In our previous article on the struggles within the aviation industry, we took Singapore Airlines as an example of one of the major companies facing strife, detailing the several reasons for its first quarterly loss in 5 years. We also provided critique on their restructuring plans and efforts to reverse their current predicament. In the third of these series, we take a look at a second giant of the skies – Cathay Pacific – and list the causes for their recent setbacks leading to a first annual loss in 8 years, as well as go through their road ahead in terms of their restructuring efforts to keep up with the times.
Once again, as with all other major full-cost carriers in the sky, fierce competition is one of the major reasons given for the airline’s reduced profits. Budget carriers in the Asian region (especially Chinese state run ones for this particular carrier) have made life tough for the big players by offering discerning travelers options for no-frills services at a fraction of the price.
Another reason that was provided by the airline was the lack of demand for premium travel options. Similar to SIA, this is an issue that also relates to competition. The Middle Eastern carriers, namely Emirates, Qatar and Etihad have been providing options in the luxury area of air travel and the other big players have not been able to keep up.
Major Hedging Losses
As we mentioned in the first of these series, all airlines hedge on the price of oil, a commodity that the industry is highly dependent on for obvious reasons. To recap on the practice, hedging refers to (in relation to this industry) the practice of using forward/futures contracts with oil as the underlying asset. This leads to a prediction on whether fuel prices will drop or rise in the near future – allowing companies to hopefully protect themselves against an extremely cost sensitive commodity. The practice allows for a form of insurance and when timed correctly can make the difference between staying in the green or moving into the red. Cathay timed it more than a bit wrong.
Although the other factors revolving around competition are definitely contributors to the airline’s HKD 5.75 Million (over SGD 103 Million) losses, what is not mentioned as much (for obvious reasons) by the company is the flawed predictions made by their experts on the future prices of oil.
The airline reportedly lost HK$8.46bn (over SGD 1.5bn) on fuel hedges in 2016, roughly on par with the HK$8.47bn (over SGD 1.5bn) hedging loss in 2015. This was due to the company expecting the prices of oil to rise considerably – the plan implemented to protect itself evidently backfired badly.
Cathay’s Restructuring Efforts: Headcount a Priority
Not unlike SIA, Cathay has also rolled out (and made public) preliminary steps that they are going to take to reverse their losses – and so far they revolve mostly around reviews of their current staff and cuts in jobs. Touted as its biggest shakeup in decades, the airline has decided to shed 600 jobs in an attempt to become ‘leaner, faster and better’. The culling will include approximately a quarter of the company’s managerial headcount although it has been said that it will spare pilots, cabin crew and other frontline staff.
Another interest that the company has taken which has gained favourable response is its bolstering of its cargo arm. The airline has reportedly planned to increase its cargo yield – a key measure of profitability for air freight – likely to rise 5.2 per cent this year, according to Andrew Lee, a Hong Kong-based analyst at Jefferies.
We will have to wait and see if these initiatives pay off for Cathay Pacific and earn their investors’ trust again in the long run. What can be said to be a given is the fact that the airline will continue to compete to regain its spot as one of the most popular and profitable carriers in the world.