Cathay Pacific will downsize and reduce budgets to compete with Chinese airlines
CATHAY PACIFIC AIRWAYS is expected to announce job cuts, cost reductions and to shift flights to its short-haul arm when it unveils the results of a key review this week, as it grapples with growing competition from Chinese carriers.
The 71-year-old Hong Kong airline is under pressure to combat aggressive state-supported mainland carriers, and to position itself against an “open skies” deal signed last month between China and Australia.
Cathay scrapped its second-half profit forecast in October and announced a review of its business. The December edition of Cathay’s staff magazine, seen by Reuters, reported Chief Executive Ivan Chu would unveil the results on January 18.
“The new management direction has to look past market share gains,” said Will Horton, a Hong Kong-based analyst for aviation consultancy CAPA. “That hasn’t been profitable and will become more competitive. It is well past time to get serious on costs.”
Cathay’s share price has tumbled to its lowest level since the depths of the global financial crisis in 2009, and none of the 18 analysts polled by Thomson Reuters have a “buy” recommendation on the stock.
Some analysts say the carrier will for 2017 report its first full-year loss since 2010.
The rapid growth of Chinese rivals such as China Eastern Airlines and China Southern Airlines has put pressure on ticket prices at a time when Cathay’s costs have risen because of the strength of the Hong Kong dollar against the Chinese yuan.
Lower cost hometown rival Hong Kong Airlines is also expanding rapidly to destinations served by Cathay.
James Pearson, who heads Basair Aviation College in Brisbane, said Cathay may need to slash its 33,700 workforce, reduce frequencies on underperforming routes and cut costs at short-haul arm Cathay Dragon, where it could shift more flights.
“[It could also] focus more greatly on ancillary products to drive incremental revenue, a focus on the back-end of the plane which hasn’t traditionally been Cathay’s forte,” Pearson said.
Cathay does not have a low-cost arm, and costs at its short-haul carrier Cathay Dragon are nearly as high as those at the parent, said one source with knowledge of the situation who was not authorized to speak publicly about the matter.
Cathay is also caught on the wrong side of China’s “one country, two systems” arrangement toward Hong Kong, as the regional hub is excluded from the air transport deals China is cutting.
The latest was an open skies agreement signed in October between China and Australia, a key market for Cathay for both direct flights and connections throughout Asia and to Europe.
Flights to the South West Pacific and South Africa – the bulk of them to Australia – represented 13.6 percent of Cathay’s capacity in the first half of 2016.
The open skies deal allows mainland carriers unlimited capacity on routes to Australia, at a time when Cathay is not allowed to add any more flights to Australia’s biggest airports and can only increase capacity by using larger aircraft.
Capacity between Australia and mainland China grew by 61.6 percent in the five years ended 2016, according to data from Flightglobal. Over the same period, capacity between Australia and Hong Kong grew by just 2.6 percent.
In an emailed statement to Reuters, the Hong Kong government said it had not held major talks with Australia about expanding air access since 2015, when no deal was reached.
Chinese hubs such as Guangzhou, Shanghai and Beijing have seized market share as a result.
“Almost three years ago, the three Chinese hubs shared less than a third of Hong Kong’s connections. Now it’s catching up,” said Singapore-based UOB Kay Hian analyst K. Ajith, who has a “sell” rating on Cathay.
“One must rise while the other one must fall.” – Reuters