China’s latest move against Cathay Pacific could send the city’s flagship airline into a tailspin and trigger possibly the worst crisis of its 72-year history, as a review of its finances revealed the airline’s increasing reliance on the mainland market.
The potential threat was recognised by Rupert Hogg, the airline’s CEO, in his letter to staff on Saturday, who said China is “key to our business”, as he responded to the intense scrutiny its mainland China operations were facing from the country’s civil aviation regulator.
Beijing has taken aim at Cathay Pacific’s golden egg – its access to the mainland market and reliance on the country’s airspace – in response to the airline’s staff openly supporting the demonstrations.
A declaration on Friday night by the Civil Aviation Administration of China (CAAC) barred Cathay aircrew who had joined or supported illegal protests from operating flights to mainland China, or flying through Chinese airspace, among other measures.
The regulator also said, from Sunday, flights that did not have CAAC-approved crew lists would not be allowed to use Chinese airspace.
The mainland market has grown to become a substantial part of Cathay Pacific’s business.
A fifth of all Cathay’s flights are directed at the China market, comprised of 24 passenger destinations on the mainland.
Though the company does not clearly specify country performance, China and Hong Kong produced half of all its revenue – HK$57 billion from a share of HK$111 billion generated in 2018, a reflection of the many millions of mainland customers that travel with the carrier each year.
Hong Kong’s biggest airline marketed the size of its mainland destinations as setting it apart from its rivals. The gambit has paid off, thanks to its earlier investments in Dragonair, now called Cathay Dragon, followed by a full takeover in 2006 to build its share of one of the fastest growing aviation markets – one that is set to overtake the United States by the middle of the next decade as the world’s largest.
Not content with the range of China destinations, Cathay Pacific has given its full backing to the Greater Bay Area, to open up a thriving economic and populous metropolitan area of Southern China on its doorstep – thereby expanding its local customer base to over 70 million people.
The airline has long agitated to grow its customer base beyond Hong Kong, with a population of 7.5 million considered small, and has chased after transit passengers from the region, including from China. It has also sought to lure travellers between Europe and Australia and from further afield to China. The airline carried 35.4 million customers in 2018. The company – which recently took control of HK Express – now has over 240 planes in its fleet.
The bay area comprises Hong Kong and 10 mainland cities in the Pearl River Delta, and has been packaged as a seamlessly integrated global economic hub to rival those of New York, Tokyo and San Francisco.
Cathay Pacific’s ties to China run through the boardroom. The Hong Kong carrier owns 18.13% of Air China and has one director seat; in turn, the nation’s flag carrier controls a 29.99% stake of the Hong Kong carrier and has five seats on the airline’s board. Cathay also has a 49% stake as part of a joint venture in Air China Cargo.
Hong Kong-listed Swire Pacific, the conglomerate, whose interests span real estate, beverages and marine services, is the largest shareholder in the airline, holding a 45% stake.
Having made significant inroads into China, Hong Kong’s de facto flagship airline has long faced a stiff challenge from mainland Chinese carriers as they expanded internationally to the same destinations served by Cathay, offering airfares at much cheaper rates, luring some passengers away, and forcing the airline to cut ticket prices.
Cathay plies the China market with over 850 passenger flights a week out of a total of about 4,000.
Achim Czerny, an associate professor in aviation management at Polytechnic University, said it may not be hard for Cathay Pacific to reduce its reliance on the China market but the question was whether it would be wise to do so from a business standpoint.
“China will soon be the biggest domestic aviation market in the world. It would seem foolish for Cathay Pacific to ignore this development and not try its best to secure its share.”
As recently as last November, chairman John Slosar described the fallout of a personal data leak of 9.4 million customers last year as one of the company’s “worst crises” at a hearing in the Legislative Council.
“Political instability and events like what has transpired in Hong Kong recently are always a major risk for any airline,” CAPA’s Sobie said. “The longer it lasts the bigger the impact but Cathay Pacific should be in good position once the situation improves, given Cathay's new multi-brand strategy and recent financial turnaround.”
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