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Cathay Pacific Embarks on Major Cost Cutting Initiative

The travel and more specifically the airline industry takes no prisoners – and is a constant ebb and flow of dominance and struggle, much like any other industry. Well, I suppose life works that way.

Cathay Pacific CX (along with regional rival and giant Singapore Airlines) used to be at the top of the totem pole when it came to international and transcontinental travel. Especially during the boom of the 1980s, they along with SQ had the lion’s share of the waves of connecting traffic between the developed and developing world.

They were also industry leaders in both their hard and soft product – pioneering in many innovations and routinely ranking amongst the top 5 airlines in the world.

Well, that shine has eroded over the years between the rise of the Middle Eastern giants, the advent of new technology that allows folks to bypass transit stops and Hong Kong International Airport (HKG), CX’s home base, becoming increasingly congested – limiting options to expand and further delaying existing operations.

And it seems that another sucker punch has just taken place.

 

The Scoop:

Cathay Pacific has announced that the airline has gone through a sweeping internal review and has concluded that massive cost cutting measure need to be taken for the airline to remain viable. These findings have also been presented to the board, who are expected to pass some of the suggestions the study has put forth.

And they aren’t particularly good.

As a precursor to announcing some (not all) of the details of this cost cutting drive, the airline said in a public statement:

“The competition is here to stay and the uncertainty is the ‘new normal’ – we must simply respond…Something of this scale hasn’t happened for more than 20 years”

Yikes.

So here’s the deal. We only know a couple of the main actions the airline will take in 2017 and through to 2018 to curb the losses and stop hemorrhaging. There will be more to follow for sure, the airline has said as much – and we will report on it when it is made public, which we expect will be in the coming weeks as elements begin to be implemented into Cathay’s operations.

The airline employs 23,400 staff and crew, with their affiliate carrier Cathay Dragon (KA), who mostly serve regional routes, has about 3,300. The two airlines within the Swire Group will cut their workforce to ‘rationalize’ operations and ‘streamline’ more effectively as sister companies. What this means exactly and just how big the cuts will be and which company they’ll come from is yet to be seen (hint: most likely Cathay Pacific).

On the topic of employees, let’s go all the way to the top – Chief Executive Officer of Cathay Pacific, Ivan Chu has been at the helm of the airline for approaching three years now.

Within the past three years the airline has posted some rather abysmal passenger numbers, absorbed massive losses through a major fuel hedging bet that went painfully awry and saw the airline seesaw between different products – both their Economy and Business Class seats were introduced and hastily changed due to such poor public reaction to the original offerings the airline put forth – something that comes at tremendous cost.

Let’s now talk about history – Chu’s predecessors, John Slosar and Tony Tyler, lasted – you guessed it: three years at the company. And whilst not entirely scandal or difficulty free, their time periods with the airline were decidedly easier than what Chu is currently going through. That’s not a slate on the veteran airline officer though – he did inherent a rather sloppy mess and has done his best to clean it up.

Again, it’s unclear whether he’ll be able to weather this storm as yet, but nothing official has been released about a potential change up top. I wouldn’t bet against it though.

The other thing that is expected to happen is cut backs in the premium services offered by Cathay, mainly in the reduction of seats offered on aircraft and the potential elimination of First Class on selected aircraft. Premium Economy is not doing as well as hoped, and has reduced the airline’s ability to swap aircraft in and out of short vs. long haul operations as CX is famous for doing, so that also added costs.

Ground services might be affected too, with some ‘less important’ outstation lounges closed and those services contracted out to local operators.

While it’s a bit odd to hear that premium services will be cut because that’s where most airlines make their bread and butter, the data does bear some repeating. Cathay Pacific announced in August 2016 that first half results were rather stark, with an 82% decrease in earnings with the comparable time period in 2015.

Well, the airline has now said they no longer expect the second half of 2016 to be any better, with the hit to the premium cabins being the hardest to the airline. In fact, Jeffries Group, LLC expects the airline to post its first six month loss for the second half of 2016, a first for the airline since 2012.

This is just what we know – sadly, expect more details and more cuts to come.

Cathay Dragon, a full service regional carrier wholly owned by parent company Cathay Pacific, is expected to take over some of the lesser performing routes that CX currently operates.

The Takeaway:

Well, none of this is good news. Especially for oneworld elites who need to travel around the region and bank on Cathay Pacific’s reliable, safe and pleasant service whilst gaining status and miles on their AAdvantage, Avios, QMiles and more.

First off, you’re looking at potentially losing First Class on a raft of routes. Next, you’re looking at a reduction of the Business and Premium Economy cabins. In fact, there’s some rumors that CX might get rid of the PY cabin altogether. This simply means less seats to redeem points on. And given the drop in supply, expect pricing to adjust accordingly. No two ways about it.

With less seats on offer, while not announced yet, don’t be surprised if you start to see the devaluation of Cathay’s Marco Polo frequent flier program in the coming months, and the stripping of some benefits afforded to fellow oneworld frequent flier members which we’d expect to be more far reaching.

Since the regional subsidiary of Cathay Pacific, Cathay Dragon, has a much lower cost base, expect some flights to be transferred over to them. We’ve already seen it on CX’s operations into Kuala Lumpur, with the airline pulling out completely and putting KA on the route due to low yields. Now listen – Cathay Dragon is a more than decent airline with an almost identical regional  Business Class seat – but Cathay Pacific it is not. That’s a very clear downgrade in product and consistency on CX’s part.

Also expect some small little cuts here and there in all cabins as we go through 2017. For instance, on the Hong Kong to Taiwan or Philippines runs, China Airlines, EVA Air and Philippine Airlines – the resident full service carriers of their respective countries on the route – offer a full hot meal on their flights. Cathay is now offering a cold snack in a branded paper bag on the very same route, whilst charging the same or perhaps more than their competitors, which is perhaps a big part of their problem of being able to compete not only with the low cost carriers or the Middle Eastern giants but their own regional peers as well.

And as we mentioned above, ground services will likely be affected too, with smaller lounges being closed down and as Cathay Dragon takes over some existing Cathay Pacific routes, expect more of a KA service rather than CX.

Listen, none of this is good news – but neither is it all that unexpected. We’ve known Cathay has been struggling for some time now, and they do have unique set of challenges to tackle. After all, their arch rival, Singapore Airlines, are facing battles of their own, but to a lesser extent and also have the airport infrastructure to cope with some of the things coming their way. CX simply does not.

These moves, while not great, is a must do for an airline looking to secure their finances and remain competitive in an increasing blood thirsty industry. It just means that passengers will eventually suffer and while in most cases it’s those flying on those bargain basement fares, this time it’s rather far reaching and will affect some of Cathay’s and oneworld’s most valued customers – such is the magnitude of the situation.

We’ll monitor closely and update you as often as we can – in the meantime, spare a thought for the existing staff, crew and other employees who will certainly be affected by this news and perhaps be just that bit extra nicer to them on your next Cathay flight.

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