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A new livery Cathay Pacific 777-300ER[/caption]
By any measure Cathay Pacific 國泰航空 has just reported on a terrible financial year in which it made its first full year loss since 2008.
However it hasn't thrown in the towel, and the interesting questions concern just how changes in its concepts of product excellence, including less passenger amenity in economy and more ancillary charges, might help it recover.
Cathay Pacific lost a net $HK575 million in 2016, compared to a profit of $HK6 billion in 2015. Much of this was attributed to fuel hedging losses which critics might variously describe as mishaps or misjudgements.
In its statement the airlines says:
The operating environment for the Group’s core airline business was difficult in 2016, with a number of factors adversely affecting their performance. Intense and increasing competition with other airlines was the most important. Other airlines significantly increased capacity. There were more direct flights between Mainland China and international destinations. Competition from low cost carriers increased. Overcapacity in the market was a particular competitive problem for our cargo business. Three economic factors were also important, the reduced rate of economic growth in Mainland China, a reduction in the number of visitors to Hong Kong and the strength of the Hong Kong dollar. Hong Kong dollar strength made Hong Kong an expensive destination and caused revenues earned in other currencies to be reduced on conversion into Hong Kong dollars. All these factors put severe competitive pressure on yields. The Group benefited from low fuel prices, but the benefit was reduced by fuel hedging losses, largely incurred on hedges put in place when the fuel price was much higher than today.
Whether taking the consequences of these pressures out on passengers as previously announced by introducing low cost carrier standards of cabin amenity in reductions in seat dimensions, or having more ancillary charges, will turn around its profitability remains to be seen.
Cathay Pacific is without doubt in a tough place in terms of changes of customer expectations, and an apparent loss of the strength of its brand in the past in terms of full service quality.
The blame for some things cannot be fairly laid at management's feet, while others, like fuel hedging policy most certainly can, but that's a set of issues of more interest to Hong Kong analysts than Australian or PRC customers.
The results certainly weaken Cathay Pacific's fundamentals against the much stronger position of Qantas in the Australia-Hong Kong market, as well as its recent lift in capacity that bypasses Hong Kong for those who don't get any pleasure out of changing flights in the city's crowded airport on their way to cities in the mainland.
Qantas isn't Cathay Pacific's main problem. That might just be a shift away from Hong Kong connections for China-Australia traffic in general as new routes fragment the market between both countries. Such shifts in growth and traffic patterns have been emerging for more than a decade and seen new players move into regional as well as long haul services. China travellers clearly include many who are as keen to avoid connections in Beijing or Shanghai as they are in Hong Kong.
It's that shift that is directing much larger volumes of China leisure and discretionary travellers onto non-stop services from dozens of mainland China cities to the outside world. Whether any Hong Kong flag carrier has an answer to this has yet to be demonstrated.