Financial Market of Hong Kong

¶ … financial market of Hong Kong in the airline transportation arena. Our central question is whether or not this a good time for an airline based in Hong Kong to issue its IPO. While the Hong Kong and market has just went for a downturn, it is turning around have weathered nicely and is turning around.. Major Hong Kong airlines such as Cathay Pacific Airways have counted upon this pending recovery and went forward with their own IPO recently in order to expand its Executive Business Class Service. For this reason, we will list the reasons and the advantages for this option and the key points for a successful move to an IPO.

In general, the present is still a good time for the movement towards the IPO because of the resiliency of the mainland China market and will likely get even better as we move into year 2012. Indeed, it appears that while the downturn in the European markets have affected Asia, the China and Hong Kong, it has been contained. Conservative companies such as Cathay Pacific Airways and Hong Kong Airlines have decided to stay the course, hoping the economy will become more than nominal. They have strong economic plans that are centered upon serving a profitable niche of the first class passengers that will bump up the profit margins of the airlines.

They know that it takes money to make money and to differentiate their companies in form the others in terms of customer service in order to buy customer brand name loyalty. However, once they achieve this loyalty, they will be able to leverage their market share favorably against the western airlines that have cut service to cut costs. The IPO offerings on the Hong Kong stock exchange have been made attractive as a calm financial port of call in the shadow of the huge and still growing mainland Chinese economy. This relative clam is very attractive in a day when the ongoing crisis in the Eurozone and the ongoing uncertainty in United States and U.K. Markets continues to scare investors about venturing into the present economic market situation. The size and stability of the Chinese market is very much a key that will have to be examined in further depth.

Indeed, it appears that Cathay Pacific Airways and Hong Kong Airlines may represent the types of airline transportation companies that can weather the storm in the relative strength of the Hong Kong Hang Sen financial market. By pairing up with the stronger Chinese economy and by centering its efforts around the premium first class market, Hong Kong has come up with a plan to go long in the treacherous waters of the present world recessional economy. They have bet that 2012 will likely be the year that things do turn around.

Research Proposal

In the wake of this study, more research needs to be done regarding the Hong Kong financial markets and the airline industry and IPO offerings as year 2012 unfolds. The situation of course may change at any time for the better for the worst. There needs to be more market research in the effectiveness of the spending of money raised in recent Hong Kong IPO offerings to fund airline Premium Executive Service. Further, there needs to be more research into the ability of the Hong Kong airline companies to leverage market share through the acquisition of increased customer brand loyalty.

Analysis

Often, a small company can get some excellent guidance from observing what the larger companies are doing and the marketing campaigns that they are launching. At the present time, a number of companies are either going IPO or expanding into the target market of airline transportation. The airline industry requires an enormous amount of capital investment and the IPO option is frequently the best way to go to raise a lot of finance capital in a very short period of time.

A consideration of a few of these companies should give a number of prescient case studies to consider. If so many companies are considering entering the market at this time in an attempt to raise venture capital, one would assume that it is a safe time for a company to do so.

The Rush to the IPO -The Case of Air Lease Corporation

A number of companies have voiced their public support for the Hong Kong market lately by launching brand these new IPO initiatives. This would indicate a great faith in the continued strength of the market despite the present economic downturn in America and in Europe, especially in light of the crisis vis a vis the Eurozone Greek, Spanish and Italian debt crises.

The Air Lease Corporation announced the launch of an initial public offering of 25 million shares of its Class A Common Stock. The estimated offering price is between 25 dollars and 28 dollars per share. Air Lease Corporation Class A Common Stock has lately been approved for its listing on the New York Stock Exchange under its symbol "AL." The company's underwriters also have the option to purchase additional stock up to an additional 3,750,000 shares of the Class A Common Stock to cover its over-allotments ("Air lease corporation," 2011).

