A Cathay Pacific passenger airplane is taxied onto the runway as other aircrafts belonging to the local flagship carrier are seen parked on the tarmac at Hong Kong's Chek Lap Kok International Airport on March 10, 2020. (ANTHONY WALLACE / AFP)Embattled Cathay Pacific faces a long, bumpy journey before air travel and quarantine restrictions ease, market analysts warned on Wednesday after Hong Kong’s flagship carrier announced massive job cuts under a HK$2.2 billion (US$283.9 million) restructuring.
The airline announced on Wednesday morning it would eliminate 8,500 jobs, or nearly 24 percent of its global headcount, and end its 35-year-old regional Cathay Dragon brand, a decision Cathay Pacific Chairman Patrick Healy described as “heart-wrenching”.
The airline announced on Wednesday morning it would eliminate 8,500 jobs, or nearly 24 percent of its global headcount, and end its 35-year-old regional Cathay Dragon brand, a decision Cathay Pacific Chairman Patrick Healy described as “heart-wrenching”
Up to 5,300 Hong Kong-based employees will be “made redundant in the coming weeks”, while 600 overseas employees and 2,600 unfilled positions will be abolished, the company said in a filing to the Hong Kong stock exchange on Wednesday.
Cathay Dragon, which accounts for “a large proportion of job losses”, will “cease its operations with effect from Wednesday” and will seek regulatory approval for the majority of its routes to be operated by Cathay Pacific Airways and HK Express.
“Whilst it’s very sad to bid farewell to a 35-year-old brand and all that stands for, the reality is that in these difficult times, we must focus on a single, world-leading premium travel brand Cathay Pacific, complemented by a single, low-cost leisure travel brand HK Express,” Healy told an online press conference on Wednesday afternoon.
Healy, who became chairman in November 2019, said that since the onset of the global coronavirus pandemic, passenger revenues have shrunk to 2-3 percent of pre-crisis levels.
ALSO READ: Embattled Cathay Pacific faces continued 'cash burn’
“This crisis is deeper and the road to recovery is slower and patchier than anyone thought possible just a few short months ago,” he noted. “Cathay is more heavily impacted than most of our peers because we are 100 percent reliant on cross-border travel.”
Jefferies equity analyst Andrew Lee said Cathay Pacific’s restructuring plans are broadly in line with market expectations. But the long-anticipated recovery remains dependent on the so-called “air travel bubble” with 11 countries the city has approached, and the timing is still unknown.
Rival financial hubs Hong Kong and Singapore are set to become the first regions in the world to open a reciprocal quarantine-free “air travel bubble”, which could start with one daily flight.
The key question over the restructuring would be the positioning of the stand-alone, low-cost carrier HK Express. “Will these routes still operate business class? If yes, how does this change (HK Express’) position as a low-cost carrier,” Lee asked in the latest research report.
A Cathay Dragon passenger plane makes its descent before landing at Hong Kong's international airport, Aug 16, 2017. (ANTHONY WALLACE / AFP)
Morgan Stanley believes that a recovery in Hong Kong’s air travel, rather than any restructuring plan, will revive Cathay Pacific.
Daiwa, which calls the restructuring a milestone and a catalyst, is more optimistic, noting that it allows the 74-year-old carrier to stay afloat in an uncertain global travel market. The worst appears to be over for the company, Daiwa said in the report.
Hong Kong lawmaker Elizabeth Quat Pui-fan said the Greater Bay Airlines, backed by businessman Bill Wong Cho-bau and which expects to operate its first flight next summer, may absorb part of Cathay Dragon’s routes and laid-off employees. If it is granted an air operator’s certificate, it will become Hong Kong’s fourth airline.
Citing the grim forecast from the International Air Transport Association, which expects it will take until 2024 for passenger traffic to recover to pre-pandemic levels, Healy said Cathay Pacific in September carried only around 1,500 passengers per day, compared with the nearly 10,000 it normally would expect to carry.
Cathay Pacific Chief Executive Officer Augustus Tang said the restructuring will help reduce the airline’s cash burn by about HK$500 million a month, from the previous “unsustainable” level of HK$2 billion per month.
ALSO READ: Cathay forecasts recovery to start in second half of 2021
“The cash burn will continue to be significant until the number of passengers return to a certain level,” Tang said in the interview, adding that he didn’t have a target for passenger numbers.
The company expects to operate well under 25 percent of 2019 passenger capacity in the first half of 2021 and below 50 percent for the entire year.
As part of the cost-saving measures, Hong Kong-based cabin and cockpit crew will be asked to sign new, cheaper contracts to “match remuneration more closely to productivity”, and executive pay cuts will continue throughout next year.
Rival Hong Kong Airlines on Wednesday also confirmed the introduction of a voluntary no-pay leave plan for support staff that most pilots and flight attendants have signed. The cash-strapped carrier, backed by Chinese mainland conglomerate HNA Group, asked support staff to take leave without pay for a maximum four days per month, from November to March. It will also slash salaries by 5-15 percent for all employees.
READ MORE: Cathay job cuts inevitable as headwinds persist, Jefferies says
Financial Secretary Paul Chan Mo-po on Wednesday reminded the Cathay Pacific Group’s management in restructuring its business of the need to keep the impact to employees and society to the minimum.
“If this life-or-death issue is not properly addressed, the situation would harm Hong Kong’s international aviation hub status and development in the region, and adversely impact other local economic activities to the detriment of the overall interests of Hong Kong,” Chan said in a statement.
Cathay Dragon, once known as Dragonair, became a wholly owned subsidiary of Cathay Pacific Group in 2006 and operated most of the group’s flights to and from the Chinese mainland, where it flew to 23 cities, among its 46 international destinations.
Cathay Pacific Airways completed its takeover of HK Express in July 2019.
READ MORE:Cathay shuns some job subsidies, raising specter of major cuts
Cathay Pacific’s share price closed 2.27 percent higher on Wednesday at HK$5.85 after hitting a one-month high of HK$6.10 in early morning trading. It is still 35.21 percent lower than the year’s high of HK$9.03 reached on January 22.
The benchmark Hang Seng Index edged up 0.75 percent, or 184.88 points, to finish at 24,754.42.
