The South China Morning Post, Hong Kong’s most respected English daily, leads with a headline entitled, “For Air China and Cathay Pacific, it’s one country, two airlines (but how long?)”.
The headline follows up with a question: What looks like fierce competition may be more a lovers’ tiff in transit to an aviation marriage of convenience.
Writer Danny Lee lays out the following points:
- Over the last decade, the number of Mainland Chinese citizens traveling rose from 158,000,000 to 488,000,000
- Cathay Pacific is in financial trouble: competition from Mainland China and the Gulf Carriers is fierce
- Air China is cutting fares drastically and its aggressive longhaul expansion is hurting Cathay Pacific
- New Shenzhen-Los Angeles is 65% cheaper than Hong Kong-Los Angeles on Cathay Pacific
- Routes to London and New York are routinely up to 45% cheaper on Air China versus Cathay Pacific non-stop
- But this also presents an opportunity for Air China and Cathay Pacific
- Air China owns 30% of Cathay Pacific
- Cathay Pacific owns 18.3% of Air China
- Ironically, Cathay Pacific benefits when Air China profits
- Air China can strategically grow in Guangzhou and Shenzhen to reduce the proliferate growth of China Southern and Hainan, two carriers that could potentially hurt Cathay Pacific even more than Air China
The hypothesis is simple: Air China’s strategic growth could save markets for Cathay Pacific that other Mainland competition would otherwise balkanize. Because Air China has a vested interest in protecting its 30% interest in Cathay Pacific, its growth in southern China would be aimed more at competing with domestic Mainland carriers and less about stealing traffic from Cathay Pacific.
A potential merger could solidify this working partnership and strengthen Cathay Pacific in the long run by shielding it from brutal competition.
I find it to be a plausible argument: Cathay Pacific is sinking right now and could use a lifeline. As Mainland Chinese passenger traffic continues to rapidly grow, Cathay may find its solution in working with Air China to create a premier partnership that could better allocate a growing base of traffic. As an aside, it would also likely mean Cathay Pacific would join Star Alliance.