The HNA Group Company Limited (HNA) and its partner Bravia Capital have further announced the appointment of Mr. Donald Boylan as the new Chief Executive Officer of Hong Kong Aviation Capital (HKAC). The Bravia company is a wholly owned subsidiary of HNA and also an affiliate of Bravia. The new CEO appointment was effective immediately. After the company's latest focus on stabilizing its Allco portfolio ( it acquired HKAC in Jan-2010), it is interested in re-establishing its and strengthening its banking relationships and in also managing the further remarketing and/or lease extensions of eight aircraft. Therefore, HKAC is refocused on the continued acquisition of these new aircraft. The company therefore also expects to further acquire up to an additional twenty-five aircraft in 2011. There have also been seven new reported A320 aircraft purchases that were finalized as well as three that have only recently been delivered to Indigo Airlines and Wizz Air. In the leasing of stocks, the shares in the Aerocentury company continued their very sharp downward turning, dropping a further 10.9%. In recent trading, the shares in the company have further lost 18.2% (ibid).

The Case of Hong Kong Air

In a recent report, Hong Kong Airlines Ltd. further expects to win a private-equity investment by the early quarter of 2012 as it prepares for its initial public offering of as much as one billion dollars and will therefore challenge its neighbor Cathay Pacific Airways Ltd. In order to help pay for this expansion, the Hong Kong airline plans to hold an initial public offering in 2012. Then it may additionally raise from anywhere from $500 million to $1 billion. The carrier could also take the full control of its affiliate the Hong Kong Express company ahead of the share sale. It has been reported that Hong Kong Air has made a net income of approximately HK$110 million ($14 million USD ) in 2010. This was its first annual profit and it may have doubled in 2011. Company press releases revealed that passenger numbers may likely have spiked to 4 million from over the 2 million mark. The airline has reported that it also expects its cargo unit (that started only last year) to account for thirty percent of its revenue in 2011-year from twenty percent as it adds some more freighter flights (Li, 2011).

Cathay Pacific Airways, with a company group fleet of approximately 170 planes flew some 26.8 million passengers in 2010. It further boosted its profits to HK$14 billion from approximately HK$4.7 billion a year earlier in 2009. This helped it by raising travel and asset sales. The health of the company is illustrated by its purchases. Cathay Pacific Airways ordered some 25 Boeing and Airbus SAS planes recently. Cathay Pacific Airways is spending some HK$1 billion as it is rolling out its new business- class cabins. It is also renovating the existing lounges, says incoming Chief Executive Officer John Slosar recently. According to Slosar, the carrier is very used to competition from its experience in battling international carriers in its home Asian market (ibid.)

The Hong Kong Air and Hong Kong Express companies operate a total of 18 Airbus A330-200s and Boeing 737-800s airplanes. These include some freighters and Hong Kong Air agreed to order some 32 Boeing 787s recently. These included two more for VIP operations and also six 777 freighter aircraft. The company also has some 30 A320s and also 27 twin-aisle planes on order at the Airbus company (ibid.).

Hainan Airlines

Grand China Airlines, which is the parent of China's fourth-biggest carrier, said that it planned to raise over HK$10 billion in the first half of 2011. This was while Hong Kong Airlines (controlled by Hainan Airlines) was simultaneously picking up underwriters for a planned HK$5 billion IPO release in the third quarter of 2011. This was according to a report that quoted Hong Kong Airlines President Yang Jianhong. He said that the application for Hong Kong Airlines was to list as a so-called "red chip" (overseas registered Chinese company) that had been approved by the State Council. They way, Grand China, which just two years ago called off a share sale plan due to the global economic crisis, is also the parent company of China Xinhua Airlines, Changan Airlines, and Shanxi Airlines ("Two airlines target," 2010)..

Hong Kong Airlines currently operates 18 aircraft and runs more than 30 routes which include routes to Beijing, Denpasar, Shanghai, Tokyo and Moscow. It also planned to use its IPO finances to fund its aircraft acquisitions. The company had ordered some 33 wide body Airbus aircraft for over a sum of $6 billion, according to Yang (ibid).

The Cathay Pacific Airways Slowdown.

Already, we noted above about the planned delivery of two additional 747-8F freighters from Boeing to Cathay Pacific Airways has been pushed to the year 2013. According to the company press release, this move will involve cutting its targeted cargo growth capacity by seven percent in the year 2012 from the original seventeen percent. Cathay Pacific, Airways the largest cargo carrier company in the world has ordered ten Boeing 747-8F planes. Four of these were delivered in the year 2011 with the delivery of the rest of them tentatively scheduled for 2012 ("Cathay delays 747-8f").

