Cathay Pacific left in the cold as mainland carriers soar

Cathay Pacific reported losses for the first time since 2008. Pic: Cathay Pacific

AT a time when full-service airlines are cutting back on spending due to an increasingly saturated market, Cathay Pacific recorded its first loss since 2008.

A report on South China Morning Post (SCMP) said Hong Kong’s flag carrier saw a loss of HK$575 million (US$74 million) in 2016 and will continue to struggle this year. This year “is going to be a difficult year and current trends won’t stop”, chief operating officer Rupert Hogg told the publication.

It was also reported passenger yield, the money earned from flying a passenger for 1km and a key measure of profitability, was down 9.2 per cent last year.

In January, Cathay’s share price 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.

Competition with Chinese airlines

Mainland airlines like China Eastern is eating into Cathay’s market. Source: Shutterstock/Vytautas Kielaitis

One of the main reasons Cathay is buckling under increased competition is the rise of affordable Chinese carriers serving mainland routes.

The quick, successive growth of Chinese rivals such as China Eastern Airlines and China Southern Airlines has brought prices down at a time when Cathay’s costs have risen because of the strength of the Hong Kong dollar against the Chinese yuan.

Cheaper hometown rival Hong Kong Airlines is also expanding rapidly to destinations served by Cathay.

“Cathay and Hong Kong have been dwarfed, completely overwhelmed, by China’s growth,” Malaysia’s aviation consulting firm Endau Analytics founder told Skift.

“China doesn’t need Hong Kong as a gateway. [Hong Kong’s] position has become a lot less important than 10 years ago.”

It doesn’t help Cathay that Hong Kong is caught on the wrong side of China’s “one country, two systems” arrangement as the regional hub is excluded from the air transport deals China is cutting.

An open skies agreement signed in October between China and Australia hampered Cathay’s dominance of direct flights and connections throughout Asia and to Europe.

The deal allows mainland Chinese 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.

Plus, the number of inbound visitors in Australia are at a record high, stimulated by China-Australia year of Tourism 2017. More than 1.2 million Chinese tourists visited Australia in 2016, up 20 percent from the year before.

SEE ALSO: What does China-Australia Year of Tourism 2017 mean for both countries?

Several Chinese airlines have agreed to work with Australia to introduce joint marketing and promotional efforts, as well as increase capacity between both countries, indirectly leaving Hong Kong and its flag carrier in the cold.

Cost-cutting measures

Two days after reporting its losses, the 71-year-old Cathay Pacific revealed it will axe office management costs by 30 percent and a three-year transformation plan will take effect to resurrect the operation.

A separate report by SCMP said job cuts can be expected; presently, 19,000 people work within the Cathay Pacific group’s airline businesses based in Hong Kong.

A Cathay Pacific spokesman told the paper: “We won’t know the final number of role changes or affected staff until later in the process. We plan to communicate the changes before June and will provide updates as we progress.”

The airline’s top management is also undergoing a major restructuring in attempt to repair its current situation.

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, Reuters reported.

Similar cost-cutting plans could also be executed by Singapore Airlines as the airline struggles to stay relevant in a market of newer, more affordable brands and increased competition with Gulf carriers.

Mathieu De Marchi, a Bangkok-based aviation consultant at Landrum & Brown told Bloomberg: “More full-service airlines in Asia-Pacific might consider [charging for extra amenities and services].”

SEE ALSO: Will Singapore Airlines be forced to cut back on luxury amenities and services?

Dwindling Hong Kong numbers

Inbound numbers for Hong Kong are dipping. Source: Shutterstock/Daniel Fung

The fall of Cathay Pacific is also inextricably tied to dipping tourist numbers in Hong Kong. According to Skift, Tourism Board chairman Peter Lam predicted the number of visitors to Hong Kong will decline by 2.2 percent this year after falling 4.5 percent last year.

To improve airport services, Hong Kong International Airport has plans in the works to overtake Dubai and London to become the world’s leading international air traffic hub.

To achieve that status, approximately 650ha of land will be reclaimed north of the airport for construction, and a new passenger terminal will be designed with over 280,000sq m of extra space.

Airport Authority Hong Kong chief executive Fred Lam Tin-fuk said the airport needed large-scale expansion to respond to long-term demand growth.

However, the recent China-South Korea spat over a controversial US military-deployed missile in South Korea is helping to redirect Chinese tourists to Hong Kong.

Head of Hong Kong consumer research with CLSA Mariana Kou told SCMP, “Hong Kong may be one of the major beneficiaries of the latest movement.”

SEE ALSO: How tension between China and South Korea could affect tourism