HONG KONG (Reuters Breakingviews) - Cathay Pacific's first loss since 2008 points to an existential threat. Asian rivals are undercutting the Hong Kong carrier on long-haul trips; budget airlines poach the short ones. But management looks in denial. Focusing on high-value routes and aggressive restructuring would fly further.
Conveniently positioned at China’s doorstep, Hong Kong’s flagship carrier is theoretically perfectly positioned to benefit from the mainland travel boom. Yet the competitive environment is changing dramatically. Declining passenger revenue at Cathay led to a 2016 annual loss of HK$575 million; chairman John Slosar says 2017 will remain taxing.
Chinese airlines are growing their point-to-point regional and intercontinental offerings, reducing the need to transfer via Hong Kong. Air China, for instance, is launching direct routes to mid-sized European cities such as Zurich and Barcelona in May. Meanwhile, Gulf carriers are able to offer cheaper yet still comfortable alternatives on long routes thanks to their geographic advantage.
Graphic: Headwind: reut.rs/2mYEw9P
At the lower end, no-frills rivals like Hong Kong Airlines are also expanding their range, flying as far as Australia and New Zealand, challenging Cathay's budget carrier Cathay Dragon.
Cathay retains a few advantages. Hong Kong’s role as a major financial centre makes it a destination for high-paying international business travellers. The airline still owns prime arrival and departure slots, and a sizeable cargo business.
Unfortunately ITB data shows global business trips grew a mere 1 percent last year, against 4 percent in leisure travel. The cargo business - one fifth of Cathay’s revenue - is also under pressure. Industry overcapacity is at its worst since 2009.
Cathay is trying to address the challenge by flying more frequently to key cities. But it is still adding new routes to places like Tel Aviv and Christchurch. There's no talk of serious job cuts, nor of a transformation strategy for Cathay Dragon. But the long-term threat to Cathay is real, and tinkering at the edges is not going to cut the mustard.
With flights to around 180 destinations, Cathay’s network looks oversized for a single city of 7 million people. Shedding routes and tightening up its budget would help it brave headwinds.
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