Cathay Pacific Airways spokeswoman Carolyn Leung said that the cargo carrier company would have the four aircraft delivered by the year 2012 and the remaining two later in 2013. Chief Executive John Slosar was quoted by the airline's monthly staff magazine CXWorld as saying that 2011 has been a tough year for the airline compared to its performance in 2010. Slosar also added that the passenger bookings for the Christmastime holiday were pretty good, although the usual end of year rush for the expected cargo runs were yet to kick off (ibid.).

Cathay Pacific Airway's hub airport, Hong Kong International recently saw an additional 8.2% fall in the demand for cargo. However, passenger traffic for October 2011 was up 5.9%. A drop in the cargo demand in the airport (partly fueled by the continuing poor economic performance in the Eurozone countries and the United States. This has had a very direct impact upon the cargo airlines and Cathay Pacific Airways has not been spared (ibid.).

Cathay Pacific Airways Stays the Course

While the Cathay Pacific Airways company is starting to become more cautious, it has further pledged to stay the course in 2012. According to an article in Aspire Aviation, the air cargo traffic just never came through this past Christmas season. Things are different however now than they have been in the recent past. There is now a sound and central business plan that is guiding the Cathay Pacific company in order to ride out the present rough economic times ("Cathay pacific stays on," 2012).

Things were much different in year 2008, when Cathay Pacific Airways was at a critical crossroads and was in the process of evaluating its commercial strategy and in going forward. It now presently has a sound and clear strategy to realize a bright growth potential. This potential is arguably the best in the airline industry in tandem with the world's manufacturing powerhouse (China) at its doorstep. Further, the purpose of moving forward now is to keep investments in the new cabin products such as the new Premium Economy Class and the Revamped Economy Class seats that Cathay Pacific is rolling out in March 2012 (ibid.).

The centerpiece of this master plan (considering the drop in air freight traffic for Cathay Pacific Airways is to focus in on the premium service for its upscale customers who can afford the frills. The Cathay Pacific Airways company intends to stay on the course of a further corporate expansion. Cathay Pacific Airways is Asia's is the largest international airline in the area of airline passenger traffic as well as the world's largest air cargo airline in terms of such traffic in year 2010 (ibid.).

A company this size has had bumps along the way. Certainly, they are not new nor are they unanticipated. Former chief executive officer Tony Tyler saw many of these ups and downs. He went on to become the director general (DG) of Geneva-based industry body International Air Transport Association (IATA). He remarked that "the one thing I have learned during my airline career is that just when you think things could not get worse, they usually do" (ibid.). With this in mind, the company intends to move forward.

This could not have been more true for the company. After enjoying a very robust year in 2010, it saw a record cargo traffic that drove the airline further to become the world's most profitable carrier posting a full-year end profit of HK$14 billion (U.S.$1.8 billion). Unfortunately, 2011 has proven to be a challenging year for Cathay Pacific Airways with the air cargo traffic accounting for thirty percent of its total revenues (measured in freight tonnage kilometers-FTKs) slumping for every month since April 2011. This was while the passenger traffic (measured in revenue passenger kilometers -RPKs) has continued to grow very steadily over the very same period (ibid.).

As the economy globally took a turn for the worse in the summer. The political impasse in Washington D.C. has lead to a historically unprecedented downgrade of the United States' coveted triple -- A credit rating in August of 2011. This has been followed by the European sovereign debt crisis that has dragged on since the global financial meltdown from 2007 to 2009. Overall, total market business confidence, to which the air freight cargo market is very closely linked, also took a hit when the International Air Transport Association (IATA) showed a 3.1% decline in the amount of air freight traffic in November 2011 versus the same month a year previously. This was whereas cargo capacity, which is measured in the available cargo and mail kilometers, grew by only 1.9% in that same month, thus resulting in a decline in the industry-wide cargo load factor to some 46.9% (ibid.).

