kong SAR’s 20th Anniversary. For years, Hong Kong International Airport (HKIA) and Cathay Pacific Airways (293:HK) have been the envy of many – given Hong Kong’s favourable position as the gateway hub to China’s fast-growing air travel demand.

But HKIA and Cathay Pacific could be stuck in a low growth trajectory with more traffic increasingly bypassing HKIA as the Chinese carriers launch more direct flights between mainland China and the rest of the world, diminishing the importance of HKIA and Cathay Pacific’s as the gateway airport and airline of China.

The Chinese airports’ passenger throughput has also been growing at a faster pace than HKIA. By 2005, Beijing Capital International Airport had already overtaken HKIA in terms of passenger throughput and was ranked the 2nd busiest airport globally in 2016. HKIA risks losing its 8th busiest airport position as early as 2018 or 2019.

Chart: Passenger capacity growth of Hong Kong and China-based carriers to the major route regions (1H17)

Chart: Passenger capacity growth of Hong Kong and China-based carriers to the major route regions (1H17)

HKIA: TOP CARGO AIRPORT AND 8th BUSIEST PASSENGER AIRPORT GLOBALLY

In 2016, HKIA was the largest cargo airport and the 8th busiest passenger airport in the world, handling 70.5 million passengers and 4.52m tons of air cargo in 2016. It is also one of the most profitable airports globally given its mature asset base, high utilisation and lucrative non-aeronautical revenue segment.

Chart: Benchmarking Hong Kong’s international passenger connectivity against its closest airport peers

Chart: Benchmarking Hong Kong’s international passenger connectivity against its closest airport peers

Chart: Hong Kong International Airport’s profitability versus major airports around the world

Chart: Hong Kong International Airport’s profitability versus major airports around the world

WHAT IS CAUSING HKIA & CATHAY PACIFIC’S LOW GROWTH TRAJECTORY?

Chinese carriers increasingly bypassing HKIA by launching more direct flights between mainland China and the rest of the world

The Chinese carriers continue to launch more direct international flights between mainland China and the rest of the world, driving passengers to bypass HKIA and Cathay Pacific Airways.

In 1H17, the Chinese carriers increased their capacity on China-United States and China-Europe routes by 23% and 9% y/y respectively. This is negative for Cathay Pacific and Hong KongNorth America and Europe are important long-haul markets for Cathay Pacific, accounting for 27% and 19% of the carrier’s total passenger traffic.

Shrinking capacity on Hong Kong-Mainland China routes – the total number of flights and seat capacity between Hong Kong and Mainland China have fallen by 7% and 3% y/y respectively in 1H17. Although Cathay Pacific and Cathay Dragon have increased their seat capacity on Hong Kong-Mainland China routes by 3% y/y in 1H17, the rest of the carriers have cut their seat capacity on Hong Kong-Mainland China routes by 8% y/y in 1H17. The Hong Kong-Mainland China route region is an important market, constituting 21% of Hong Kong International Airport’s total airline seat capacity in 1H17.

Chart: Seat capacity growth (decline) on Hong Kong-Mainland China routes (1H17)

Chart: Seat capacity growth (decline) on Hong Kong-Mainland China routes (1H17)

46% of HKIA’s passenger volume is driven by Cathay Pacific and Cathay Dragon which are restructuring their operations

46% of HKIA’s passenger volume is driven by Cathay Pacific and Cathay Dragon which are restructuring their operations and their capacity growth will be moderate in the coming years. Cathay Pacific and Cathay Dragon’s market share in Hong Kong have also fallen 5ppts in the past 5 years.

The Hong Kong-based carriers’ scheduled aircraft deliveries are implying a more moderate seat capacity growth compared to historical years. In the past 5 years, the Hong Kong-based carriers’ seat capacity grew 12% per year but going forward from 2017 to 2019, their average seat capacity growth is expected to moderate to 9% per annum.

Chart: Hong Kong carriers’ seat capacity growth (2012 to 2019)

Chart: Hong Kong carriers’ seat capacity growth (2012 to 2019)

Chart: Airline market share at Hong Kong International Airport (1H17)

Chart: Airline market share at Hong Kong International Airport (1H17)

Chart: Cathay Pacific & Cathay Dragon’s market share in Hong Kong (2007 to 1H17)

Chart: Cathay Pacific & Cathay Dragon’s market share in Hong Kong (2007 to 1H17)

Mainland China visitor arrivals numbers have weakened

The number of mainland China visitor arrivals to Hong Kong fell 7% y/y in 2016. The good news is that this market is recovering with the number of Chinese visitor arrivals rising 3% y/y in January-April 2017 but still significantly weaker than the 15% annual growth rate in Chinese visitor arrivals that Hong Kong used to enjoy in the past 10 years.

