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Cathay Pacific targets deep management cost cuts in Hong Kong after loss
March 16, 2017 / 12:28 PM / 5 months ago

Cathay Pacific targets deep management cost cuts in Hong Kong after loss

FILE PHOTO: Lined up banners are seen at a city check-in counter of Cathay Pacific Airways in downtown Hong Kong August 8, 2012.Bobby Yip/File Photo

SYDNEY/SHANGHAI (Reuters) - Cathay Pacific Airways Ltd plans to cut the cost of middle and senior management roles at its Hong Kong head office by 30 percent, according to an internal memo a day after the airline reported its first annual loss since 2008.

The memo, sent by chief executive Ivan Chu to staff on Thursday and seen by Reuters, said the firm needed a "simplified, more agile and smaller" head office structure, and that the "re-organization will inevitably result in some roles being made redundant".

Shares in Cathay Pacific jumped by as much as 2.5 percent on Friday following the Reuters report, with analysts saying the move would help support Cathay's bottomline in the short term. Its shares have fallen about 18 percent over the past year.

The Hong Kong flag carrier earlier this week reported its first full-year loss since the 2008 global financial crisis, dragged down by overcapacity, a strong Hong Kong dollar and mounting competition from mainland Chinese rivals.

"The outlook remains challenging and we do not expect to see any fundamental shift due to the structural issues we are faced with," the memo said. "Our airlines have not seen a review of the business or restructured our teams for over 20 years. We cannot afford to stand still."

A Cathay spokeswoman confirmed the memo was accurate, but said the company would not know the final number of role changes or staff affected by the cuts until later in the process.

Chu told staff on Thursday there would be no "people cost reductions" in customer facing roles including pilots, cabin crew and customer service.

A passenger plane of Cathay Pacific Airways parks at the airport in Colomiers near Toulouse, Southwestern France, November 24, 2016.Regis Duvignau

But he said a new head office management structure would be announced in June for the company, which has 33,700 employees globally. The company's website said more than 3,000 of its staff are based in its head office.

The airline said in its annual results that it wants to reduce overall costs, excluding that related to fuel, by about 2 percent over the next three years, even as it looks to grow its capacity by 4 to 5 percent this year.

Its staff costs amounted to HK$19.8 billion ($2.55 billion)in 2016, accounting for just over 30 percent of its operating expenses excluding fuel costs for the year. Analysts said it would be tough to estimate how much Cathay will save from the latest move as it does not provide a breakdown of these costs.

The airline in January said it would cut jobs and consider shifting some flights to its short-haul arm, Cathay Dragon, after completing a strategic review. But it did not outline the extent of the job cuts or other strategic initiatives, such as increasing ancillary revenue at the time, to the disappointment of analysts who had expected more detail.

It told analysts this week that it planned to reduce some unit costs by reconfiguring the number of economy class seats on its Boeing 777 fleet from 'nine-across' to 'ten-across', according to a transcript of the analyst call.

"In the short-term, it will have a positive impact on its bottom line," said Shenzhen-based Morningstar analyst John Hu on the planned cuts to management costs.

"But I don't think this will solve Cathay's problems. What Cathay faces is a structural issue. The core issue is that Cathay relies on Hong Kong as a home base but its status as a transit hub has been declining."

Editing by Elaine Hardcastle and Muralikumar Anantharaman

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