With the Asia/Pacific carriers holding a whopping 40.5% total market share of the world's cargo traffic, these carriers a (including Cathay Pacific Airways) took a bigger hit than their rival European and North American counterparts in the present renewed cargo slump. This comes amid some global economic uncertainties that further led to a 4% lower than expected industry-wide cargo traffic when compared to the start of 2011 and also a 6% lower cargo load factor when compared to the mid-2010 peak in traffic (ibid.).

At the Cathay Pacific Airways company, the picture is nothing but bleaker as well. The typical pick-up in air freight cargo demand in the last quarter just before the holiday sales season did not materialize in the year 2011. This is simultaneously happening with Cathay's November cargo traffic slumping some 9.8% against the same month in 2011 following a 15.9% decline in that October's cargo traffic vis a vis the previous year. "Somebody cancelled Christmas as really the cargo volume has not been there," said Cathay Pacific' Airways chief executive said John Slosar told Bloomberg. He added that the air freight cargo traffic is likely going to be soft for the first quarter of year 2012. "Cargo was weak in the last quarter of this year [2011] and I suspect it will carry on in 2012. It looks like the world economy is facing some challenges, so that is probably going to mean we will have some challenges too," remarked Slosar at an industry luncheon that was organized by the Pacific Asia Travel Association (ibid.).

Though there is a marked difference between the scenarios presently facing the Cathay Pacific company back in 2008 and coming year 2012. Unlike in 2008 (when Cathay Pacific Airways was placed at a crossroads evaluating its commercial strategy going forward), it now has a clear and sound strategy to realize its bright growth potential. This growth potential is arguably the best available in the airline industry with the world's manufacturing powerhouse China as its neighbor. This is keeping investment in the new cabin products such as the new premium economy class and the revamped economy class seats that Cathay Pacific Airways is rolling out in March 2012, in-flight connectivity with on-board wi-fi system, as well as the construction of a HK$5.5 billion dedicated cargo terminal that is going to enter into service in early 2013. Coupled with peak aircraft orders for 91 new aircraft, these continuous investments are meant to enable the Cathay Pacific Airways company stay the course in order to reap the benefits when the final turnaround in the global economy finally comes (ibid.).

The premium economy strategy is the best hedge against recession risks, boosts profitability. Since its revelation in August 2011 confirming the airline's intention to launch a premium economy class, the Cathay Pacific Airways company has released the details on its brand new premium economy class and has revamped the long-haul economy class seats. The airline further claims it will be tailoring products and significantly enhancing their overall quality. The premium economy class seats (that will be entering into service on the routes to Toronto and Sydney beginning March 2012) will include a 38-inch seat pitch and a 19.3-inch seat width and a 8-inch recline. This is in comparison to the long-haul economy class that will feature a seat pitch of some 32 inches, a seat width of 18.1 inches to 18.5 inches and also a considerable improvement over the present 4-inch recline of the existing long-haul economy class fixed-back shell seats that drew a significant amount of criticism because of insufficient recline and cushioning (ibid.).

There is a definitive strategy behind all of this. Cathay Pacific Airways company's premium economy class is comparable with the other carriers' offerings, such as the British Airways' new World Traveller Plus that has the very same seat pitch and reclining with Cathay Pacific Airway's offering. However, British Airway's premium economy seats compare with a 18.5-inch seat width while Cathay Pacific Airway's three inches or Qantas' premium economy class seats featured on its Airbus A380 that has a seat pitch and a width of 38-42 inches and of 19.5 inches, respectively. Cathay Pacific Airway's premium economy class promises to be a "real upgrade" over the economy class. It comes complete with complimentary snacks and beverages, priority check-ins/boarding and increased baggage allowances from 20 kg to 25 kg and also as an amenity kit, toothbrush, socks, large cushioned pillows and noise-cancelling headsets provided complimentary (ibid.).

Finally, the Cathay Pacific Airways company has entered into a longterm partnership with Air China. The company is saying in press releases that two additional Boeing 747-400BCF (Boeing Converted Freighters) freighters are also going to be sold to its cargo joint venture with Air China (Shanghai-based Air China Cargo) in 2012 and will be coupled with one or two more examples that will be transferred to Air Hong Kong. Aspire Aviation thinks that Cathay Pacific Airways should further replace its 747-400BCF fleet with the eight 777F freighters that it has on order. This is because the 777F burns fifteen percent and twenty-four percent less fuel per payload ton than the 747-400F and the 747-400BCF, respectively, while still carrying a similar payload amount (ibid.).

