Cathay Pacific (CPCAY), Hong Kong's flagship airline, will slash 5,900 jobs, or 17% of its total, and eliminate entirely its Cathay Dragon regional-airline brand, the company said Wednesday. That should ensure it is "only" losing HK$1.5 billion to HK$2 billion (on average US$223 million) per month while the bulk of its fleet is parked in the Australian desert around Alice Springs.
The shares got a short-lived bounce, up 6.1% after the announcement, and closing on a 2.8% gain in Hong Kong. The company plans to eliminate 8,500 positions in all, partly through a hiring freeze, and by not replacing people when they leave through attrition. In terms of departures, 5,300 employees in Hong Kong are being made redundant, as well as 600 at its international operations.
Eliminating Cathay Dragon, which takes immediate effect, actually amounts to the final bullet in the head of a competitor. Called Dragonair at its outset in 1985, the short-haul Asian carrier was the first upstart in 40 years to take on Cathay out of its home base when it was established. It took advantage of Cathay's focus on European and North American expansion by focusing on flights to China and Southeast Asia, selecting underserved and secondary cities.
Cathay bought a partial stake in Dragonair in 1990, then took it over entirely in 2006. As a Hong Konger of 20 years standing, I was saddened to see Cathay take over a rival that occasionally offered cheaper prices. Singapore Airlines (SINGY) has had the same strategy of buying rivals and attempting to offer its own regional carriers to prevent budget operators from producing any competition on prices. Just like Cathay, Singapore Airlines has killed its Southeast Asia-focused carrier Silkair and rolled its operations into the main airline.
Cathay changed the name from Dragonair to Cathay Dragon in 2016, and integrated its service with the parent flyer. So by slaying Cathay Dragon, the parent basically only has to paint over the "Dragon" on its planes and give its remaining flight crew new uniforms. The parent company has filed the necessary paperwork to change over Cathay Dragon's routes to Cathay Pacific and another smaller rival that the parent bought to co-opt the competition, HK Express.
The reorganization will cost HK$2.2 billion (US$280.4 million), Cathay says. Expect HK Express to go the way of the Dragon as well in good time. Expect consumers to get fewer choices and pricier tix.
There's nothing that the Hong Kong flight crew of Cathay love than a good moan. Pilots are always complaining about rostering, and the reduction of benefits that has come as the company eliminated cushy expatriate packages and hired local pilots instead. So we can expect quite a hue and cry about the restructuring.
Cathay is "asking" cabin and cockpit crew to agree to changes in employment that will match "remuneration more closely to productivity and to enhance market competitiveness," whatever that means. I'm sure it equates to lower pay.
The company will freeze salaries for 2021 and will not pay the customary 2020 year-end bonus. Executive compensation is also going to be slashed into 2021.
Cathay CEO Augustus Tang said management "are deeply saddened" to part ways with so many people. The airline expects only to fly around 50% of its pre-pandemic passengers in 2021, with 2020 "well under 25%."
Cathay Pacific and Singapore Airlines benefit from fortress hubs, dominating the cities they call home. But their complete lack of domestic travel has proved a totally unexpected but drastic flaw. It also leaves them with wide-body aircraft that are ill-suited to low passenger loads. The Singapore carrier as well as Australia-based Qantas Airways (QUBSF) have already embarked on deep headcount cuts.
Cathay and Cathay Dragon's total passenger count of 47,061 in September, mainly students flying back to study in Britain, was down 98.1% from the same month last year. For the first nine months, the passenger count fell 83.2%. Cargo tonnage was down "only" 33.9%, so that cargo weight is keeping the airline in the air.
Cathay Pacific in June landed a HK$39 billion (US$5.0 billion) bailout package led by the Hong Kong government. As part of the deal, it agreed to conduct an overhaul of its operations.
The airline was already struggling when Hong Kong's economy first turned down in early 2019 thanks to the slowdown in China's economy, then as months of pro-democracy protests drew widespread international concern.
In its best effort at "white terror" corporate pressure over the democracy protests, China's civil-aviation authority threatened to close off China's air space to Cathay unless it conducted a witch hunt for staff members who posted or expressed pro-democracy sentiments. CEO Rupert Hogg and his chief deputy Paul Loo stepped down, and the airline fired numerous staff who supported the protests.
Under new China-friendlier management, the airline also threw its support behind Hong Kong's draconian treason law, a spokesperson saying the ill-defined law "is essential in maintaining stability."
But as the Hong Kong-London bank (HSBC) is discovering, public support of China over an issue such as the treason law merely seems to show to the Chinese Communist Party that a company can be pushed around.
HSBC also supported the much-hated law, which essentially ends Hong Kong's prized freedoms of speech, assembly and dissent, and nevertheless continues to be subject to a torrent of criticism out of Beijing. The top Communist brass are irked by the bank's role in handing over documents that it had under law to hand over in the case surrounding Huawei Technologies heir Meng Wanzhou.
China's national carrier, Air China (AICAF) , already owns 22.7% of Cathay, with 45% in the hands of Swire Pacific, the corporate vehicle of the Swire family that founded one of Hong Kong's original hong trading houses. The Hong Kong government, which answers to Beijing, owns what it says is a temporary 6.1% stake in Cathay after contributing HK$27.3 billion (US$3.5 billion) by buying preferential shares and awarding a bridge loan in the rescue plan.
Cathay shares are down 41.1% year to date even after today's small bounce. Expect an overhang to the shares if and when the Hong Kong government offloads its stake. It takes a brave investor to buy into airline stocks right now. But how much worse can it get?!