Hong Kong Express Airways has announced it will transform itself into a budget airline by mid 2012.

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

The new budget airline, which has yet to be named, plans to acquire 15 Airbus 320 aircrafts over the next three to four years. According to Yang Jianhong, the president of Hong Kong Airlines, the new budget carrier will be headed by a CEO with a background in European budget airlines.

Hong Kong Express’ fleet of five Boeing 737-800s will be turned over to Hong Kong Airlines next year. Its pilots can opt to retrain for the new budget carrier or work for parent company Hong Kong Airlines.

Hong Kong Express Airways’ transformation to budget carrier will pose a threat to full-service carriers, including Cathay Pacific, which enjoy a monopoly on lucrative regional routes from Hong Kong.

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. Though budget carriers in other Asian cities are thriving, Hong Kong lacks a budget terminal and thus local carriers face higher overheads than those based in Kuala Lumpur or Bangkok.

“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, a transport analyst for Daiwa Capital Markets.