Cathay Pacific is getting into the discount business. The once reassuringly expensive airline looks to have fired the first shot in what could be a brutal price war. By slashing fares aimed at short tourist breaks, Hong Kong's flag carrier hopes to get bottoms on seats. September saw its passenger load factor fall to 62 per cent, a level thought close to its break-even point. The post-handover hangover hit Cathay hard. Flights originating outside Hong Kong are twice as many as those starting in Kai Tak, making Cathay an inevitable victim of Hong Kong's tourism crunch. Profits are expected to decline by as much as 25 per cent, matching the performance of 1993, when Cathay faced a global airline recession and an expensive attendants' strike. Slashing fares was not done lightly. Having positioned itself upmarket, it will want to avoid being tagged as just another cheap Asian carrier. It will be difficult, because the one-off, never-to-be-repeated offer is likely to be the first of many. Diminishing tourist arrivals increasingly looks like a structural, rather than a cyclical, trend. The allure of an unchanged Hong Kong will never match 'the-see-it-before-it-dies' pitch. Increasingly, Japanese tourists see just another expensive Asian city, while the rest of the region is sliding towards recession. The Hong Kong Tourist Association blitzed Japan with promotions before the handover. Hotel overcharging scandals aside, a natural slowdown was inevitable. With other regional capitals up to 40 per cent cheaper after currency devaluations, their return seems unlikely. The picture is not uniformly bad. New York remains a prime earner, and passenger loads are relatively strong on most European routes. The killer is plunging intra-regional traffic. Japan is critical, being one of the airline's highest-yielding destinations. Direct price competition will be difficult due to government regulations restricting price cuts. Instead, Japanese tourists will get cheap hotels and meal vouchers. The airline has substantial liabilities in yen, which it leaves unhedged, figuring its yen revenues provide a natural hedge. As passenger numbers dwindle that exposure could hurt the bottom line. Similarly, the high-yielding Taiwan route is showing weakness. That pressure is compounded by regional airlines' newly acquired competitive advantage. Paribas Asia Equity estimates that average route yields will tumble 5 per cent this year. Cathay has chosen a quiet period in the Hong Kong tourist calendar to launch its promotion. If successful, and the ensuing months provide no pick-up in arrivals, then a repeat is likely. Tourists more than any other group are price driven in picking destinations and airlines. Outbound fares will lag but are likely to fall. The opening of Hong Kong's new international airport will increase airline capacity, adding to downward pressure on prices. While good news for travellers, profits can only be squeezed further. Cathay operates in a brutally competitive industry. Considering the losses sustained by other carriers, perhaps it is amazing it stayed profitable for so long. The coming two years threaten to prove one of the biggest tests it has ever faced. Cost pressures such as new airport landing fees are unavoidable. Whatever savings are squeezed, the hard reality is that revenues are shrinking. Forecasting an upturn requires an unrealistic insight into Hong Kong's near-term economic future. So long as the pegged exchange rate remains and the US dollar strengthens, Cathay will operate at a huge competitive disadvantage to rival carriers. A rapid turnaround in Asian economic prospects seems unlikely. Against that grim sky, shareholders have little option but to buckle up and wait for a drop in altitude. The outlook is sunnier for passengers, who should for the first time in years benefit from cartel prices unravelling due to competitive forces. As part of the process, that should help to win back Hong Kong's competitiveness. That can only be a good thing.