CATHAY PACIFIC RUNS INTO TURBULENCE WITH ITS GLORY DAYS LONG BEHIND IT
Storied carrier forced to explore every option available with first back-to-back losses in 70 years looking likely
It’s time for Cathay Pacific boss Rupert Hogg to go to the back of the plane.
With the company expected to announce another loss this week, Cathay Pacific Airways needs to shift strategy from being the region’s top airline for premium flyers and make a bigger effort to woo some of the millions of mainland leisure travellers who have enriched its state-owned rivals in China, analysts say.
The chief executive Mr Hogg today may report a loss of HK$1.2 billion (Dh561.9 million) for the six months through June, the median in a Bloomberg survey of three analysts showed. That would potentially put Cathay on course for the first back-toback annual losses in its 70year history. The Hong Kong company last month warned of a “disappointing” first half.
Cathay is caught between budget carriers luring regional tourists and deep-pocketed, state-owned competitors on the mainland offering cheaper, long-haul flights from cities like Shanghai, Guangzhou and Shenzhen, without the need to fly via Hong Kong. The airline’s fortunes are entwined with the former British colony’s declining prominence relative to the burgeoning wealth of the surrounding southern China.
Key to winning back a bigger slice of the market from state-owned China Eastern Airlines and China Southern Airlines is Cathay’s partnership with flag carrier Air China, says John Hu, an analyst at Morningstar Investment Services in Shenzhen.
“Cathay is begging with a golden bowl,” Mr Hu says. “It has Air China on its back in the mainland but it has yet to fully exploit that tie-up.”
Air China is Cathay’s second-largest shareholder with a 30 per cent stake, but their co-operation is hampered by the fact that they belong to rival aviation alliances, limiting codeshare agreements, says Corrine Png, the chief executive of Crucial Perspective, which focuses on equity research in Asia’s transport sector. Cathay is part of Oneworld, while Air China is a member of Star Alliance.
Investors so far have been unimpressed after Cathay in May said it would cut 600 jobs as part of a three-year corporate revamp, its biggest in two decades. That is partly because the airline has revealed little else about the transformation. Cathay’s shares have risen 1.6 per cent since the announcement, compared with a 6.7 per cent gain in Hong Kong’s benchmark index. On Monday, the stock fell as much as 0.9 per cent in early trading, poised for its lowest close in more than two months.
Only two of 20 analysts tracked by Bloomberg recommend buying the stock, with 11 advising holders to sell.
“It’s a good cost initiative, but not a profit initiative,” says Mohshin Aziz, an analyst at Maybank Investment Bank in Kuala Lumpur.
Meanwhile, Shanghai-based China Eastern and China Southern, with its headquarters in Guangzhou, near Hong Kong, have teamed up with peers in the US and Europe through ventures and equity investments to extend their global network. Delta Air Lines took a minority stake in China Eastern in 2015 and American Airlines announced a similar deal with China Southern earlier this year.
While Cathay bet on its hub in Hong Kong to build a clientele of wealthy business passengers prepared to pay premium fares, the mainland players became rich – China Southern flew about 38 million more passengers since 2010 – tapping into the boom in tourists and firsttime flyers spawned by China’s economic boom. In the same period Cathay added more than 7 million flyers.
Last year, 122 million tourists ventured out of China, a number that has more than doubled in seven years, according to data from the China national tourism administration.
Cathay said last year that premium travel was slumping, and has offered seasonal discounts for the front seats.
“While Cathay has a strong premium product that is well-suited for the first and business travel market, its cost structure is less competitive when vying for leisure traffic,” says Ms Png. Cathay needs to take a leaf out of Singapore Airlines’ playbook and start a low-cost carrier to target the budget travel market, which has good growth potential in North Asia, adds Mr Hu.
One way to do that would be through Cathay’s affiliate Hong Kong Dragon Airlines, he says. “There’s already a perception among customers that Cathay Dragon fares are lower than Cathay Pacific. The company should reduce costs for Cathay Dragon and play to that popular perception.”
Cathay merged the two carriers’ websites in March.
A more radical path has been popping up with increasing frequency in speculation on mainland Chinese social media: Air China should acquire or merge with Cathay to create the world’s largest cargo airline and second-largest passenger carrier.
“The reality is that we are getting into a congested market,” says Mr Mohshin. “The superior quality proposition is diminishing by the day because competitors are getting better. The glory days of Cathay are ancient history.”