Airbus orders at risk as regulator curbs HK Airlines expansion

HONG KONG Fri Aug 3, 2012 8:31pm IST

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HONG KONG Aug 3 (Reuters) - Hong Kong's aviation regulator has halted the expansion of Hong Kong Airlines following complaints about its service standards, raising fresh doubts about the carrier's orders for Airbus planes worth billions of dollars.

In an unprecedented move by the Hong Kong Civil Aviation Department, the authority has frozen the fleet of unlisted Hong Kong Airlines, controlled by China's HNA Group, to its current size of 20, at least for now.

The decision has cast renewed doubts over the fate of Hong Kong Airlines' orders for 10 Airbus A380 worth a combined $3.8 billion. They are due to be delivered from 2015.

The orders already faced uncertainty due to a row between China and the European Union over airline emissions charges.

The Hong Kong Civil Aviation Department (CAD) said on Friday it had added a condition to the Air Operator's Certificate (AOC) issued to Hong Kong Airlines (HKA) that listed all the current aircraft the airline has in operation.

This meant that Hong Kong Airlines will not be able to operate any aircraft that is not listed on the certificate unless the department later rectified the conditions, it said in an emailed statement.

"It sounds like a very diplomatic way to say that we think your safety standards are slipping so, until you can show us you can handle any additional aircraft being added to your fleet, we would not approve it," said Jeffrey Lowe, general manager of Asian Sky Group, a Hong Kong-based aviation consultants group.

Partly owned by China's fourth largest airline, Hainan Airlines Co Ltd, Hong Kong Airlines signed a draft agreement in 2010 to buy 15 A350 XWB and 10 A330-200 aircraft in a deal worth $5.7 billion in total.

Based on a previous Airbus statement, Hong Kong Airlines had placed accumulated orders for 30 A320 to be delivered from 2012. But Airbus and Hong Kong Airlines declined to disclose the delivery schedule of planes.

"With a very rapid expansion of aircraft fleet in recent years, CAD considers that it is time for HKA to catch up with its current fleet size by consolidating their existing operations," the aviation department said.

Hong Kong Airlines' cargo unit Hong Kong Express Airways also ordered six Boeing B777 freighters last year, according to Boeing's website.

The cargo carrier, however, operated under a separate AOC, the equivalent of a driving licence for airlines, and thus will not be affected, a Hong Kong government spokeswoman said.

The regulator said it had received eight complaints concerning Hong Kong Airlines' service standards since July but none of them are related to its safety standards.

Cabin staff members have been asked to clean the planes and work overtime after Hong Kong Aircraft Engineering Co (HAECO) stopped maintenance service to Hong Kong Airlines in June due to an unsettled maintenance bill, local media reports said.

The airline has suffered flight delays, which had been escalated by recent typhoons in Hong Kong and Taiwan.

Hong Kong Airlines could probably accommodate the new conditions in the short term, said Credit Suisse analyst Timothy Ross.

"However, in 2014 and 2015, HKA has major additions to its fleet (including Hong Kong's first A380s) and to have its fleet growth limited by an impaired AOC would have real implications for aircraft utilisation and the carrying cost of surplus assets," he added.

Hong Kong Airlines apologised to customers, saying the recent unstable operations of some of its flights was caused by the shift of maintenance service to a new provider from HAECO.

The new provider had started recruiting staff, training and purchasing facilities and that would take time to have an effect, it said in a statement.