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Cathay Pacific

Cathay Pacific can look to what competitors have done, as it struggles to keep lid on rising costs

Qantas and British Airways, during their cost-cutting exercises some years back, made deeper and more painful cuts, helping them return to the black

PUBLISHED : Thursday, 09 August, 2018, 7:03am
UPDATED : Thursday, 09 August, 2018, 7:08pm

Cathay Pacific’s restructuring efforts have shown some early results but its struggle to keep a lid on costs remains apparent.

Hong Kong’s flagship carrier, which is midway through the three-year exercise, saw overall costs rise by 8.5 per cent to HK$53.3 billion (US$6.8 billion) in the first six months of the year.

Fuel continued to be its biggest expense – the airline is still suffering the effects of poor long-term bets on the price of oil some years back and now, like all other carriers in Asia, faces rising oil prices. Cathay Pacific spent 31 per cent of its first-half operating expenses on fuel, followed by 19 per cent on staff and 16 per cent on airport and flying fees, and 9 per cent on maintenance.

Analysts expect the airline to turn a full-year profit – if it can continue to benefit from the growth factors of a buoyant cargo business and an increase in airfare prices, and press on with efforts to rein in staff costs.

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When CEO Rupert Hogg took office in May last year, he promised a turnaround through boosting revenue and cutting costs. The airline has been trying to get aircrew to agree to lower pay and smaller benefits to shave HK$1 billion off its HK$20 billion annual employee costs.

The airline has also made 600 head office staff redundant in the past year and last week it revealed plans to cull more – though no specifics were given – from its 7,000-strong headcount across 100 overseas offices.

Hong Kong-based aviation analyst Will Horton from CAPA Centre for Aviation acknowledged Cathay Pacific’s restructuring included a “large focus on revenue generation and not just cost and productivity”.

But the airline may still want to pay closer heed to how rivals have managed costs.

Qantas and British Airways, during their cost-cutting exercises some years back, made deeper and more painful cuts, helping them return to the black.

Between 2007 and 2017, Australia’s national airline cut staff costs by 5 per cent and shrunk its workforce by 4,700. It carried 53 million passengers last year.

British Airways reduced staff costs by 10 per cent and employee numbers by 4,000 in the same period, and flew 45 million people last year.

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The cuts meant Qantas reduced its unit cost – how much it costs to fly each passenger per kilometre – to 4.99 Australian cents (3.7 US cents), down 10 per cent from 2010 to last year. British Airways in the same period kept costs broadly flat, rising just about 1 per cent to 4.37 pence (5.66 US cents) last year.

In comparison, Cathay’s staff costs during the same period grew 30 per cent when accounting for inflation. Its staff numbers grew 6,800 to 32,700 last year, when it carried 34 million passengers.

Its unit cost rose about 4.9 per cent to 2.12 HK cents.

“If you are still interested in being a premium carrier, then to a certain extent with the service levels required, you probably need a lot more staff,” said Geoffrey Cheng Bok-hoi, deputy head of research at Bocom International.

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But he added: “My feeling is [Cathay] tends to have a higher cost structure.”

Airline chairman John Slosar said during a results briefing on Wednesday: “One of our key challenges remains cost management – our goal is to keep unit cost flat whilst not doing anything which compromises the quality of the customer experience that we deliver to our passengers.”

But Cathay has also been bogged down by higher costs it cannot control.

Higher fees introduced two years ago at Cathay’s home base Hong Kong International Airport to help fund the expansion of its third runway meant the airline spent 15 per cent of operating costs – HK$15.2 billion – on “landing, parking and route expenses”.

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In contrast, similar fees disclosed in Singapore Airlines’ financial report showed these expenses at Changi Airport only accounted for 6 per cent of costs or S$853 million (US$624 million) last year.

Horton said the HKIA charges were “egregious”.

“Cathay and other local airlines are using their own private capital to grow and substantially invest in Hong Kong. The airport and government have not done their share to be supportive.”