Chart: Chinese visitor arrivals to Hong Kong (2007 to 2017)

Chart: Chinese visitor arrivals to Hong Kong (2007 to 2017)

Mainland Chinese airports are expanding rapidly: We forecast the Chinese aviation sector’s traffic to grow 9%-10% per annum in the next three years

The Mainland Chinese airports’ passenger throughput has been growing at a faster pace than Hong Kong’s. By 2005, Beijing Capital International Airport had already overtaken HKIA in terms of passenger throughput and was ranked the 2nd busiest airport globally in 2016.

Shanghai Pudong International Airport is also catching up, it was ranked the 9th busiest passenger airport globally in 2016; handling 66.0 million passengers, only 6% shy of HKIA passenger throughput level. It is highly likely that Shanghai Pudong’s passenger throughput will overtake HKIA’s as early as 2018 or 2019.

In fact, the current combined passenger throughput of both Pudong and Hongqiao airports in Shanghai has already surpassed HKIA’s.

The nearby Guangzhou Baiyun International Airport is not far behind either with its passenger throughput only 15% lower than HKIA’s level. If Cathay Pacific’s Oneworld Alliance partner American Airlines, through its new equity stake and expanded cooperation with China Southern Airlines, chooses to feed more traffic through China Southern Airlines instead of via Cathay Pacific in Hong Kong, Cathay Pacific and HKIA will be negatively impacted.

See our previous report for more details: American Airlines’ China Southern investment positives could be a long-term negative for Cathay Pacific

Under China’s 13th Five-Year Plan (2016-2020), China targets to build 74 civil transport airports (including 44 newly built airports and 30 airports under construction) by 2020. This will raise the total number of civil transport airports in China to 260 by 2020. There will also be 139 airport expansion projects. This is likely to drive even more direct flights between China and the rest of the world, thus diminishing the importance of Hong Kong and Cathay Pacific’s as the gateway airport and airline of China.

Chart: Top 50 passenger airports in the world (2016)

Chart: Top 50 passenger airports in the world (2016)

Chart: Top 30 passenger airports in Greater China (2016)

Chart: Top 30 passenger airports in Greater China (2016)

HONG KONG’S AIR TRAFFIC GROWTH OUTLOOK IS LIKELY TO BE WEAK IN THE COMING YEARS

In the past 1.5 years, Hong Kong International Airport’s passenger throughput growth y/y has started to slow down, rising only 3% in 2016 and 1.7% in Jan-May 2017. This is a marked contrast from HKIA’s annual passenger CAGR of 5% since Hong Kong’s handover in 1997 until 2015.

Chart: Hong Kong International Airport passengers handled (1998 to 2017)

Chart: Hong Kong International Airport passengers handled (1998 to 2017)

AIR CARGO REMAINS A BRIGHT SPOT

HKIA still maintains a huge lead as the world’s busiest air cargo hub and is likely to retain its pole position in the coming years. This is helped by having Cathay Pacific Airways as one of its hub carriers. Cathay Pacific is the fourth largest cargo airline in the world and also has joint ventures with DHL and Air China – Air Hong Kong and Air China Cargo respectively. In contrast, the Chinese carriers are generally weak in their cargo operations.

The global air cargo market has been stronger than expected this year, mainly driven by improving US and European consumption demand. Hong Kong International Airport’s cargo throughput rose 11% y/y in January-April 2017.

However, recent moves by Zhengzhou Xinzheng International Airport to bolster its role as an air cargo hub could be a precursor of things to come if the other Mainland Chinese airports also follow suit.

See our previous report: Zhengzhou Airport flying high with Henan Cargo Airlines, Cargolux/Emirates partnership and AirAsia China JV

 Chart: Hong Kong International Airport cargo handled (1998 to 2017)

Chart: Hong Kong International Airport cargo handled (1998 to 2017)

Chart: Top 20 cargo airports in the world (2016)

Chart: Top 20 cargo airports in the world (2016)

Chart: Top 10 air cargo carriers in the world (2016)

Chart: Top 10 air cargo carriers in the world (2016)

Chart: Top 30 cargo airports in Greater China (2016)

Chart: Top 30 cargo airports in Greater China (2016)

HKIA’s HK$141.5 Billion Three Runway System (3RS)

The Three Runway System (3RS), which has an estimated construction cost of HK$141.5B, will add 30 million of annual passenger handling capacity to Hong Kong International Airport. This will enable HKIA to handle 100 million passengers and 9 million tons of cargo per annum by 2030. 3RS is expected to be completed by 2024, with the commissioning of the new runway in 2022. The availability of more viable landing and take-off slots could attract more carriers to increase their flight frequencies to/from Hong Kong.

Related Articles:

American Airlines’ China Southern investment positives could be a long-term negative for Cathay Pacific

Global air cargo traffic & yields trending up but low utilization could persist

Cathay Pacific Airways (293:HK) Initiation Research Report 2017 – Cathay Pacific outlook to stay gloomy?

China Southern Airlines Initiation Research Report 2017 – Strong domestic drivers tempered by funding needs

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