Cathay Pacific Sees a Discount Path to Survival

David Fickling
·5 min read

(Bloomberg Opinion) -- For an airline built in an era of globe-spanning cosmopolitanism, a pandemic that’s shut the world’s borders is particularly brutal.

No wonder Cathay Pacific Airways Ltd. is struggling. Just four months after receiving a HK$40.95 billion ($5.3 billion) bailout package from Hong Kong’s government, the carrier is planning to cut a quarter of its workforce and close the Cathay Dragon shorter-haul brand that it has operated since the 1990s.

Remaining Hong Kong-based crew will be asked to agree to changes “to match remuneration more closely to productivity and to enhance market competitiveness,” Cathay said in a statement Wednesday. That’s a fancy way of saying many of them will be exchanging their glitzy full-service uniforms for the more cheap-and-cheerful outfits of recently acquired discount carrier HK Express. With the city’s unemployment rate at a 15-year high and limited opportunities to move to a rival or another city, staff may end up having to take whatever they can get.

All of this represents a remarkable turnaround. Cathay was traditionally so hostile to discount travel that it fought a three-year regulatory battle to stop Qantas Airways Ltd. from setting up a budget airline in the city. Almost uniquely among Asia Pacific carriers, it didn’t have a low-cost arm until management finally jumped on board last year by purchasing HK Express from cash-strapped HNA Group Co. The best explanation for the demise of Dragon is that management sees its future as one split between a low-cost HK Express and a premium Cathay Pacific brand, with no space in the middle for a regional carrier.

For a major city and tourism hub, Hong Kong is a surprisingly difficult place to catch a budget flight, with such traffic accounting for just 12% of the total last March, according to consultancy CAPA Centre for Aviation. Full-service regional carriers like Dragon appeal to pretty much the same shorter-haul market as discount airlines, except with higher staffing costs and a chunk of seats at the front for business-class passengers. With management cutting 8,500 jobs and corporate travel likely to recover even more slowly than leisure flying, now is as good a time as any to jump into low-cost aviation with both feet.

Repainted in HK Express livery, Cathay Dragon’s A320s would be perfectly placed to give the group a discount fleet that could take passengers to other Asian destinations such as Singapore, South Korea, Taiwan and Japan, where infection rates have been low and travel bubbles may open up in the coming months.

Even these planned cuts are going to leave the airline with more employees than it knows what to do with. Roughly half of Cathay’s traffic connects with Europe and North America, which have seen an alarming spike in coronavirus infections in recent weeks. The carrier will be operating at about 10% of usual capacity for the rest of this year and well below 25% for the first half of 2021. In a best-case scenario it will be at 50% capacity through 2021, the airline said Monday.

Cathay will still remain hobbled by the fact that its home territory is a single city that has seen its promised autonomy eroded. To the extent that any airlines are coping in the current climate, it’s those with dominant positions in cozy domestic markets where coronavirus infection rates have been low. Industry-wide passenger traffic on domestic routes in August was down only 51% from a year earlier, compared with the 88% fall on cross-border routes, according to the International Air Transport Association.

While Cathay’s shares are down 43% this year, the mainland-listed stock of China Eastern Airlines Ltd. has fallen just 16%. Shares of Spring Airlines Co., a budget carrier operating out of China Eastern’s home hub of Shanghai, have actually risen 1.2%.

In theory, mainland China should be the domestic market Cathay so badly needs. Yet it has traditionally accounted for a surprisingly small share of traffic, less than Southeast Asia or Northeast Asia.(1) As an emblem of Hong Kong’s independent identity, Cathay and HK Express can expect few favors from Beijing in its current mood. Going head-to-head with Spring Airlines, whose Chairman Wang Yu is one of the great and good on the Chinese People's Political Consultative Conference, doesn’t look like a smart way to curry favor with the mainland leadership, either.

President Xi Jinping plans to integrate Hong Kong further with the Greater Bay Area megalopolis that includes Guangzhou, Shenzhen, Dongguan and Macau, but there haven't been too many carrots for businesses such as Cathay.

China has been remarkably slow at opening up its border with Hong Kong since the pandemic struck, in spite of an infection rate that's mostly been lower than in the mainland in recent months. Meanwhile, Taiwan has been left off the list of 11 destinations with which Hong Kong is discussing travel bubbles, a decision that makes little sense except as an expression of Beijing’s political priorities. Even with a newfound love of discount airfares, there’s no cheap way out of Cathay Pacific’s current crisis.

(1) To some extent this is a result of geography, since traffic is calculated as passengers multiplied by distance flown. Still, Manila, Taipei and Hanoi are all closer to Hong Kong than Shanghai, while flights to Seoul and Osaka are not much further than those to Beijing.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

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