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Mar 15, 2017

Cathay Pacific suffers serious reversal of fortune, but fights on

Does anyone have a convincing answer to the problems besetting Cathay Pacific?

Ben Sandilands — Editor of Plane Talking

Ben Sandilands

Editor of Plane Talking

A new livery Cathay Pacific 777-300ER

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.

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19 comments

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19 thoughts on “Cathay Pacific suffers serious reversal of fortune, but fights on

  1. comet

    I wonder why Cathay Pacific doesn’t buy A380s?

    They’ve got the A350 going into Melbourne. They’ve got two 777s and two A330s going to Sydney every day. But Hong Kong is completely slot constrained.

    I just booked a flight with Cathay a few minutes ago. I wanted to ride with them one more time before they convert their 777s from 9-across seating to the squished 10-across format. When they go 10-across I’ll stop flying with them. Their rival Singapore Airlines is still 9-across in the 777s.

    I guess Cathay thinks, “Why buy a huge A380 when we can squeeze an extra row of seats into our 777?”

    1. freddagg

      Comet,
      When are CX converting their 777 to 10 across?
      Thanks

  2. nonscenic

    One big problem is Hong Kong airport. Long haul flights obviously have priority but connecting through Hong Kong to a Chinese destination is becoming a nightmare especially to other major airports such as Shanghai Pudong or Beijing. Connecting flights are likely to be seriously delayed or cancelled. If you want to fly Australia to China better fly direct to as near to your destination as possible on the long haul sector, obviously to Cathay s loss. Their Y cabin service has also lost its shine making CZ more of an option (for those prepared to put up with the misery of CAN airport.

    1. JW (aka James Wilson)

      Nonscenic,
      Hong Kong is not without its ATC problems, but the major delays that often affect flights departing Hong Kong for the mainland are actually caused by China, not Hong Kong. Chinese ATC cannot cope with the enormous amount of traffic that now plies the skies within China, resulting in flow control restrictions that cause major delays for flights departing Hong Kong through Chinese airspace. Long haul flights into China aren’t as badly affected as flights from Hong Kong, because it’s easier to hold the Hong Kong departures on the ground, sometimes for hours on end. That causes big headaches for Cathay and has resulted in a big loss of revenue now that many Chinese airlines offer direct flights into the mainland.

      1. Dan Dair

        If accurate, that’s most unfortunate for Cathay.
        Is it the mainland ATC ‘preferring’ mainland airlines ‘along party-lines’ or is it that an aircraft on the ground is less trouble to deal with than one in the air.?
        Perhaps Cathay should draft a prestigious Party oligarch onto their board.?

        1. JW (aka James Wilson)

          Dan,

          Mainland airlines departing out of Hong Kong are affected much the same as Cathay. Two hour delays are not uncommon, especially to Shanghai, and if there is any bad weather around the delays can blow out to 12 hours plus (I kid you not), forcing flights to be cancelled due to crew duty limitations. I once heard a Cathay flight to London being told there would be an eight hour delay to depart via Chinese airspace due to flow control restrictions. Hong Kong’s proximity to mainland China is a major negative in that regard, because it is easy for ATC to hold the Hong Kong aircraft on the ground. It’s harder to delay an aircraft that has already been airborne for many hours, although that does sometimes happen, forcing some flights to divert to other airports.

          Cathay is 30% owned by Air China, so it already has some mainland representation on its board, including Air China’s President, Chief Financial Officer and one of its Vice Presidents. Clearly they don’t have enough pull within the Party!

      2. nonscenic

        Point taken about it being a China ATC issue. The problem for Cathay is that it can’t focus on being a long haul hub without good short haul connections feeding the hub, especially now that Hong Kong isn’t the gateway that it used to be and SIN and KUL are competing for other SE Asian short haul traffic.

  3. 777 Steve

    Yes, sack the entire management team that signed off on their ill advised, and poorly thought through fuel hedging programme.
    Take out that, and they’d have made a tidy profit.

    1. Dan Dair

      777Steve,
      Things are always clearer with the benefit of hindsight.!
      I’ve no doubt the board thought it was a very good deal when they signed-up to it.?

      1. 777 Steve

        Dan the issue is not 20/20 hindsight, the issue is the process behind it. No one else thought it was a clever or good idea, but as ever..those imagineering bluesky good ideas club members thought they knew better than anyone else. Yes there are product and structural issues…but they are fixable, idiotic mismanagement based upon greed and arrogance is not.

        1. ghostwhowalksnz

          Hasnt fuel hedging become a sort profit transfer game. Much like ‘re-insurance’ did for the ethically challenged companies. No surprise it hits taxable profit, thats the whole idea. For any business the cash available is much more important. Profit has become such a debased word in regard to company financial statements. Much better to think of its ‘earnings’

  4. comet

    It doesn’t seem that the governments in Hong Kong or China are looking after Cathay Pacific.

    How could Hong Kong’s relatively new airport at Chek Lap Kok reach capacity in such a short time after opening? Why wasn’t it better planned?

    Why aren’t the Chinese ATCs unable to cope with large volumes of traffic? Couldn’t they add the extra ATC capacity?

    1. ghostwhowalksnz

      They did. It opened with one runway (1999), they built the planned 2nd runway soon after and are proposing/started a 3rd now.

  5. nobeljnet

    Differentiate on service, on time/ safety or cost?
    777 with 10 across, job cuts, … sounds like cheaper.
    More flights to other points in China, why go point hub point, when you can go point to point, be it Air China, Eastern, Cathay, Southern or others?
    No doubt write downs to follow, selling off some assets, …
    Though compared to Qantas Group – I noted its CEO on Bloomberg talk of adapt – more of the world’s population in reach from HKG than, say, SYD.

    1. Tango

      I think one of the aspect not answered or addressed is Chinese Military control of ALL China airspace.

      They can cover it up internally inside China (12 hour delays!) , but CP is more public exposures with its delays.

      Av Week discuses this with some regularity.

      So, its not just ATC thought that may be part of it (Military as well?) but the whole thing is a mess with limited routes they are allowed to fly on so they don’t fly over all those high security rice paddies.

      Keep in mind CP is also part of Swire Group and they probably can cover the issues.

      I always thought of futures trading and fuel hedging (etc) as legalized gambling.

      At one time the US lawas were you had to have the storage cpaicity to hold your futures.

      It was intended as a bugger system. My wife’s dad did it, he would sell what peas he needed to for expenses and then stored the rest in COOP silo for when the market came back up.

      Something to be said for regulations, actually a lot.

  6. comet

    Oh dear,

    Cathay Pacific really is having difficulty with its aircraft interiors, and not just in economy.

    The leather on seats is disintegrating, plastic woodgrain laminate is peeling off, and other bits and pieces are dropping to the floor. And this tatty interior is in business class, on its flagship aircraft, the A350.

    https://runwaygirlnetwork.com/2017/03/16/damaged-substandard-zodiac-seats-hit-cathay-pacific-image/

  7. George Glass

    Same old same old.Some things never change in Longhaul International operations. Over capacity and state subsidy. Its a crap business.Buying A380s would send them broke even quicker.Their biggest problem,and always has been, as lack of reliable shorthaul feeder network. Good luck. They are going to need it.

    1. JW (aka James Wilson)

      George,
      How do you define a “reliable shorthaul feeder network”?

    2. JW (aka James Wilson)

      The reason I ask is because Cathay Pacific and Cathay Dragon (formerly Dragonair) both have short-haul networks that feed traffic into Hong Kong. China delays certainly cause problems for long-haul connections from some of the regional ports located in China, but they are by no means the majority and China delays have not ‘always’ been a problem.