By pairing itself up with a Chinese based airline, the Cathay Pacific Airways company is counting on the strength of the Chinese economy as the engine of its growth. Although the Chinese economy continues to grow (albeit at a slower rate in year 2012 as the result of the global economic slowdown) the expanding middle class is probably going to fly on the premium economy class. This will then maximize the total revenue stream that is derived from those types of passengers that would otherwise have traveled in the economy class section (ibid.).

Hong Kong Attempts to Retain the IPO Crown

In general, while the general economy has continually turned down for the Hong Kong financial markets due to the European sovereign debt crisis. This has of course been mitigated by the continued strength of the Chinese economy as opposed to the United States and European economies still mired in recession (Yi, 2012).

Recently, the Hong Kong stock exchange raised some USD $36 billion through its new listings as of December 29, as against the USD $31.4 billion it raised in New York City. This information was according to data provider Dealogic, which tracks the IPOs in major markets. "Overall the economy is doing poorly due to the euro debt crisis and the U.S. economy, so the Hong Kong market and investor sentiment has also been affected," remarked Philip Mok, a senior research analyst at Hong Kong's Phillip Securities. "Most of the IPOs only did well in their first few days of trading and are now trading below their IPO price," he added later. The Hang Seng Index fell some 20% over that year (ibid.).

Analysts claim that the gap between 2011 and the previous year 2011 may not be as severe as it seems when compared with the share sales by Asian insurer AIA and the Agricultural Bank of China. They raised a combined USD $42.6 billion and skewed the 2010 figures. The attraction of Hong Kong as an IPO destination can be largely traced to the mainland Chinese move to privatize some state-owned enterprises, though many of these were laden with crippling debts and some questionable balance sheets (ibid.).

"The larger companies in China have mostly listed and we are now seeing the second wave of mid-tier companies seeking to list," remarked analyst Arjan van Veen of Credit Suisse about the shrinking funds situation that was seen in year 2011. Firms that have shelved plans to list themselves in Hong Kong include Shanghai-listed China Everbright Bank. They were aiming to raise up to USD $6 billion. Also joining it was Australian miner Resourcehouse that planned to raise USD $3.6 billion. The fears over an economic slowdown in China as it is threatened by the Eurozone turmoil could also drag the global economy back into crisis and quell the appetite for IPOs. "The market sentiment in China and in Hong Kong... may affect the amount of fundraising and therefore some companies will think twice before deciding on listing here (in Hong Kong)," Li added later on. But the Hong Kong stock exchange that said it has a "good chance" to remain atop of the IPO table, downplayed the fears over the attractiveness for new listings. "Regardless of its ranking, the most important thing is Hong Kong has established itself as one of the world's leading capital formation centres," a spokesman said later. The Phillip Securities company's Mok is more optimistic for the coming year. He cites several new Hong Kong listings that were said to be in the pipeline. These included "Angry Birds" maker Rovio and also London-based jeweller Graff Diamonds who remarked that "The China economy is likely to do better than the U.S. In the coming year. This isn't the end yet for the story of China (ibid.)."

The prevailing opinion that inevitably economically things will pickup or at least do somewhat better than the Eurozone economies is reflected as well by the opinion expressed in the Financial Express of Jan. 2, 2012. In that edition of its online issue, China has again outshone the U.S. As the top venue for initial public offerings despite steep share price falls on the mainland and Hong Kong stock markets, highlighting the shift in global financial activity from West to East. The companies raised some USD $73 billion from the IPOs in Shanghai, Hong Kong and Shenzhen in year 2011 (ibid.).

