Staying the course

The reasons for the current slump are no secret. Prime among them is the unprecedented international expansion of Mainland Chinese carriers which are sucking up thousands of travelers who use to make their way into China through the Hong Kong hub.

Now they fly right over it. Cathay’s average fares declined, mainly on services to North America and Europe, in part due to Chinese travelers going directly from the mainland and skipping Hong Kong. On another front, Hong Kong International Airport (HKIA) continues to suffer constraints because of slot shortages. Construction has started on a third runway but it won’t be ready until 2023.

But just as serious as the Chinese airlines issue has been the phenomenal growth in the region of the low cost carrier sector. And here, to many industry observers, lies the mystery. Why hasn’t Cathay entered the no-frills fray?

Hong Kong itself has only one home-grown budget operator, HK Express, though even that is actually owned by the Mainland’s HNA Group, with its flagship Hainan Airlines. Sixteen other budgeteers from around the region fly in and out of Hong Kong. From operating just 5 per cent of seats through HKIA in 2013, by 2015 that share had risen to 15 per cent and is now believed to be more than 20 per cent.

Yet Cathay is the only legacy, full-service operator in all of Asia-Pacific that does not have an LCC subsidiary. Even rival Singapore Airlines, long regarded as the pinnacle of the high quality, top-end airline brand, has been in the game for a decade with Scoot and Tigerair (now folded into Scoot).

Cathay’s new chief executive Rupert Hogg is un-phased, continuing the persistent message that came from his predecessors Ivan Chu and John Slosar (now Cathay’s Chairman).

“Broadly speaking, we have no plans to start a low-cost airline,” said the 55-year-old Hogg. “But we compete with low cost carriers on lots of different routes and clearly we have to have a proposition that price sensitive travelers, new travelers and first time travelers find attractive and prefer to fly on our airline relative to the alternatives.”

His message is that Cathay will stay in the market it is in, focusing on better services such as new lounges in major airports, offering Wi-Fi on board planes, more dining options and self-check-in facilities to nurse the carrier back to financial health.

Unfortunately, too many price sensitive flyers are happy to do without such luxuries.

It’s not a message that convinces many. Shukor Yusof, founder of Endau Analytics in Malaysia and one of the region’s leading analysts says Cathay’s reluctance to change is “very disturbing” and it seems “they still believe they have this unique market position… they don’t realize that the way things were done doesn’t work anymore.”

They don’t realise that the way things were done doesn’t work anymore. Shukor Yusof

It is a view shared by other industry observers. One suggestion put forward is that Cathay should take its full-service regional subsidiary Cathay Dragon (formerly Dragonair), which has a strong network into China, and turn it into an LCC. Indeed, HK Express was originally a full-service operator, Hong Kong Express, which was transformed into an LCC in 2013. It has been extremely successful.

Just how firmly Hogg, who took over as chief executive from Chu in May, believes an LCC isn’t the answer is hard to tell at this early stage. Some believe he may be following the company line as laid down by a Board led by John Slosar who was very committed to the “No budget offshoot” credo.

In the meantime, things are potentially going to get worse before they get better. In a statement issued along with the latest financial results, Slosar declared: “We do not expect the operating environment in the second half of 2017 to improve materially. In particular, the passenger business will continue to be affected by strong competition from other airlines and our results are expected to be adversely affected by higher fuel prices and our fuel hedging positions.”

One bright spot: the slump in the air cargo business which has persisted since the Global Financial Crisis (GFC) finally seems to be over and freight, a key to many airline’s profitability, including Cathay, has been bouncing back strongly.