Cathay Pacific’s announcement today that it is shedding 8,500 jobs and closing its Cathay Dragon brand is the culmination of more than a year of strife at the Hong Kong carrier, with the industry-wide upheaval of the coronavirus crisis adding to the financial pain already being caused by local political unrest.
Roll back to the beginning of last year though and the airline appeared to be turning a corner: yields were on an upward trajectory, passenger demand was healthy, and its transformation efforts appeared to be paying off.
The success of the restructuring was reflected in Cathay’s full-year results for 2018, which showed saw a swing back into the black. It also acquired HK Express in March 2019, allowing an expansion into the low-cost market.
Six months later, Hong Kong was veiled in clouds of tear gas as anti-government protesters took on the authorities and any momentum Cathay had bled away.
As the protests – over an unpopular proposed extradition bill – wore on, Cathay began to feel the heat.
In early August, the carrier announced a significant number of flight cancellations out of Hong Kong, initially caused by an air traffic control strike.
But on 12 August, protests hit fever pitch, with protesters occupying large swathes of Hong Kong’s airport. That meant that all flights, including Cathay’s, were cancelled.
Days later, in yet another unexpected twist, the airline’s chief executive Rupert Hogg and chief customer and commercial officer Paul Loo announced their resignations, caught up in a controversy over crew members taking part in the anti-government protests.
August was also the month where the first signs of financial stress became apparent, with Cathay warning that the protests could dent its revenue for the month. In addition, the month also marked the start of a traffic tailspin that the carrier has been unable to arrest.
Inbound traffic declined 38% year on year in August 2019, traditionally a strong month for the carrier. Yields, which months ago were climbing, also took a hit.
The carrier trimmed its capacity growth for the rest of the year in order to cope with the impact of the protests.
A month later, Cathay flagged weaker financial results for the second half of the year, as continued unrest dragged its revenue down. September saw lower load factors and passenger numbers than August, and marked the third straight month of weaker traffic.
By November, the carrier announced it was pushing back the delivery of four Airbus A320neo-family aircraft originally set to join its subsidiaries HK Express and Cathay Dragon in 2020 – the first of many deferrals to come.
The following month, the carrier announced it would cut seat capacity by 1.4% year on year in 2020 as Hong Kong’s political troubles and trade tensions hurt the airline in key markets.
“Rather than growing our airlines in 2020, for the first time in a long time our airlines will reduce in size,” said newly installed chief executive Augustus Tang.
FROM ONE CRISIS TO ANOTHER
While the protests abated by the end of the year, they meant that Cathay ended 2019 in an already weakened state. Without the cushion of a period of sustained profitability, what came next would and threaten the airline’s very existence.
Cathay, and its associate carriers, entered the new year amid growing prominence of a novel coronavirus outbreak originating in mainland China.
By end-January, the mainline carrier, along with subsidiaries Cathay Dragon and HK Express, had halved capacity to 24 points in mainland China, as part of special arrangements made by the Hong Kong government.
Traffic figures, already impacted by the protests, plunged further – at first gradually in January, then showing a rapid collapse from February.
By March, Cathay was only flying a “bare skeleton” network of just 15 destinations, as it hunkered down amid the crisis.
The carrier warned that its financial results for the first half of 2020 would be significantly impacted by the outbreak, disclosing an unaudited loss of more than HK$2 billion for February alone.
Cash burn was initially at a rate of around HK$2.5 billion to HK$3 billion ($0.3 billion to $0.4 billion) a month, although that has since been brought down by cost-cutting measures.
Things got bleaker as the months rolled by: in April, Cathay despondently said it was “impossible to predict” when passenger demand would recover from the coronavirus crisis. The following month, it said it did not “anticipate… a meaningful recovery for an extended period”.
A sliver of hope came in June, when the Hong Kong government stepped in with a financial lifeline, as part of the airline’s group HK$39 billion recapitalisation plan.
Cathay chairman Patrick Healy said that the recapitalisation was crucial for the carrier’s survival, without which the airline would have collapsed.
The carrier’s financial results for the first half of this year were predictably disastrous – it reported a staggering operating loss of HK$8.7 billion, with Healy calling it the “most challenging” period for the group in its 70-year history.
Traffic has continued to remain at extremely low levels in recent months, particularly given that the airline had no domestic market to fall back upon. Cathay deferred delivery of new Airbus and Boeing aircraft and parked about 40% of its fleet in long-term storage overseas.
In addition, the carrier embarked on a business review that would see determine the “final shape and size” of the group.
That process culminated on 21 October, when Cathay announced the job losses – 2,600 unfilled posts would be axed, along with 5,900 redundancies – and the closure of Cathay Dragon, an operation which began life as Dragonair in 1985.
These measures will help the carrier reduce monthly cash burn further, says Healy, with the axeing of Cathay Dragon allowing the group to better align its product offerings.
The carrier remains pessimistic of any recovery in the coming year, disclosing that it will likely only operate at up to half capacity in 2021, given the sluggish pace of rebound globally.