King Kong: Hong Kong’s airline market, despite some setbacks in 2014, continues to thrive

Hong Kong’s airline market,It was a difficult year for Hong Kong overall, with major political protests, a slowdown in export markets, weak inbound tourism from some key source markets and sluggish economic growth.

But the city’s airport?

With the Chinese New Year still a few weeks away, Hong Kong International is already celebrating, having welcomed 63m passengers during 2014, a record performance. That marked solid 6% y/y passenger growth on a 5% increase in the number of flights. The year ended on an even more bullish note, with passenger traffic for December alone rising a robust 8%.

If not the economy, and not inbound tourism, what’s driving the steady expansion? For one, Hong Kong is enjoying double-digit increases in connecting traffic—in other words, traffic that merely passes through the airport for a flight change but originates and terminates somewhere else. In addition, with the value of Hong Kong’s dollar tied to the strong U.S. dollar, local residents are taking advantage of bargains abroad. They’re going to weaker-currency markets like Japan, for example, or the ASEAN region.

The fortunes of Hong Kong’s airline market, of course, depend heavily on the city’s largest airline: Cathay Pacific. Although it has struggled with mediocre profit margins since its strong showing in 2010, Cathay remains a growth airline. Last year, it grew ASK capacity 6%, driving 7% RPK traffic growth. That included a 16% traffic increase to North America and a 10% jump to elsewhere in northeast Asia. In 2014, Cathay accounted for just less than half of all the seats departing from Hong Kong, according to an Airline Weekly analysis of Diio Mi data. This figure includes Cathay’s wholly owned regional airline Dragonair, which introduced a number of new destinations including Penang, Bali and Siem Reap. Cathay itself started flying nonstop to Newark, Male, Doha, Colombo and Manchester.

For a long time, Hong Kong was an underpenetrated market for low-fare airlines, which is one reason why Cathay, unlike so many of its regional rivals, never launched a low-cost unit of its own. Even today, its lobbying has effectively blocked two of its rivals—Qantas and China Eastern—from jointly launching Jetstar Hong Kong. The prospective airline is still…

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