Cathay Pacific

The major problems facing new Cathay Pacific boss Rupert Hogg after management reshuffle

Oil price misstep and increased regional competition among pile of problems at beleaguered Hong Kong carrier

PUBLISHED : Thursday, 13 April, 2017, 1:54pm
UPDATED : Thursday, 13 April, 2017, 2:08pm

News of Cathay Pacific Airways’ management reshuffle – involving chief executive Ivan Chu Kwok-leung being replaced by chief operating officer Rupert Hogg – boosted the company’s shares on Thursday.

Shares jumped as much as 3.5 per cent from Wednesday’s close, at one stage hitting HK$11.30 during Thursday morning.

But what problems face Hogg? Here is what you need to know about the airline’s business.

What did Cathay Pacific get wrong?

Bosses made a bad bet on fuel prices. They were caught out by the collapse in those prices, because fuel contracts had tied the airline to higher prices for up to four years.

And the Civil Aviation Department unexpectedly scrapping passenger fuel surcharges in February last year immediately removed a chunk of revenue that would have helped ease those fuel woes.

Facing an industry trend for packing more seats onto planes, Cathay Pacific almost came last to expand from nine to 10 seats in economy from next year. That decision, which will align the carrier with competitors, may yet prove unpopular with consumers.

Inside Cathay Pacific's new condensed economy class

The carrier lost HK$575 million last year, the first time its profits fell into the red since 2008. Revenue fell 9 per cent to HK$92.75 billion.

Will Horton from the Centre for Aviation said Cathay Pacific’s competitors could fly more passengers on the same plane, yet do so at a lower cost and make more money. That left the beleaguered Hong Kong airline at a competitive disadvantage, he said.

What competition does the airline face?

The growing number of budget airlines in the region means more travellers have switched to Cathay Pacific’s low-cost rivals, while a weaker global economy has caused a slump in business travel.

Virgin Australia takes on Cathay Pacific and Qantas with Hong Kong-Australia flights

And Chinese airlines offering direct routes to other countries has resulted in dwindling numbers of people flying to Hong Kong.

What is the airline doing to revive its business?

Cathay Pacific started a three-year restructuring earlier this year, seeking HK$4 billion in savings, with HK$2 billion targeted for this year, a major shareholder has disclosed. That included management jobs cuts, a pay freeze for managers, a halt on all non-critical recruitment and a 30 per cent cut in staff costs at its headquarters.

Cuts will not affect Cathay Pacific’s safety and services, says chief executive

And what else could it do?

It has been suggested that Cathay Pacific could launch its own budget airline. BOCOM International Holdings’ head of transportation and industrial research Geoffrey Cheng said travelling on budget airlines had become a global trend and Cathay Pacific could benefit in the long run by offering a low-cost option. But the company said it would only consider that after the completion of the third runway at Hong Kong’s airport.