According to Dealogic, this was almost double the amount raised on the New York Stock Exchange and the Nasdaq combined. Hong Kong also retained its crown as the top stock exchange for the third year consecutive year running, with USD $30.9 billion raised. That financial figure compares favorably with USD $30.7 billion and USD $18 billion, respectively, on the London and New York stock exchanges. The companies raised over USD $41 billion in Shanghai and Shenzhen, even as the stock prices tumbled to their three-year lows. The end results belied a much weaker deal flow on the Chinese mainland and the Hong Kong exchanges this year. This was as the market turmoil forced many companies to delay their share offerings and even in some cases to hem them off at the very last minute ibid).

The USD $73 billion that various companies raised was less than one half of the last year's total when compared with a six percent decline in the IPO fundraising on the United States exchanges. The United States last topped the IPO league tables in year 2008. Hong Kong stock market's benchmark Hang Seng index is also further down nearly 20 per cent in 2011. China's main index in Shanghai has also fallen 23 per cent. This makes the Chinese markets among the worst performing in the world. United States stock markets are ending a very volatile year where they began with the Standard & Poor's 500 index being down less than one per cent on 29 December 2011. Until very recently, the Hong Kong stock market rarely attracted the listings by companies outside of China. But with the western markets in a rut and the Eurozone mired down by the sovereign debt crisis, the stock market has hosted some landmark IPOs by foreign groups that including Prada, Samsonite and Glencore ("China beats us," 2011).

The Continuing Advantages of the Chinese Market

One could be skeptical about the continuing viability of the Chinese financial market, especially in a market that is as difficult as the airline industry. However, when the source is Bloombergs, one must take a statement seriously. According to the business news outlet, Hong Kong tops anywhere in the United States in financial market development ranking. The Hong Kong stock market topped the World Economic Forum's 2011 index of financial market development. This supplanted the Untied States and Great Britain from these highest rankings for the first time in history (Vallikappen, 2011).

The United States and Great Britain both dropped one place from 2010 to rank second and third respectively in the forum's report. The city of Hong Kong jumped from the fourth position, making it the first Asian financial center to take the lead in the 60-country index. This was helped by the non-banking services sector such as insurance and initial public offerings (ibid.).

The fallout from the 2008 global financial crisis still continues to hamper many companies' ability to access capital. This in turn weighs heavily upon economic growth. Around 90% of the surveyed countries have as yet to return to the levels that were prevalent before the economic crisis in terms of their access to capital and the financing via the local equity markets continues to be challenging. "While Western financial centers are understandably focused on short-term challenges, this report should serve as a wake-up call that their long-term leadership may be in jeopardy," Kevin Steinberg, chief operating officer of the World Economic Forum in the United States, said in a statement (ibid.).

In a worldwide phenomenon, IPOs in 2011 plunged 35% to USD $175 billion compared with the same period of year 2010,. This was according to data that was compiled by Bloomberg. According to Bloomberg, the IPOs more than doubled in their holdings to more that USD $285 billion in 2010 according to the data (ibid.).

"We are working very hard to maintain Hong Kong's competitive advantages and increase Hong Kong's capital markets," said K.C. Chan, Hong Kong's secretary for financial services and the Treasury. He further stated that "In the future years, developing Hong Kong's remaining business will give our financial center an additional boost (ibid.)."

For Further Research-IPO Financing -- the Source for Funding First Class

If one asks any economic analyst what runs brand name loyalty, one will likely get a variety of answers, none of them standard. This is simply because brand name loyalty in terms of service and quality is a very ephemeral concept. One usually knows what it is when they see it, but it is difficult to define. It is a concept that is mired in mystique. However, once a company has it, it is hard to break. Many times it is connected with the ideas of luxury and comfort. Further, ask any businessman who has to travel on a regular basis and divide them up among those who can afford a first class flight and those who can not afford first class comforts. Once one gets used to the creature comforts, they are hooked. This author took a look at two first class reviews of the Hong Kong Airlines and Cathay Pacific Airways company. The review of Hong Kong Airlines commented especially about the small amenities such as the food, beverages, wine, spacious seats, reading materials and movies ("Hong kong airlines," 2012). The Cathay Pacific Airways review was far and above what they received before when the airline focused so much on air freight. The reviews were all that the service had hooked them, that it was an improvement over what came before and that they would fly again ("Cathay pacific airways," 2012).