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Cathay Spurns Budget Route to Health as CEO Bets on Service

Cathay isn't going to embrace the discount revolution.

2017 08 18

2017 08 18

Bloomberg News 

Undaunted by the worst half-year loss in at least two decades, declining passenger numbers and cheaper fares, Cathay Pacific Airways Ltd.'s new Chief Executive Officer Rupert Hogg rejected suggestions for a budget carrier with an emphatic no. Instead, he plans to focus on better services such as new lounges in major airports, offering Wi-Fi on board planes, more dining options and self-check-in facilities to nurse the carrier back to financial health.

"Broadly speaking, we have no plans to start a low-cost airline," Hogg, 55, said Wednesday. "But we compete with low cost carriers on lots of different routes and clearly we have to have a proposition that price sensitive travelers, new travelers and first time travelers find attractive and prefer to fly on our airline relative to the alternatives."

Analysts including Corrine Png, chief executive officer of Singapore-based Crucial Perspective Pte., and Shukor Yusof, founder of Endau Analytics in Malaysia, have said Cathay needs to take a leaf out of rival Singapore Airlines Ltd. and start a budget a carrier, or turn its affiliate Cathay Dragon into one to keep a grip on Hong Kong passengers. Singapore Air has operated a low-fare airline for about a decade from its base in Changi Airport, where about 50 percent of all travelers are now taking a budget carrier.

"They still believe they have this unique market position," Shukor said about Cathay, Asia's biggest international airline. "They don't realize that the way things were done doesn't work anymore. Their reluctance to change is very disturbing."

Hogg took charge in May after Cathay announced a three-year corporate transformation program, the airline's biggest in 20 years. He also cut 600 jobs that month as the airline struggles in the face of low-cost operators and mainland competitors offering cheaper, direct long-haul flights. The effects of the revamp will be felt in the second half of this year and more in 2018, the company said.

The marquee airline reported Wednesday a net loss of HK$2.05 billion ($262 million) for the six months through June, potentially putting it on course for the first back-to-back annual losses in its 70-year history. Average fares declined, mainly on services to North America and Europe, in part due to Chinese travelers going directly from the mainland and skipping Hong Kong.



"The fact that they continue to suffer the same structural challenges as before makes it all the more important for Cathay to figure out ways to capture demand on the Chinese mainland," said John Hu, an analyst at Morningstar Investment Services LLC in Shenzhen.

Cathay shares rose as much as 2.4 percent to HK$11.98 in Hong Kong trading Thursday. Daiwa Securities analyst Kelvin Lau upgraded the stock to hold from sell and also raised his price target to HK$11.50.

Although the second half will remain loss-making, "we believe losses have bottomed out as management forecasts passenger and cargo yields to sequentially improve," Jefferies analyst Andrew Lee said in a research note after the earnings.

Cathay has reported losses only for three years since it was founded in 1946 -- once in 1998 in the aftermath of the Asian financial crisis; again, in 2008 as the global credit crisis unfolded; and, last year as a result of fuel-hedging bets gone wrong and intensifying competition.

Last month, Singapore Air returned to a profit in the quarter through June after a surprise loss in the previous three months. The city-state's flag carrier has embarked on a business review. It's facing pressure from rivals such as Emirates Airline and Etihad Airways PJSC at the premium end, and a host of budget carriers at the lower end.

There are hurdles to starting a budget carrier in Hong Kong, which has been suffering from capacity constraints, according to Will Horton, senior analyst at CAPA Centre for Aviation in the city. The airport recently started construction of a third runway and a passenger building to address this problem.

"Hong Kong and other regional airports don't have the slots that would allow a new LCC to make an attempt - period," Horton said.

For Cathay, the declining prominence of Hong Kong relative to the burgeoning wealth of surrounding cities in southern China is also a threat. With the rise of hubs such as Shanghai, Guangzhou and Shenzhen, Cathay risks being eclipsed by competitors on the mainland such as China Southern Airlines Co. and China Eastern Airlines Corp. that offer cheaper, direct and long-haul flights.

To take on rivals, Cathay needs to make sure it's as productive as possible and serve customers better, Hogg said.

"It's making sure we really understand what customers want and that we can deliver it in a productive way and that we get leaner and more efficient in that market," he said.

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