Cathay in Crisis

Why did both have to go, given that they were well respected by staff and clearly performing well in terms of pushing through the recovery plan and returning Cathay to financial stability? The answer lies both within Cathay itself and in the position of its parent, the Swire group, a London-based conglomerate with many core businesses – they range from the airline to shipping, property, the oil industry and agriculture – in the Asia Pacific region. Traditionally, Swire operations have centred on Hong Kong and mainland China. In other words, Swire (it is known as Taikoo in China) is heavily dependent on keeping on the right side of Beijing, not only for its commercial success but for its very survival.

With China becoming increasingly angry at the goings on in Hong Kong it hardly helped when, in July, a Cathay pilot was charged with rioting and was removed from flying duties. Two airport ground staff were also fired for misconduct. Then, in early August, Cathay flight and cabin crew unions took part in a general strike coordinated by the protesters. Days later, on August 7 at an earnings briefing, the 63-year-old Slossar declared that the airline “certainly wouldn’t dream of telling them what they have to think about something… they’re all adults, they’re all service professionals. We respect them greatly”. China was furious and senior Swire executives as well as Slossar travelled to Beijing where, by all reports, there was a serious dressing down.

‘It was hardly surprising there was total capitulation to Chinese demands’

China’s regulator, the Civil Aviation Administration of China (CAAC) demanded Cathay suspend any staff supporting anti-government protests. It ordered the airline to submit information about all crew members flying to the mainland for verification and authorisation and required it to submit a plan for boosting internal controls, flight safety and security. CAAC said in a statement Cathay’s actions, or lack thereof “have led to a severe threat to aviation safety, created negative social impact and increased the risk of flying from Hong Kong to the mainland”. Any Cathay flights found to be manned by staff participating in demonstrations would be barred from flying to, from or over China. Some Chinese state-owned firms also boycotted the airline. Since then, at least 20 more employees of Cathay and Cathay Dragon have been dismissed for alleged involvement in the protests. In the words of one Malaysia-based regional analyst, Shukor Yusof, founder of aviation consultant Endau Analytics: “They’re using Cathay as an example on how far they (China) can go, how far they can economically and financially strangle you.”

There are reports that airline staff are deeply unhappy about the events and the trouble hasn’t been confined to the question of whether employees should be free to demonstrate in their own time. More seriously, evidence has emerged there has been a form of “sabotage” on some flights operated by both Cathay Pacific and its regional subsidiary Cathay Dragon. This emerged after a number of low-pressure oxygen bottles were found on the carrier’s flights. As a result, the airline group terminated the contracts of two flight attendants on September 24 following an investigation. In a statement the group said over a month-long period both Cathay Pacific and Cathay Dragon identified six additional cases where one or even several portable oxygen bottles were “found to be in a low-pressure state”. The airline “has informed the Hong Kong Civil Aviation Department (HKCAD) and the Police” about the incidents, it said. It stressed that “the safety of our crew and passengers” was never compromised during the flights. “All affected oxygen bottles were immediately recharged and checked for serviceability by engineers prior to the next flight departures”, Cathay Pacific stated in a press release.

In the end, since half of the revenue of Cathay and Cathay Dragon come from flights to and from China and Hong Kong and Swire is so dependent on relations with Beijing, it was hardly surprising there was total capitulation to Chinese demands. Cathay quickly stepped into line, with Hogg telling staff there was “zero tolerance” for employees joining “illegal protests” and warning disciplinary consequences would include being fired. He said the airline had to comply with CAAC regulations. “Though people may share different views, it is essential that we all respect each other, our customers and members of the public. We are aware that this has been, and continues to be, a very challenging time for many of us who live in Hong Kong and call this incredible city home.” Cathay parent Swire Pacific was also adamant. “Hong Kong is our home,” it said. “We have consistently and resolutely supported Hong Kong’s development and remain fully committed to Hong Kong today. We share the vision of the Chinese Central Government for a vibrant Hong Kong within an integrated Greater Bay Area which will bring future prosperity and opportunity to the people and businesses of Hong Kong. We are supporting this vision with our own investment plans which remain ambitious across a wide range of industries in Hong Kong and more broadly across China. Swire Pacific is deeply concerned by the ongoing violence and disruption impacting Hong Kong. We resolutely support the Hong Kong SAR Government, the Chief Executive and the Police in their efforts to restore law and order. We condemn all illegal activities and violent behaviour, which seriously undermine the fundamental principle of ‘One Country, Two Systems’ as enshrined in the Basic Law… as the largest shareholder in Cathay Pacific, we fully support the airline’s strict implementation of all CAAC’s directives to ensure safety and its zero tolerance approach to illegal activities.”

Whether Hogg and Slossar left because they were unhappy with this capitulation or whether, more likely, parent Swire felt management change was required to appease Beijing, is unknown but the timing could hardly have been worse, in the midst of a critical corporate re-engineering program. Following Hogg’s shock departure and before he himself resigned, Slossar simply said: “This is regrettable as we have always made safety and security our highest priority. We therefore think it is time to put a new management team in place who can reset confidence and lead the airline to new heights.”

