BTN's 2009 Corporate Travel Index: Deals To Be Had In Hong Kong's Transpacific Squeeze

Carriers are cutting capacity on routes between the United States and Hong Kong significantly as travel demand to Greater China continues to slide, pushing prices downward and creating more negotiating receptivity with home carrier Cathay Pacific Airways as Hong Kong, Asia/Pacific's financial and banking capital, feels the effect of the global financial crisis.

Available seat capacity on U.S.-Hong Kong direct flights are scheduled to decrease by more than 20 percent in the first half of this year compared with the same period in 2008, according to OAG.

Direct seat capacity from Los Angeles decreased 49 percent after United Airlines eliminated all LAX to Hong Kong service and Cathay Pacific Airways dropped its seat capacity by 50 percent.

All other direct U.S. routes—from Chicago, Newark, New York and San Francisco—also are seeing seat capacity drop, albeit not as drastically as Los Angeles.

Cathay is cutting 7.7 percent from its San Francisco capacity. The only other non-U.S. carrier to fly directly to Hong Kong from the United States is Singapore Airlines from San Francisco, a route on which it is cutting capacity by 36.1 percent in the first half of the year.

Continental Airlines, meanwhile, is shaving capacity from its Newark-Hong Kong route by 2.27 percent.

Overall, Hong Kong visitor arrivals increased 4.7 percent annually in 2008, a much smaller rate of growth than the 11.6 percent increase in 2007, according to the Hong Kong Tourism Board. Visitor arrivals originating from the Americas decreased 5.5 percent, year-over-year, in 2008. In 2007, in contrast, Americas arrivals increased by 9.4 percent.

Meanwhile, travelers are trading down from premium classes even on U.S.-Hong Kong routes, causing downward pressure on premium seat prices.

According to FCm Travel Solutions general manager of Hong Kong David Fraser, price drops and reduced corporate travel spending have reduced average transaction values 20 percent to 25 percent. "The smaller non-home-based carriers in Hong Kong are a lot more flexible with corporates and agencies to generate win-win deals," he said. "Cathay dropped fares a reasonable amount, which they previously got away with at a premium to the market because of their strong loyalty in their home country."

The 2009 American Express Global Business Travel Forecast released last fall predicted a 3 percent to 6 percent increase on Hong Kong international/long-haul business class fares in 2009. According to the forecast, Hong Kong's premium traffic traditionally has been "heavily subsidized" by the large financial services and merchant banking sector.

The sector's financial problems are feeding the dramatic demand and capacity reductions, however, and offsetting the price structure seen in recent years in which U.S.-Hong Kong business class capacity was at a premium.

In 2008, front-of-plane airfares on U.S.-originating flights to Hong Kong were far more expensive than fares on the reverse route, but now some carriers have altered that scheme by deeply discounting all fares, according to Gregor Lochtie, vice president and general manager of American Express Business Travel in Greater China.

"What will be interesting to watch is whether 2008's meteoric rise in first- and business-class fares will start to rationalize somewhat, given a drop in demand, or whether carriers will need to keep prices high and hope for stabilized demand in order to maintain strong profit margins," he said.

As companies feel more pressure to cut costs, their corporate travelers are booking fewer direct flights, with some instead choosing to fly multi-leg trips with stopovers in London, according to HRG Westminster Hong Kong general manager Joe Birrell.

The length of the U.S.-Hong Kong flight makes it difficult to shift travelers to the back of the plane, even as corporations squeeze permissible premium-class travel policies. For those sticking to their long-haul policies, however, there is potential for further price relief.

"Existing route deals are being reviewed," according to Birrell, "and we are seeing reduced pricing being offered to encourage travel in premium cabins."