Hong Kong has COVID-19 under control—it hasn’t helped its flagship airline

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Hong Kong’s flagship airline Cathay Pacific will slash 8,500 jobs and shutter one of its subsidiary airlines as part of a pandemic-induced restructuring, the airline announced on Wednesday.

The job cuts represent roughly 24% of Cathay’s 35,000-person headcount: 5,300 Hong Kong employees and 600 employees outside of Hong Kong will be affected; the remaining 2,600 jobs are unfilled positions. The shuttered carrier, Cathay Dragon, was founded in 1985 and since 2006 operated as a wholly-owned subsidiary of Cathay Pacific. Dragon flew regular routes between Hong Kong and cities in mainland China and destinations in Southeast Asia, Taiwan, and South Korea. Cathay said the restructuring measures will save around $65 million per month in 2021.

“The future remains highly uncertain and it is clear that recovery is slow,” Cathay said in the Wednesday announcement, noting an International Air Transport Association (IATA) prediction that passenger travel won’t return to pre-pandemic levels until 2024.

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Hong Kong, like mainland China, has the COVID-19 mostly under control, keeping daily new cases to the low double digits in recent weeks. But unlike airlines operating in mainland China, Cathay cannot rely on domestic flights to boost revenue and make up for the losses incurred by the decimation of international air travel.

“There’s really only one airport, and all the routes connected to Hong Kong are considered international routes,” said Ivan Su, a Hong Kong-based equity analyst at Morningstar. “For that reason, Hong Kong and Cathay just cannot benefit from the fact that the case count here is low.”

Hong Kong International Airport recorded 97.9% fewer passengers and 68.5% fewer flights in September 2020 than it did in September 2019. In mainland China, international travel slumped by similar levels, Su said, but ample domestic routes have helped Chinese airlines weather the drop in long-haul demand.

Domestic passenger flights in China in August reached 80% of August 2019 volume, and the number of domestic flights during the eight-day ‘Golden Week’ holiday in early October exceeded the total for the same period last year. Domestic Chinese airlines like Air China and China Southern also benefit from being state-owned, meaning they have financial backing from the government and don’t have to resort to restructuring measures like Cathay, Su said.

Hong Kong and Singapore—another regional hub with a struggling flagship carrier and no capacity for domestic flights—announced last week that they had reached an agreement to create a ‘travel bubble’ that will allow people from each city to visit the other without needing to quarantine. Shares in both Cathay Pacific and Singapore Airlines surged after the announcement.

Travel bubbles will help, Su said, but only to a limited extent. Even if Hong Kong forms multiple bubbles with neighboring countries like Japan, Thailand, and others in the Asia-Pacific region, “I just cannot see how those travel bubbles will be able to bring airlines, especially Cathay, to a net profit territory or a breakeven territory,” he said.

A large share of Cathay’s pre-pandemic passengers were travelers from mainland China who either flew direct to Hong Kong on Cathay or else flew Cathay through Hong Kong for connecting flights to destinations that mainland Chinese carriers didn’t serve, Su said. In that regard, Cathay’s rebound “to its previous self” depends a great deal on how soon mainland tourists can travel internationally without quarantine restrictions, he said.

Cathay shares climbed as much as 6% on Hong Kong’s stock exchange after the company announced the restructuring on Wednesday morning, signaling investors’ approval of the cost-cutting measures.

In the longer term, Cathay is banking its recovery prospects on a successful mid-2021 coronavirus vaccine rollout across the globe, it said in the Wednesday statement.

“Assuming the vaccines currently under development prove to be effective and are successfully rolled out on a global scale by summer 2021,” Cathay expects to be operating at “well below” 25% of its capacity in the first half of 2021 with a “gradual recovery” in the second half of the year, it said.

Cathay didn’t give capacity projections for a scenario in which an effective vaccine isn’t deployed by the middle of next year. “If the vaccine gets delayed, I think airlines like Cathay will have to reconsider their cash position. They might need to borrow money or issue equities or even tap into the government’s pockets for help,” Su said. He estimates that Cathay will still have “at least one or two years” before resorting to such measures.

The restructuring is the latest chapter in Cathay’s year of woes. The Hong Kong government spent nearly $4 billion to bail out Cathay in June in a package that included the government taking a stake in the company. It was the first time Hong Kong’s government made a direct investment in a private company.

Before the pandemic, Hong Kong’s anti-government protests in 2019 dented Cathay’s sales as mass airport sit-ins and employee strikes forced the airline to cancel 130 flights in one week in August 2019. The political unrest prompted several countries to issue travel warnings for their citizens visiting Hong Kong.

Cathay has tried to generate revenue in unorthodox ways this year, such as offering ‘flights to nowhere’ on its low-cost carrier, Hong Kong Express, in which passengers board a plane that flies around Hong Kong airspace and lands back where it started. Cathay has designed special leave schemes for employees and executives have taken pay cuts. Even so, the carrier continued to bleed around $193 million to $258 million per month.

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