Events in Hong Kong were hitting Cathay and Cathay Dragon hard. Their latest combined traffic statistics, for September, showed passenger numbers were down 11.3% from the same month in 2018. Freight, a critical part of revenue, was down 14%. Hong Kong, the world’s biggest air cargo hub, was already being hit hard by the ongoing trade dispute between the US and China. Load factors in both the passenger and freight sectors were also down significantly.

Beyond Cathay itself, the situation was bleak. Hong Kong International Airport handled 6 million passengers in August, down 12.4% from the previous year, according to figures released by the Airport Authority. “Passenger traffic to and from Mainland China, Southeast Asia and Taiwan experienced significant declines compared to August 2018,” it said in a statement. With viewers around the world seeing little of Hong Kong but further violent clashes, protesters launching petrol bombs and riot police responding with tear gas and water cannons, there has been little sign the situation is easing.

Cathay Group Chief Customer and Commercial Officer Ronald Lam, new in the job after his predecessor Paul Loo had also stepped aside, described August as an incredibly challenging month. “Overall tourist arrivals into the city were nearly half of what they usually are in what is normally a strong summer holiday month, and this has significantly affected the performance of our airlines. Our inbound Hong Kong traffic was down 38% while outbound was down 12% year-on-year, and we don’t anticipate September being any less difficult.” In response to the deteriorating situation Cathay announced it is cutting capacity for the upcoming winter season.

The carrier explained demand for premium class travel had fallen more significantly than for leisure travel, with demand from mainland China and North-east Asia severely hit, although Australia and New Zealand were more positive.

It should be pointed out that although it has become the focus of Beijing’s ire, Cathay isn’t the only local business wary of upsetting Chinese authorities. Multinational companies such as KPMG and PwC have taken steps to avoid giving the appearance of siding against the mainland.

Luxury fashion brands Givenchy, Versace and Coach have also apologized after Chinese social media users lambasted the companies for selling t-shirts which listed Hong Kong, Macao and Taiwan as independent countries. Officially Hong Kong and Macao are classified as “special administrative regions” with a greater degree of autonomy than mainland Chinese provinces.

“We are deeply sorry for the damage caused to our consumers’ feelings,” Coach said.

Likewise, Versace said that their “incorrect design” linked some cities with incorrect country names. It said the T-shirts with this design were removed from all official sales channels and “destroyed” in July. “We love China and resolutely respect the national sovereignty of Chinese territory,” the brand said.

‘Events in Hong Kong were hitting Cathay and Cathay Dragon hard’

In the meantime, Cathay is desperately striving to recover under new management. Hogg’s replacement is Augustus Tang, a Hong Kong Chinese and former Cathay executive who in more recent times has been in charge of Swire-controlled engineering business HAECO (Hong Kong Aircraft Engineering Company Limited). He immediately moved to try and restore confidence. “Right now, we are one of the most watched companies in the world,” he told staff. “As such, more than ever, each one of us carries a personal responsibility to make sure that our reputation for safety and security is untarnished. We cannot ease off the throttle, especially at a time when international trade tensions are high and international travel is under pressure,” he said. Tang also said a three-year financial turnaround plan begun by Hogg would continue at full speed. Slossar, stepping down in November, is being replaced as chairman by 53-year-old Patrick Healy, a 31-year Swire veteran who has worked his way up at the group’s various businesses in Hong Kong, Germany and China and will leave his job as head of Swire’s Coca-Cola operations. He graduated from St. John’s College, Cambridge University, in July 1988 with a Bachelor’s degree in modern languages.

‘Cathay isn’t the only local business wary of upsetting Chinese authorities’

Just how quickly these changes will resolve the serious problems is questionable. As one Chinese analyst, Zhao Dongchen from State-backed ICBC International put it: the resignations may not be enough to bring a turnaround. “Management changes are generally good for a company in crisis but I think Cathay still has a lot to do to turn its current negative public perception,” he said, adding Hogg’s departure was only a first step on the airline’s “long journey” to improve management and its brand in China.

Just how serious the financial toll will be on Cathay remains to be seen but it appears the turmoil is set to continue for some time. Even though the protest movement has achieved one of its major goals, halting new legislation that would have allowed Hong Kong citizens to be extradited to the mainland to face criminal charges, it continues to protest, demanding free elections. That is something Beijing will certainly not allow. The result has already been a serious dent in Hong Kong’s reputation as a major commercial and financial hub, a position that Cathay profits from significantly. There are some 8,000 international companies that have set up sales, operations and research and development centres in Hong Kong and many will be considering whether to move to a more stable Asian centre. The airport handled 75.3 million passengers last year, making it the world’s second-busiest international airport after Dubai, according to Airports Council International. Ongoing political turbulence will certainly continue to deter many travellers and therefore seriously impact Cathay’s operations. Some are even questioning its future ownership. Although Swire is the largest shareholder with 45%, State-owned Beijing-based national flag Air China holds 29.99% (Qatar Airways also holds 9.99%) and there have been persistent reports that at some stage Air China may take full control of the airline. What is certain is that Cathay is unlikely to be announcing any meaningful profits this year and just when financial stability returns very much depends on political calm returning to Hong Kong.