One company, two systems
74-year-old Cathay Pacific navigates through coronavirus and protests.
Six months ago, Fion, a flight attendant with Cathay Pacific Airways, avoided wearing a face mask for fear of being associated with the pro-democracy protests that were rocking Hong Kong. Now, she wears a mask on all flights to and from mainland China to guard against the coronavirus that has killed hundreds and sickened tens of thousands.
The mask confusion reflects the twin challenges facing Hong Kong’s biggest and oldest airline. But while the coronavirus is a huge challenge today, the bigger test for the company may be how it navigates the delicate balance of “one country, two systems”.
In early 2019, investors breathed a sigh of relief after Cathay reported a profit for the first time in three years, having completed a lengthy restructuring plan. Protests dented inbound travel to Hong Kong, but better-than-expected passenger traffic helped the airline’s share price recover toward the end of the year.
Then the coronavirus hit. Within two trading days just before the Lunar New Year in late January, Cathay’s share price plunged 13% as investors in Asia — whose memories of Sars epidemic remain vivid — feared the worst was yet to come.
“It depends on how quickly the situation escalates, but I imagine airlines in the region will be severely impacted,” said Paul Yong, an analyst at DBS Group Research.
In response to the dwindling travel demand, Cathay announced in early February that it would slash mainland China flights by 90% and consolidate schedules on other routes, bringing the total capacity cut to 30% worldwide over the next two months. It has also asked its employees to take three weeks of unpaid leave by the end of June to further cut costs.
In a video message urging staff to cooperate, CEO Augustus Tang compared the current challenges to the 2009 financial crisis, saying, “The situation now is just as grave”.
China air passenger traffic dropped as much as 70% when the Sars epidemic broke out 17 years ago and only began to recover after five months of consecutive decline.
The impact of the coronavirus has been sharp and sudden, but the silver lining is that the aviation industry tends to rebound quickly once such crises are over. Cathay Pacific in particular has a track record of being resilient in tough times — it returned to profit in the second half of 2003, when the Sars epidemic ended.
But this time around, the political challenge hanging over the airline could hamper a speedy recovery.
The airline generates almost half its revenue in China and Hong Kong. Like Hong Kong itself, Cathay is in a delicate position when it comes to navigating tensions between the semi-autonomous territory and the mainland.
Rupert Hogg dramatically resigned as CEO of Cathay last August amid criticism from Chinese regulators over the involvement of the airline’s employees in the Hong Kong protests. Hogg’s deputy Paul Loo also stepped down. One month later, John Slosar resigned as chairman, saying he would “retire”.
Speaking on condition of anonymity, sources with knowledge of the decisions said the management reshuffle was an attempt by Swire Pacific, Cathay’s parent company, to make peace with China.
Hogg was replaced as CEO by Augustus Tang. Upon taking office, Tang published several statements condemning the violent protests and supporting the government’s work to restore order in Hong Kong. He also urged employees via internal letters that they should “mind their words and actions” on social media and in private, so as to ensure the “unimpeachable reputation” of the company.
But while tensions seem to have eased since the Beijing-friendly Tang took over, Cathay has yet to restore its image in the eyes of Chinese patriots.
Cathay is in the midst of a lawsuit for wrongful dismissal after firing flight attendants’ union leader Rebecca Sy, who said she was sacked because of her pro-protest social media posts.
This incident, says Fion, has deterred many employees from taking active roles in the union.
“I have never seen such reluctance before, my colleagues all prefer staying silent in this sensitive timing,” said Fion, who has worked at Cathay for 15 years.
The political crackdown at work, combined with Cathay’s latest cost-cutting measures, are prompting many to rethink their commitment to the company, she added.
There are even calls for a boycott of Cathay Pacific in Hong Kong — though fortunately for the company, it is much harder to sustain thanks to its quasi-monopoly in the territory. Following its acquisition of the budget carrier Hong Kong Express, the group currently holds over half of the seat capacity at Hong Kong International Airport.
“I wanted to join the boycott, but it is just impossible because Cathay has all the best slots,” said a frequent Cathay flyer. The airline is the default option for his form, a US investment company, because it has “excellent service that no other Chinese airlines can provide”.
Top-notch service is also why staterun Air China, the second-largest shareholder of Cathay Pacific, remains committed to its 30% stake despite the political saga, according to Luya You of Bocom International.
“Air China has still got a lot to learn from Cathay, a full-service global carrier with premium offerings,” said You. “They definitely find the relationship with Cathay worth continuing.”
Cathay Pacific has introduced a series of damage-control measures in recent months in response to declining travel demand, including steep discounts and cuts in passenger and cargo flight capacity. These measures have started to bear fruit, as seen in recent improvements in occupancy rates.
Although overall airline passengers in Hong Kong fell 13% in December, the traditional peak travel season, the number of passengers Cathay carried dropped just 3.6%.
But this comes at the expense of profit margin. Bookings were driven mainly by low-fare tickets and lower-yield transit traffic via Hong Kong. The latter grew by 15% in December compared to the same time in 2018.
“My doubt is, if customers get used to the discounts, are they willing to pay the regular price again in the future?” said Zhao Dongchen, research director at ICBC. “Not to mention we are experiencing an economic slowdown and an intense price war with lowcost carriers.”
In terms of pricing, Hong Kong Express can help fill a void for Cathay Pacific, said Andrew Cowen, chairman of the Asian airline advisory group Mango Aviation Services and the former CEO of Hong Kong Express. It can also help Cathay to tap into the market of younger travellers, who are more price-sensitive, he said.
The exclusive destinations Hong Kong Express offers, including secondary cities in Japan, are also beneficial to Cathay’s market expansion, according to You of Bocom.
But for now, Hong Kong Express is “likely to be a further drag on Cathay’s bottom line”, given the budget carrier lost money in 2018, said Yong. “The acquisition has its positive side in the long run, but it could not have come at a worse timing.”
He added that Cathay’s gearing ratio — net debt to total equity — is near a 10-year high, leading to a decision to defer delivery of four Airbus aircraft to delay capital investments.
Cathay is also asking suppliers for price reductions, implementing hiring freezes, postponing major projects and stopping all non-critical spending. “Preserving cash is now the key to protecting Cathay’s business,” CEO Tang said in an internal video message earlier this month.
But despite the pessimism in the near term, the Swire family has faith in the airline’s future based on the long-term potential of China, according to Brendan Sobie, founder of the Singapore-based consulting company Sobie Aviation.
Hong Kong is becoming increasingly connected to China’s Greater Bay Area by bridges and high-speed rail, and a third runway at Hong Kong International Airport is scheduled to open in 2022. Given this growth potential, Cathay Pacific “would want to expand and maintain their market share”, he added.
“As long as Hong Kong maintains its status as a regional trade hub, there are good reasons to be confident in Cathay,” said Yong.