Hong Kong premium travel slump hurting Cathay Pacific

Mr Chu, Cathay Pacific's CEO, is under pressure to revive the airline's earnings. Cathay's shares have lost about 25 per cent of their value since he took over more than two years ago. This slump comes amid expansion into Asia by Middle Eastern airli
Mr Chu, Cathay Pacific's CEO, is under pressure to revive the airline's earnings. Cathay's shares have lost about 25 per cent of their value since he took over more than two years ago. This slump comes amid expansion into Asia by Middle Eastern airlines, which offer luxuries such as butlers and showers, and Chinese airlines offering more direct services to the US and Europe from the mainland.PHOTO: BLOOMBERG

Cathay Pacific Airways, Asia's biggest international carrier, says it is getting tougher to find premium fliers from Hong Kong.

The lack of first- and business- class travellers from the Asian financial centre - the worst since the global financial crisis days of 2009 - is such a dent on Cathay's financials that analysts are asking whether chief executive officer Ivan Chu needs to find a Plan B.

After more than two years at the helm of the Hong Kong airline - his two predecessors stayed for about three years at the top - Mr Chu is under pressure to revive earnings that have slumped amid expansion by Chinese and Middle Eastern rivals.

Cathay shares have lost about 25 per cent of their value since Mr Chu took over, while passenger yields - the amount earned by carrying a person per kilometre, and a key metric of profitability - slumped to their worst in seven years.

With Chinese airlines offering more direct services to the United States and Europe from the mainland, Cathay's Hong Kong hub is no longer critical. The carrier also reported on Wednesday that it lost HK$4.49 billion (S$776 million) from fuel hedges in the first half of the year.

"Everything is quite negative for them and their business model is ripe for change," said Mr Shukor Yusof, founder of aviation consulting firm Endau Analytics in Malaysia. "They need to review their hedging and focus on things that have contributed to growth. They should focus more on regional services."

TOUGH ENVIRONMENT

There's not much we can do about the economic environment. We hope it is a short-term issue rather than a long-term one. We are going to have very competitive fares.

CATHAY PACIFIC AIRWAYS CHIEF EXECUTIVE OFFICER IVAN CHU

The carrier reported an 82 per cent drop in first-half net income on Wednesday. Passenger yields fell 10 per cent to 54.3 Hong Kong cents as an economic slowdown in China hurt premium class demand and depressed corporate travel from Hong Kong to London and New York, Cathay said. Cathay launched summer sales for premium classes in May, offering as much as 30 per cent discount, in a bid to boost passenger load in the low season for business travellers, Mr Chu said.

Chairman John Slosar said in a statement on Wednesday that the business outlook "remains challenging" as the operating environment in the second half continues to face the same adverse factors.

"There's not much we can do about the economic environment," Mr Chu said. "We hope it is a short-term issue rather than a long-term one. We are going to have very competitive fares."

Shares of the carrier fell 3.5 per cent to HK$11.50 as of 11.47am in Hong Kong yesterday, extending Wednesday's 7.3 per cent decline, which was the most in a year.

Cathay's yields have been under pressure as Air China, China Eastern Airlines and others offer more direct services from the mainland. That's coming at a time when the Middle East's "Big Three" - Emirates, Etihad Airways and Qatar Airways - expand more into Asia and offer luxuries such as butlers and shower rooms.

"Cathay needs to change its business model from being a hub airline to a more point-to-point airline," said Mr Mohshin Aziz, an analyst at Malayan Banking. "But I don't think that will happen in my lifetime."

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on August 19, 2016, with the headline 'HK premium travel slump hurting Cathay Pacific'. Print Edition | Subscribe