By Donny Kwok and Jamie Freed
HONG KONG/SINGAPORE (Reuters) - Hong Kong flagship carrier Cathay Pacific Airways Ltd said on Tuesday it is in "active discussions" about an acquisition involving budget airline Hong Kong Express Airways Ltd, although an agreement has yet to be reached.
Such a deal would give Cathay exposure to the growing budget-travel market at a time when a lack of slots at Hong Kong International Airport has constrained its ability to follow peers like Singapore Airlines Ltd and Qantas Airways Ltd and set up its own budget brand.
The Hong Kong carrier has instead shifted some destinations from its main brand to its regional carrier, Cathay Dragon, as part of a transformation plan designed to cut costs and increase revenue. It has ordered 32 Airbus SE A321neos for Cathay Dragon.
Cathay said it had decided to go public about the discussions in response to media reports suggesting it may be in talks to acquire shares in Hong Kong Express Airways Ltd and full-service sister carrier Hong Kong Airlines Ltd from cash-strapped Chinese conglomerate HNA Group Co Ltd.
It did not detail the potential value of the transaction, nor the size of the stake it would hold. It said it would issue an additional statement when appropriate.
An analyst last year estimated to Reuters that HK Express could be worth about $300 million.
HK Express in a statement said shareholders have held initial discussions with strategic investors about a potential acquisition but no details had been confirmed and there was not yet any agreement.
A person with knowledge of the matter said the companies appeared close to reaching an agreement and noted Cathay's parent Swire Pacific Ltd had historically taken majority stakes when making investments.
Cathay is not interested in Hong Kong Airlines because it has both similar routes and full-service positioning, the person said.
A second person with knowledge of the matter said Cathay had signed an exclusivity period for discussion but other parties remained interested in HK Express if a deal could not be reached.
Both sources spoke on the condition of anonymity as discussions are confidential.
ANTITRUST
Given Cathay's dominance of Hong Kong's aviation market, a deal could attract scrutiny from the competition regulator.
Some analysts have also expressed doubts about the likely benefits of any deal. Daiwa analyst Kelvin Lau said he did not see much value from the acquisition as the two airlines flew similar routes, but also because Cathay would need to undertake significant reform to add a budget wing.
Jefferies analyst Andrew Lee however said in a note to clients it would be "positive for Cathay Pacific" as it would give the airline greater access to a different passenger segment in the low-cost market.
FLYING HIGH
News of Cathay's interest in HK Express comes just weeks after Hong Kong's flagship carrier projected its annual profit at more than double analyst estimates, sending its shares surging nearly 9 percent.
Shares of Cathay have risen more than 19 percent so far this year, compared with an 8 percent fall in 2018. The airline's shares jumped more than 3 percent on Tuesday morning.
Cathay has faced repeated questions from investors over the last few years about its failure to set up a budget carrier.
Chief Executive Rupert Hogg has said it would be difficult to do so until a third runway was completed at Hong Kong International Airport in 2024, opening up more slots.
"Our home-based airport is full at the moment, or largely full, and so it's not a perfect place to develop a model from scratch," he told CAPA Centre for Aviation last May.
HK Express operates a fleet of 25 A320 family aircraft to regional destinations around Asia, according to plane tracking website FlightRadar24.
Embattled HNA Group is more than a year into the process of unwinding a $50 billion acquisition spree that at its peak netted the company stakes in banks, fund managers, hotels, property and airlines, among other assets.