Hong Kong Express Airways will transform itself into a budget airline in July or August next year.

As a low cost carrier, it will fly to cities in China, South Korea, Japan and Southeast Asia, and use the traffic rights of Hong Kong Express to Shanghai, Beijing, Singapore, Seoul, Kuala Lumpur, Osaka and Taipei.

The new budget model, which has not been named yet, plans to acquire 15 Airbus 320s over the next three to four years. According to Yang Jianhong, president, Hong Kong Airlines, the new budget carrier will be headed by a CEO with a background in European budget airlines.

Hong Kong Express' existing five Boeing 737-800s will be turned over to Hong Kong Airlines next year. Its pilots can opt to retrain for new budget carriers or work for Hong Kong Airlines.

Hong Kong Express Airways' transformation as budget carrier poses a threat to mainline carriers including Cathay Pacific which enjoys a lucrative regional routes.

Some analysts say that the collapse of Viva Macau and Hong Kong's Oasis Airlines is an ominous sign for low cost carriers based in Hong Kong when rivals in other Asian cities are thriving. Hong Kong has no budget terminal and thus the carriers face higher overheads than those based in Kuala Lumpur or Bangkok, for example.

"The new budget carrier will have a tough time competing with AirAsia and Tiger Airways for Southeast Asia destinations because they have relatively low operating costs in their hubs in Singapore and Malaysia," said Kelvin Lau, transport analyst, Daiwa Capital Markets.