Cathay spurns budget route to health as CEO bets on service

Cathay Pacific's chief executive Rupert Hogg has rejected suggestions to start a budget carrier. Instead, he plans to focus on better services such as new lounges in major airports, offering Wi-Fi on board planes, more dining options and self-check-i
Cathay Pacific's chief executive Rupert Hogg has rejected suggestions to start a budget carrier. Instead, he plans to focus on better services such as new lounges in major airports, offering Wi-Fi on board planes, more dining options and self-check-in facilities to nurse the carrier back to financial health.PHOTO: AFP

SINGAPORE (BLOOMBERG) - Cathay isn't going to embrace the discount-fare revolution.

Undaunted by the worst half-year loss in at least two decades, declining passenger numbers and cheaper fares, Cathay Pacific Airways' new chief executive Rupert Hogg rejected suggestions for a budget carrier with an emphatic "no".

Instead, he plans to focus on better services such as new lounges in major airports, offering Wi-Fi on board planes, more dining options and self-check-in facilities to nurse the carrier back to financial health.

"Broadly speaking, we have no plans to start a low-cost airline," Hogg, 55, said on Wednesday (Aug 16). "But we compete with low-cost carriers on lots of different routes, and clearly, we have to have a proposition that price sensitive travellers, new travellers and first-time travellers find attractive and prefer to fly on our airline relative to the alternatives."

Analysts including Corrine Png, chief executive of Singapore-based Crucial Perspective, and Shukor Yusof, founder of Endau Analytics in Malaysia, have said Cathay needs to take a leaf out of rival Singapore Airlines' book, and start a budget a carrier, or turn its affiliate Cathay Dragon into one to keep a grip on Hong Kong passengers.

SIA has been operating a low-fare airline for about a decade from its base in Changi Airport, where about 50 per cent of all travellers are now taking a budget carrier.

"They still believe they have this unique market position," Shukor said about Cathay, Asia's biggest international airline. "They don't realise that the way things were done doesn't work any more. Their reluctance to change is very disturbing."

Hogg took charge in May after Cathay announced a three-year corporate transformation programme, the airline's biggest in 20 years.

He also cut 600 jobs that month as the airline struggles in the face of low-cost operators and mainland competitors offering cheaper, direct long-haul flights. The effects of the revamp will be felt in the second half of this year and more in 2018, the company said.

The marquee airline reported on Wednesday a net loss of HK$2.05 billion (S$357 million) for the six months through June, potentially putting it on course for the first back-to-back annual losses in its 70-year history.

Average fares declined, mainly on services to North America and Europe, in part due to Chinese travellers going directly from the mainland and skipping Hong Kong.

"The fact that they continue to suffer the same structural challenges as before makes it all the more important for Cathay to figure out ways to capture demand on the Chinese mainland," said John Hu, an analyst at Morningstar Investment Services in Shenzhen.

Cathay shares rose as much as 2.4 per cent to HK$11.98 in Hong Kong trading on Thursday. Daiwa Securities analyst Kelvin Lau upgraded the stock to "hold" from "sell" and also raised his price target to HK$11.50.

Although the second half will remain loss-making, "we believe losses have bottomed out as management forecasts passenger and cargo yields to sequentially improve", Jefferies analyst Andrew Lee said in a research note after the earnings report.

Cathay has reported losses for only three years since it was founded in 1946 - once in 1998, in the aftermath of the Asian financial crisis; again in 2008, as the global credit crisis unfolded; and last year, as a result of fuel-hedging bets gone wrong and intensifying competition.

Last month, SIA returned to a profit in the quarter through June after a surprise loss in the previous three months.

The city-state's flag carrier has embarked on a business review. It is facing pressure from rivals such as Emirates and Etihad Airways at the premium end, and a host of budget carriers at the lower end.

There are hurdles to starting a budget carrier in Hong Kong, which has been suffering from capacity constraints, according to Will Horton, senior analyst at CAPA Centre for Aviation in the city. The airport recently started construction of a third runway and a passenger building to address this problem.

"Hong Kong and other regional airports don't have the slots that would allow a new LCC (low-cost carrier) to make an attempt - period," Horton said.

For Cathay, the declining prominence of Hong Kong relative to the burgeoning wealth of surrounding cities in southern China is also a threat.

With the rise of hubs such as Shanghai, Guangzhou and Shenzhen, Cathay risks being eclipsed by competitors on the mainland, such as China Southern Airlines and China Eastern Airlines, that offer cheaper, direct and long-haul flights.

To take on rivals, Cathay needs to make sure it is as productive as possible and serve customers better, Hogg said.

"It's making sure we really understand what customers want and that we can deliver it in a productive way and that we get leaner and more efficient in that market," he said.