Asian long-haul airlines are taking a hammering, suffering at the hands of Middle Eastern and mainland Chinese rivals poaching their business. And nowhere are their troubles clearer than with premium carriers Cathay Pacific (CPCAY) and Singapore Airlines (SINGY) .
Both carriers reported surprise losses in their latest figures. Cathay on Monday said it would shed almost 600 head-office jobs out of 3,000 -- the largest job cuts in two decades.
Singapore Airlines shares last Thursday suffered their biggest selloff in close to six years after the company reported a loss of S$138 million ($100 million) for the first three months of the year. The shares are down 9.2% since the announcement, and up just 1.2% this year.
In March, Cathay confessed to a HK$575 million ($74 million) loss for 2016, its first annual loss in eight years, which took analysts totally by surprise. They had been expecting a profit after a gain of HK$6 billion in 2015. The 2016 performance bashed the stock, but prospective savings from the job cuts have cheered markets again, leaving Cathay shares up 12.6% this year.
At Singapore Airlines, revenue was down 2.4% for the fiscal year through March. It still turned a profit for the year, but the S$360 million ($260 million) gain was down by 55% over the prior year.
Both airlines are conducting a review of their business. Singapore Airlines CEO Goh Choon Phong says he will leave "no stone unturned" in poring over operations.
Cathay will cut another 200 jobs from its junior office ranks, according to the South China Morning Post, bringing total jobs lost to 800. The airline, however, denies other positions will go. Whatever the case, no frontline cabin-crew or pilot jobs are disappearing this time. In fact, it's due to take on another 1,300 cabin crew this year.
Cathay's job cuts, most of which will be accomplished this year, are part of a three-year plan to change the airline's ink from red to black. These are the deepest job cuts since the Asian financial crisis. It eliminated around 800 jobs in 1998.
Cathay Pacific also owns Cathay Dragon -- the former Dragonair -- which mainly serves China and smaller Asian cities. The three-year rework, and particularly the job losses, should save it HK$4 billion over that period.
Intense competition from the likes of Emirates, Qatar Airways and Etihad Airways for high-end travelers in particular have cut into margins at the Asian carriers. All three Middle Eastern carriers are privately held, with massive oil backing from their owners, the states of Dubai, Qatar and Abu Dhabi, respectively.
Passenger yields, or the money earned each mile for carrying each passenger, are down at the Asian airlines. Of course, neither Hong Kong-based Cathay nor Singapore Airlines has a domestic market to fall back on when times get tough.
New Cathay CEO Rupert Hogg, who took up his role earlier this month, blamed "changes in people's travel habits and what they expect from us," as well as "evolving business and a challenging outlook" for causing a situation that needs "significant change."
Echoing those thoughts, Goh at Singapore Airlines said "some changes may be radical, but if needed, we'll do it." It expects to give an update on its plan within six months.
But Cathay caused some of its own pain. It locked in oil prices at significantly longer-term contracts than normal, and faced pressure when crude fell lower than it anticipated. That made it less competitive than airlines able to benefit from cheap fuel.
Cathay owns a 20% stake in Air China (AIRYY) , the mainland's flagship carrier - which in turn owns 30% of Cathay. Air China is faring significantly better, with it, China Eastern Airlines (CEA) and China Southern Airlines (ZNH) ramping up international expansion substantially.
Chinese carriers are another key reason why both Cathay and Singapore Airlines are suffering. The Chinese carriers have expanded aggressively on long-haul routes, OCBC Investment Research said in a note, particularly in the Southwest Pacific. If oil prices stay low, competing airlines will likely continue to offer cut-rate prices to compete.
Air China has been one of the best-performing Asian airline stocks this year, up 29%. But earnings for the Chinese carriers likely peaked in 2016, according to Jefferies, which now has underperform ratings on all three carriers. It sees a potential downside of 19% in Air China shares, 16% in China Eastern and 26% in China Southern, according to a May 10 note.
While the poor performance at Cathay is a drag on Air China, China Southern has just penned a deal for American Airlines (AAL) to buy an 8.8% stake for $200 million. That should boost connectivity for an airline that still gets 67% of revenue from flights inside China, the highest ratio of the three mainland carriers.
At Singapore Airlines, its budget carriers Scoot and Tiger and regional carrier Silkair, which serves secondary Asian markets, actually turned an operating profit of S$22 million for the first quarter. But the first loss since 2014 for the main airline dragged performance down.
Singapore Airlines gets around 45% of its passenger revenue from business and first-class passengers, Corrine Png, the CEO of Crucial Perspective, told Bloomberg. Png, whose company focuses on research into Asian airlines, noted that long-haul routes are facing overcapacity and pressure on yields.
Passenger yields at Singapore Airlines fell to 10 Singapore cents per kilometer for the year through March, down from 10.5 cents the prior year, and 11.4 cents the year before that.
Competition has been so fierce in the past, that the airlines got together to rig prices, in the eyes of the European Union. Singapore Airlines and Cathay Pacific were both among 11 carriers slapped with a €776 million ($873 million) fine by the EU for price fixing between 1999 and 2006. Air Canada T:AC, British Airways (a subsidiary of International Consolidated Airlines (ICAGY) ) and Air France-KLM (AFLYY) were also among those penalized in a decision handed down in March.
Cheating is clearly a bit much, if you're going to compete. Hedging fuel costs correctly and pricing tickets competitively could go a long way to ensure Asia's carriers continue to fight fairly, and fight well, in the future.