Never say never: Cathay Pacific enters budget market

Courtesy AFP

In 2015, Cathay Pacific together with Hong Kong Airlines opposed Qantas’ application to set up Jetstar Hong Kong Airways – co-owned with China Eastern Airlines and billionaire Stanley Ho’s Shun Tak Holdings Ltd. Cathay was particularly vehement about there being no room or need for budget travel in Hong Kong. The authorities were convinced and Jetstar HKG never took off.

Today, Cathay announced its decision to buy Hong Kong’s only budget carrier, Hong Kong Express Airways, for HK$4.93 billion (US$628 million). This expands Cathay’s stable of airlines to three, which includes regional carrier Cathay Dragon. It will boost Cathay’s market share to 50 per cent in Hong Kong.

A Cathay spokesperson said: “We intend to continue to operate Hong Kong Express as a stand-alone airline using the low-cost carrier business model.”

Now what caused Cathay to change its mind?

Cathay is not alone in facing stiff competition in the long-haul and premium market, from not only neighbouring rivals such as Singapore Airlines (SIA) but also Middle east carriers such as Dubai Airlines. Besides, Chinese carriers from mainland China are also fast expanding, flying direct and more services to Europe and North America.

At the same time, Cathay can no longer ignore the encroachment by the flourish of budget carriers in the region, particularly those operating out of mainland China. The Hong Kong authorities too may begin to realise how all this may be reducing Hong Kong International Airport’s hub status, particularly when limited options are resulting in Hong Kong being bypassed.

It could be a matter of timing. In 2017 Cathay reported its first annual net loss in eight years and introduced a three-year transformation program. It was later in that same year that Cathay CEO Rupert Hogg affirmed that Cathay had no plans to start a low-cost carrier. But the debt-ridden HNA Group which owns Hong Kong Express offers a timely opportunity not to be missed even as Cathay posted its first full year profit in 2018 of US$299 million.

The business climate can change fairly quickly, but unfortunately airlines may be slow in catching up with the changes because of the huge investment and lead time to implement many of the changes, apart from a host of other reasons, some of which could be largely circumstantial.

Many legacy airlines pooh-poohed the threat of budget airlines to their traditional market when it was first mooted, and as many of the carriers fell by the wayside before they could assert any impact.

SIA for one came on the scene later than most others, setting up Tigerair jointly with Ryanair, and then Scoot. Its strategy has changed yet again with the merger of Tigerair and Scoot, and now SIA is in the process of assimilating SilkAir into the parent airline.

One wonders if this is the path that Cathay may take should Hong Kong Express and Cathay Dragon find their services overlap as they expand.

Whatever the reading, it would be discreet to never say never. The question is always if so, when?

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Qatar Airways acquires stake in Cathay Pacific: Is there a strategy in place?

IT is not surprising to see cash-rich Qatar Airways buying stakes in other carriers. It already has stakes in International Airlines Group (20%) which owns British Airways, Iberia, Vueling and Aer Lingus; South America’s LATAM Airlines Group (10%) and Italian airline Meridiana (49%). It was however rebuffed by American Airlines.

Courtesy Qatar Airways

The Middle East airline’s latest buy is a 9.6% stake in one Asia’s leading airlines, namely Cathay Pacific, for HK$6.5bn (US$662m). Now that might not have come as expected, although both airlines which are OneWorld partners have publicly acknowledged the outcome as a positive one. Qatar chief executive Akbar Al Baker was pleased with “massive potential for the future” and Cathay chief executive Rupert Hogg looked forward to “a continued constructive relationship.”

Unlike Gulf rival Emirates Airlines, Qatar has seen acquisitions in key partners as a way to access the wider market. Tying up with Cathay would open up opportunities to tap into the wide and growing China market. That depends on how much influence Qatar can assert on Cathay’s China channels, quite unlike the Qantas-Emirates’ relationship although the latter was merely a commercial arrangement. Yet too the way that the aviation business is shaped by the somewhat promiscuous relationships across the industry, it may well be a sitting investment for profit, albeit Cathay’s recent poorer performance.

Perhaps Qatar’s move may be telling more of Cathay, which in fact is a rival airline. Things may not be looking as good at the Hong Kong-based carrier as it embarked on stringent cost-cutting measures to turn its fortune around. Interestingly, news of Qatar’s interest was met with a 5% dip in the price of Cathay’s stock.

A hub airport needs a strong home-base carrier – but does it really?

Courtesy Cathay Pacific

Courtesy Cathay Pacific

INCOMING Cathay Pacific Chief Operating Officer Rupert Hogg who will be taking up his new position in March loses no time in marking his presence as one with a voice and views to be heard. At a recent meeting in Vancouver, Canada with officials from Vancouver International Airport (VIA), he offered a piece of advice that might not sit too well with his host but certainly something that Air Canada in its battle to check VIA’s enthusiasm to open its doors to foreign carriers willy-nilly might use to support its case.

Mr Hogg emphasized the need of a strong home-base airline to anchor an airport’s hub operations. He said: “Only a home-base carrier has the wherewithal to create the banks of incoming flights and make them connect to the banks of outgoing flights.”

