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Cathay Pacific made changes to boost revenue and restore brand and service value after an annual loss in 2016. Photo: Bloomberg
Opinion
Mind the Gap
by Peter Guy
Mind the Gap
by Peter Guy

Cathay Pacific is a case study in how most companies fail in the long run … if they don’t change

The airline has focused on restoring its brand, ignoring the idea that Asian air travel is being driven by price rather than premium service

Cathay Pacific faces an Asian air war of attrition between price versus value. It is the central issue that will decide its leadership or survival. The new competitive dynamics have sucked in all airlines whether they like it or not. Competitive advantage is increasingly based on the price of a ticket rather than the value of service. Which one do future passengers truly care about?

Asian airline competition has become more intense and unrelenting. National and budget airlines are restructuring operations and business models looking for new profit centres and reducing costs. Cathay Pacific made changes to generate more revenues and restore brand and service value after an annual loss in 2016. This may positively show up in future financial results. But, it may not make a difference if Asian air travel will be driven by price rather than premium service.

Restoring the service quality of the business lounge and mileage programme were important but predictable remedies for brand perception. But, they may be inconsequential to the onslaught.

The common problem facing Asian flag carriers is falling ticket prices. Passenger yields declined for airlines in the Asia-Pacific region for three years in a row from 2014 to 2016, according to the International Air Transport Association (IATA). IATA estimates Asia-Pacific airlines’ passenger demand growth, driven by tourism and business increased 10 per cent in 2017, the third straight year of double-digit expansion. Yet price competition won’t likely recede as nine long haul budget airlines have been established in Asia-Pacific since 2006, according to the Centre for Aviation.

Cathay has also complicated its ownership situation and made itself a hedge fund play. State-owned Air China has a 30 per cent stake in Cathay. Air China is also a majority shareholder in Shenzhen Airlines, which operates 17 international flights from Shenzhen. This only implies an opportunity or evolution for integration as Shenzhen further develops.

Travellers complain about Cathay, but data shows they continue to fly the airline, according to Asian airline analysts. Photo: Xinhua

Then, in November last year Qatar Airways acquired a 9.6 per cent stake in Cathay for HK$5.16 billion (US$662 million) or HK$13.65 per share (at 14.5 times EV-to-Ebitda) making it Cathay’s third largest shareholder after Swire and Air China.

It may be a supporting vote for Cathay Pacific’s turnaround plan, but it also sets a benchmark for any future buyer or shareholder activist. At some point, its owners will have to decide if the company’s model makes sense when long term price competition is hammering the value proposition. And most of all, if the current value of Cathay Pacific’s constituent assets are worth more than whole.

Asian airline analysts remark that many travellers complain about Cathay, but data shows they continue to fly the airline. Business and luxury travellers appear willing to pay a premium for punctuality and better services. But, is that paradox sustainable?

Think of how the networking affect of technology is changing perceptions about transportation service delivery. The “Uber-isation” or “Lyft-ing” of the airline industry is occurring where consumers’ expectations of airline services are affected by their experience with ride hailing apps. Click open a travel app and Cathay Pacific’s air fares are consistently ranked and presented as the most expensive without an explanation why. User perceptions become hard to change between apps.

Qatar Airways announced in November that it had bought a stake in Cathay Pacific, giving the Doha-based airline a toehold in the potentially lucrative Asian aviation market. Photo: AFP

Unlike other airlines, Cathay is controlled by a family-owned conglomerate which operates like a traditional, Hong Kong Chinese family- except it has successfully augmented family managers with an extended family of carefully recruited, long term career managers. This may work in certain industries where dominance is more predictably entrenched, like property development or sugar refining, but in a chaotically competitive industry increasingly influenced by state players and budget airlines, talented and ruthless innovation and decision making are needed more than family loyalty. Change isn’t pretty.

Peter Guy is a financial writer and a former international banker

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