Cathay Pacific is blaming too many empty seats and increasing competition from Mainland China for only its third annual loss in company history.
In 2015, Cathay Pacific reported a HK$6bn annual profit ($772mn USD). In 2016, the company lost $575mn ($74mn USD). Why the huge reversal?
The same market dynamics that are pressuring carriers in North American and Europe plus the added fortune of a burgeoning Mainland China aviation industry. To be sure, the Gulf Carriers are putting a squeeze on Cathay Pacific. Connecting in Dubai or Doha saves time over connecting in Hong Kong if traveling between Europe and Australia. Those were bread and butter routes for Cathay in the past.
Cathay Pacific’s Red Menace
But China’s rapid aviation expansion represents perhaps an even greater threat to Cathay Pacific’s sustainability. Chinese carriers are expanding their international reach, offering more direct flights to global cities than ever before. That means passengers do not have to connect in Hong Kong, as in the past. There goes more bread and butter routes.
And it will only get worse. Chinese carriers are modernizing their fleets with fuel efficient 787s and other aircraft perfectly suited for direct longhaul routes that were otherwise unfeasible. A320NEO and 737MAX planes are coming, opening up more midhaul routes in Asia. With more connections to the Mainland from Taipei now, Hong Kong is no longer a necessary intermediary. Cathay Pacific has a lot to be worried about.
Cathay Pacific points specifically to “intense competition” Air China (Star Alliance) and China Eastern (SkyTeam). Demand for premium cabins is down and passenger yield (average fare paid per mile per customer) is down 9.2%. Even Cathay’s cargo business is suffering.
Some of the loss is allegedly due to fuel hedging. Were that the case, though, I think Cathay would be quite comfortable citing that instead of more systemic issues as the reason.
Yesterday I wrote about Finnair’s growing dissatisfaction with oneworld‘s presence in Asia. A closer partnership with Finnair, however, might further strain Cathay Pacific’s objective of winning more passengers, particularly price insensitive premium cabin business travelers. Sadly for Cathay Pacific, the problem is not (necessarily) having the wrong partners, but the risk of redundancy thanks to new direct routes on Mainland carriers.