AVIATION
Mind the Gap
by

Comment: Cathay Pacific is a flawed business model in a changing world

PUBLISHED : Sunday, 26 March, 2017, 8:28pm
UPDATED : Monday, 27 March, 2017, 3:01pm

Cathay Pacific Airways has lost its glamorous and exclusive image because it is no longer a glamorous and exclusive business. “Arrive in better shape” was their old slogan. Today, it means “Lost in transit.” Their business model is irrevocably flawed in a changing world.

An unexpected announcement of a HK$575 million loss last year and a reversal of a HK$6 billion profit in the previous year suggests there is no turnaround on the horizon. Aviation fuel accounted for nearly 30 per cent of total operating costs last year. Yet, near catastrophic bets on future fuel costs raise serious questions about management competence.

Cathay is mired in a stuck-in-the-middle strategy – unable to compete as a discount airline and unable to sustain a premium brand

We will probably never know how Cathay’s management erred to cause a huge US$1.8 billion loss in oil derivatives, even though they try to explain it with phlegmatic dignity. Derivatives salespeople are laughing all the way to the bank and surprised the senior management team still survives.

The airline blames a slump in business travel, global conditions and the increasing competitiveness of mainland airlines. But all airlines operate in difficult conditions. Cathay management appears oblivious to reality, living in the fantasy profit world of Hong Kong’s protected cartels now beset by the cruel world.

According to Bloomberg, China plans to build more than 50 airports by 2020 to accommodate more passengers, raising the number of civil transport facilities from 210 to 260. The government also plans to build six airport clusters nationwide and elevate airports in Beijing, Shanghai and Guangzhou to international hubs.

Through the 70s and 90s Cathay benefited from its colonial monopoly concession from the Hong Kong government. That co-dependency hasn’t changed. Cathay and its owners, Swire, have such a unique and lucrative deal with the government that taxpayers will be paying for a third runway. They collude to prevent Hong Kong travellers from benefitting from the entry of local, low cost, discount airlines.

Sustaining the cost, and passing on the pricing structure of a premium airline to passengers is unsustainable when confronting the onslaught of competition from mainland airlines.

Cathay is mired in a stuck-in-the-middle strategy – unable to compete as a discount airline and unable to sustain a premium brand. They respond in the typical, smug, self-immolating Hong Kong (and I mean Hong Kong British and Chinese) fashion that characterises many of the local businesses when confronted with real competition – they cut quality.

The only sensible option for Swire is to sell Cathay while it still holds valuable assets like landing slots, a decent cargo business and maintenance facilities

That’s evident in the numerous complaints online about Cathay’s service quality, and a mileage awards programme which looks about as difficult to achieve as a manned expedition to Mars. Even the business class lounge has been subcontracted to an outside manager.

Controlling your brand is paramount when your business is in turmoil. Instead of reinventing the business or innovating, management chooses to die by a thousand cost cuts over time.

Cathay shouldn’t be encouraged with sympathetic descriptions of being a Hong Kong “icon.” They are owned and controlled by a wealthy family who run it for profit, not public trust.

The only sensible option for Swire is to sell Cathay while it still holds valuable assets like landing slots, a decent cargo business and maintenance facilities.

No doubt, a mainland company will devour them. Current management is utterly confused and cannot stop the insurmountable competition and deterioration of value.

Peter Guy is a financial writer and former international banker

business-article-page