Cathay Pacific Gets Its Wings Clipped

It wasn’t that long ago that Hong Kong’s flag carrier, Cathay Pacific, used to be referred to - as was the territory’s police force - as the pride of Asia.

Benefitting from top management skills and a deep war chest from its parent company, Swire, Cathay opened up many new regional routes and maintained a tight monopoly on some of the most lucrative routes in the world, such as Hong Kong-Taipei. Its pilots were among the finest in the world, said to be able to land wide body jets in the fiercest of typhoons.

The airline’s transformation into a Chinese airline began well before the current crisis in Hong Kong, which has seen pro-democracy protesters take to the streets for the 12th week-in-a-row, and even well before the 1997 handover of Hong Kong to China. The union jack was quietly wiped off the tail fins of its aircraft, it began to hire local managing directors and, allowed Air China to take a stake in its ownership. With a fifth of the carrier’s flights to the mainland and with China and Hong Kong generating half of all of its 2018 revenue, Cathay can hardly afford to upset one of its largest shareholders.

But last week a new line was crossed when, in an unprecedented intrusion into its internal operations, China’s aviation regulator demanded that the airline, in order to continue flying into and over China, hand over lists of crew members so that they can be vetted for participation in the ongoing protests. As the days passed, China went even further - apparently demanding the resignation of CEO Rupert Hogg and another top executive, and forcing Cathay to take a tougher line on staff who participate in protests or show sympathy towards the pro-democracy movement (at least three pilots have reportedly left the company). Some state-owned companies imposed boycotts of the airline.

Several protests which caused massive disruptions at Hong Kong International Airport have caused hundreds of Cathay flight cancellations

Taken together, the moves are further evidence that Hong Kong has reached a point of no return and that, in order to survive, local companies must demonstrate loyalty to the mainland - basically toe Beijing’s line.

“The Chinese government doesn’t see business as being separate from the state and it has made it clear that if you want to do business in China, you’d better toe the line,” Steve Vickers, chief executive officer of a political and corporate risk consultancy told Bloomberg News.

Why is what is happening to Cathay so important to its bottom line? Many reasons.

First and foremost, if China cuts Cathay off from lucrative mainland destinations or denies it overfly rights, the airline would take a massive, perhaps fatal financial hit. Already, Chinese carriers are indirectly bleeding revenue from Cathay by under-cutting the airline on fares on such popular routes as Hong Kong and Vancouver - where more Chinese carriers touch down than in any other airport in North America (a search this week shows competitors - including Hong Kong Airlines and Air Canada - selling one-way economy seats from Vancouver to Hong Kong for US$350, severely undercutting Cathay).

Second, the way Cathay has handled the crisis - essentially allowing China to throw it under the bus by forcing management changes and putting severe restrictions on the participation of staff in pro-democracy protests - will cause a big blow to the morale of its frontline staff.

While at first signalling that Cathay staff could do and think whatever they wanted, days later the airline abruptly introduced a zero tolerance policy for participation in the protests. Social media posts and unattributed quotes from Cathay staff already indicate significant staff discontent. And as any marketing expert will concede, when morale plummets in a service industry such as aviation, it doesn’t take long for customers to notice. And Cathay is not known to have the best labor relations track record with its pilots and cabin crew unions. Just today, The Washington Post reports that, based on dozens of discussions with Cathay staff, that “a portrait of panic” has appeared: flight attendants locking their cell phones away in sales cats and route swaps to avoid flying into China).

Finally, because of the downtown in cargo and passenger traffic - Cathay this week warned of a downturn in bookings for August - the airline is in a vulnerable state. On Monday its shares plunged 4.9 percent to the lowest level in 10 years. It would not take much for a major shareholder such as Air China to push it to the brink.

The influence of China over Hong Kong companies cannot be under-estimated. But many Hong Kong-based companies and expatriates have taken proactive measures to help inoculate themselves from undue Chinese pressure.

For example, Cathay’s chairman, John Slosar, renounced his American citizenship long ago for a Chinese passport. Even though he may have taken the decision for other than business reasons, it may be one of the factors that allows a veteran Swire hand to keep the airline afloat in some very turbulent times.

Cathay, and Swire for that matter, are by no means about to become has-beens in the greater China region. After all, Swire has been in business for 202 years and its business dealings with China go back to the Qing dynasty - far longer than any of today’s Chinese state-owned companies.