There is much truth in Mr Hogg’s statement. No one, including Mr Hogg, can resist citing the opposing fate of Dubai and Bahrain as an example. Both airports are quite on par in terms of an advantageous geographical location and the capability to provide good facilities, but Bahrain today is unable to achieve the kind of success that Dubai is enjoying because it lacks a strong home-base carrier like Dubai’s Emirates Airlines. Gulf Air, once the leading airline of the Middle East and which was expanding rapidly in the ‘80s and becoming the first airline from the region to fly to Australia, has succumbed to the competition posed largely by rival Emirates and by other younger airlines such as Etihad Airways (Abu Dhabi) and Qatar Airways (Doha). Gulf Air has since ceased operations to major airports such as Singapore, Hong Kong and Sydney. So too spelt the decline of Bahrain as a major Middle East hub.

There is more to the story of the decline of Bahrain, which did enjoy brisk business in its early days when Dubai and Emirates were relatively little known; it became badly affected when new jets plying the kangaroo and east-west routes no longer needed a technical stop in a city that offered little else and their operators preferred airports in Asian cities such as Bangkok and Singapore. Bangkok offered the shortest route from Sydney to European cities and the additional attraction as a touristy stopover, and Singapore topped the efficiency table for best connectivity and the lowest probability of a costly disruption.

Courtesy Cathay Pacific

Courtesy Cathay Pacific

But Mr Hogg’s advice to VIA, as it appeared to be intended, might be incidental. He was actually talking about Cathay Pacific and Hong Kong International Airport (HKIA), and their symbiotic relationship. Mr Hogg cited the synonymous growth of both Cathay and HKIA in support of his argument. Similarly, as another example, we can look at the relationship between Singapore Airlines (SIA) and Singapore Changi Airport. In fact, in many of the recent surveys such as those conducted by Skytrax, the awards for the best airline and for the best airport seem to go hand-in-hand: SIA/Changi, Cathay/HKIA, Asiana/Incheon and Emirates/Dubai amongst them. Indeed, it is difficult to imagine London Heathrow without British Airways, Frankfurt without Lufthansa, Sydney without Qantas, Tokyo Narita without Japan Airlines or All Nippon Airways, and major American hubs without the spoke patterns of resident American airlines.

Mr Hogg’s argument may therefore come across as being self-serving in the interest of Cathay, which has protested Qantas setting up Jetstar Hong Kong jointly with China Eastern Airlines and a local company. In that respect, his view is one-sided, to think that it is the airline that grows the airport (and not the other way round) although one definitely cannot deny the airline’s contribution to an airport’s success. The question is: Does an airport similarly contribute to the success of its home-base airline (or for that matter a visiting airline)? More specifically, how much of Cathay’s success can be attributed to HKIA’s positioning (and for the sake of comparison that of SIA to Changi’s)?

Mr Hogg said: “As you can see in the case of Dubai, you need geographical location, but if you don’t have a successful home-base carrier, you have nothing,”

Those were strong words, which led us to the next question: Can an airport and its home-base airline succeed independently or one without the other?

While geography is not everything, it cannot be denied that it is an important factor. Mr Hogg would not refute that, as he did say that airports and airlines must leverage their geographical advantages. But as the world shrinks with technological advances, this importance can shift, as when Bahrain lost its geographical advantage with the introduction of modern jets that allows airlines to overfly it. In the same way, Mr Hogg did not think that SIA poses a threat to Cathay in the North American market. He reasoned: “If you look at the Great Circle Route, Hong Kong is directly on the route. The reality is, with current technology, Singapore is too far south to effectively serve North America. If you are travelling to India, you are not going to go all the way south, then come back up north to Delhi.”

Changi has often been cited for its geographical advantage over its regional rivals, and no doubt this advantage has contributed to SIA’s success. But the lesson of Bahrain continues to hold true, in yet another example when Qantas decided to move its hub for European flights from Changi to Dubai. So Mr Hogg was right here to think that geography is not everything but a starter’s advantage. Qantas’ exit from Changi has more to do with a shift in marketing strategy. So in the same way, hypothetically, can SIA do a Qantas on Cathay in the case of Indian traffic, even though logically the shorter flight distance favours Hong Kong but not that much more considering the close proximity of HKIA and Changi to each other?

Indeed, Cathay should be grateful for HKIA’s growing popularity as an Asian gateway, advantaged by its location at the doorstep of the huge Chinese market. That, while not denying Cathay’s contribution, Mr Hogg might accede, has to do with geography too.

We have come round a full circle to recognizing that Mr Hogg’s view cannot be viewed as the definitive scenario of things to come. At best, it was pre-emptive. In spite of the setback caused by the Qantas rerouting of its kangaroo runs, Changi continues to register higher passenger volumes. In 2013, it handled a record 53.7 million passengers, an increase of 5.0% attributed to growth in regional travel, fuelled particularly by the burgeoning budget business. As a hub airport, it is confronted by growth issues of the airport per se vis-à-vis the interest of its home-base carrier. So it is with HKIA and VIA. Changi boasts an open skies policy that may intensify the competition for SIA. HKIA will face the pressure of allowing more airlines to call at its port in view of its proximity to the growing market of the Chinese hinterland and its promotion as an alternative Asian gateway, but this has disturbed Cathay somewhat. VIA sees its future in connecting with more Asian carriers across the Pacific, positioning itself as the western gateway to the rest of North America, the initiative meeting with objection from Air Canada. How then will the airlines figure in their growth plans?

Although it was in Vancouver that Mr Hogg spoke, his message to HKIA on Cathay’s position is clear. His view was hardly a new one, but it was a timely reminder of how as the competition among hub airports and that among airlines begin to move divergently, the concerned parties may increasingly lock horns over whose interests are more important.