Cathay Remains Under Scrutiny as CEO Takes Fall for Protests

Bloomberg News
Cathay Remains Under Scrutiny as CEO Takes Fall for Protests

(Bloomberg) -- Cathay Pacific Airways Ltd. is counting on the resignation of its British chief executive officer, Rupert Hogg, to move beyond the tumult that saw its employees’ participation in the Hong Kong protests draw the ire of Beijing. But will it be enough?

Incoming CEO Augustus Tang has the delicate task of continuing to placate China, an increasingly important market for the 72-year-old airline, while also minimizing the fallout from staff, customers and investors as the unrest in its home base continues to seethe.

Whether Tang -- a long-time lieutenant with Cathay’s biggest investor, Swire Group -- succeeds or falters, Cathay’s story is having repercussions beyond the carrier itself. It’s become a cautionary tale of modern-day China, with the country increasingly willing to call out companies that want access to its lucrative consumer market, but don’t toe the party line.

“This is the most appalling kowtow to Peking,” David Webb, a Hong Kong activist investor, wrote on his blog just hours after Chinese state broadcaster, CCTV, broke the news of Hogg’s departure on Friday. “Every substantial employer in Hong Kong, in both the public and private sectors, has employees who have participated in marches that have frequently gone beyond their approved spatial or time limits. Should all the CEOs resign?”

Too Little

After China’s aviation watchdog slapped a string of demands on Cathay Aug. 9, the company appeared to swing into action, with Swire chairman, Merlin Swire, flying into Beijing to meet with the authority three days later. But even with Hogg taking the fall, it’s unclear whether China, which along with Hong Kong accounts for about half of Cathay’s revenue, will be satisfied.

The Global Times, a newspaper published by China’s Communist Party, said Hogg’s departure may not be enough to atone for Cathay’s “lukewarm attitude” to dealing with its “radical” employees. Pilots and flight attendants from the airline took part in strikes and demonstrations related to the protest, which has morphed from opposing an extradition bill into a mass repudiation of China’s hold over the territory it took back in 1997.

“Cathay Pacific’s latest gesture was viewed by many as too little to restore its scarred reputation and the loss of customers,” the Global Times said after Hogg’s departure. Chief Customer and Commercial Officer Paul Loo resigned alongside the CEO.

Cathay shares rose 0.9% to close at HK$10.70 in Hong Kong. The stock has fallen about 4% this year, compared with a 1.7% rise in the Hang Seng Index.

First Step

Zhao Dongchen, an analyst at state-run Industrial & Commercial Bank of China Ltd. who fueled Cathay’s plunge last week to a 10-year low by blasting its “poor” handling of the crisis, applauded the top-level changes given the company was “severely lacking in crisis management competency.”

But he also offered some caveats.

“I am not sure that replacing two top personnel will be enough to meaningfully enhance Cathay’s management,” Zhao said in an email responding to questions from Bloomberg. “More likely, this marks a first step.”

Zhao also criticized Cathay for what he described as a “hasty” decision to fire two pilots in connection with the protests, saying the move raised questions about procedural justice.

Meanwhile, Cathay’s flight attendants’ union lamented the departure of Hogg and Loo.

Their workplace “is now and shall continue to be greatly influenced by many unforeseeable elements,” according to a Facebook post on Sunday. Members are being asked not to discuss political topics while flying and be careful on social media and outside of work hours discussing issues which could “cause significant effect on everyone of us now.”

Sets Precedent

The Civil Aviation Administration of China, or CAAC, barred staff who took part in or supported Hong Kong’s protests from flying to the mainland and demanded Cathay provide a plan for improving flight safety and security. On Thursday, it said Cathay had complied with its demands.

“This will pacify CAAC for now, but it may not be the end,” said Shukor Yusof, founder of aviation consultant Endau Analytics. “Once you cave in, it sets a precedence. It could embolden CAAC to seek harsher measures.”

Cathay’s entanglement with the anti-Beijing protests stood out because of its stature and connection to Hong Kong, but it wasn’t alone.

Within days of Cathay being castigated by CAAC and boycotted by state-backed firms, luxury brands Versace, Coach, and Givenchy were forced to apologize for selling T-shirts that implied Hong Kong wasn’t part of China. PricewaterhouseCoopers LLC was accused on Chinese social media -- where nationalistic posters are increasingly pushing the country’s causes -- of not condemning the demonstrations enough after a company-linked online post appeared to support the protests. The firm said it was a fraud.

Cathay suspended ticket sales from counters at the Hong Kong airport due to tightened security measures from the airport authority, the airline said on Monday.

Symbolic Target

In a message to employees obtained by Bloomberg, Hogg said a change in leadership was required so that Cathay could move forward. “There is no doubts that our reputation and brand are under immense pressure and this pressure has been building for some weeks -- particularly in the all-important market of mainland China,” he wrote.

For many, Cathay is an emblem of the years Hong Kong was governed by Britain, making it a target loaded with symbolism. The airline is almost half-owned by the two-century-old conglomerate headed by the U.K.’s Swire family, but now counts state-run Air China Ltd. as its second-largest shareholder.

Joshua Wong, the student activist who shot to fame during Hong Kong’s Umbrella Movement protests five years ago, tweeted that Hogg’s resignation showed how China was tightening its grip over the city and its people.

Pilots Quiet

Most of Cathay’s 32,800 workers are based in Hong Kong and its hub is the airport that had become a key site for the protesters. Last week’s airport shutdown as demonstrators occupied key buildings added to Cathay’s woes, with hundreds of flights scuppered.

While the flight attendants’ union acknowledged Cathay’s need to comply with CAAC’s demands so they can keep flying there, other workers’ groups, including the Hong Kong Aircrew Officers Association have so far kept quiet.

The company’s actions -- which included voicing its support for Hong Kong’s embattled leader, Carrie Lam, and the police, which have clashed violently with protesters -- risk triggering a backlash from staff and its home market, but that may pale in comparison to the alternative of prolonging Beijing’s anger.

“The message China wanted to send was that they have the power and the will to do what they want to do,” said Endau’s Yusof. “Cathay is caught between a devil and the deep blue sea -- it’s the beginning of the end.”

“Like many others in Hong Kong, the future of the airline is in China,” he said.

(Updates share price in eighth paragraph, adds Cathay not telling tickets at Hong Kong airport in 19th paragraph.)

To contact Bloomberg News staff for this story: Kyunghee Park in Singapore at kpark3@bloomberg.net;Evelyn Yu in Shanghai at yyu263@bloomberg.net

To contact the editors responsible for this story: Young-Sam Cho at ycho2@bloomberg.net, Emma O'Brien

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