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HONG KONG (BLOOMBERG) – Both are vitally important to their national economies, highly regarded by customers and totally dependent on international travel. They are also in deep financial struggle and are losing thousands of jobs due to the coronavirus crisis.
Cathay Pacific Airways and Singapore Airlines (SIA) have for more than half a century stood out as powerhouses in aviation, prestigious brands at the top of a lucrative market driven by Asia’s economic boom. The pandemic has hit the couple badly, but Hong Kong-based Cathay is likely to be in a more difficult situation, analysts say.
Cathay announced on Wednesday (October 21) that it will lay off nearly 6,000 people and eliminate 2,600 job openings, which together represent about 24 percent of its total workforce. It is also closing regional airline Cathay Dragon and redoing contracts for pilots and cabin crew. The goal is to reduce unsustainable cash burning by HK $ 500 million (S $ 87.4 million) per month.
“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,” Cathay President Patrick Healy said Wednesday. , referring to the company’s budget airline. acquired last year.
Cathay’s removal follows SIA, which said in September that it was cutting 20 percent of its workforce, or 4,300 jobs, shortly after it raised $ 11 billion from a rights issue and loans. Cathay also raised billions of dollars in a restructuring in June that, among other things, resulted in the Hong Kong government getting a stake and two observer seats on its board.
Investors welcomed Cathay’s announcement on Wednesday: The company’s shares rose as much as 6.6 percent in Hong Kong. “The worst could have happened for Cathay with this restructuring,” said K Ajith, an analyst at UOB Kay Hian in Singapore, who raised the company’s rating to buy.
However, the outlook remains challenging at best, with Cathay warning that it will operate at less than 50 percent of pre-pandemic passenger capacity next year. And that’s his most optimistic scenario.
SIA is in a better position because its personnel costs are about 20 percent lower than Cathay’s, said Ajith, who has a withholding rating on Singapore Airlines stock.
“We expect earnings for Singapore Airlines to show some improvement in the second quarter of the fiscal year, while for Cathay it will be in the first half,” he said. “This improvement in Cathay’s earnings will be driven by its cargo business.”
Uncertain future
Passenger numbers have dropped alarmingly in both Cathay and SIA, which are even more vulnerable than most during this crisis as they have no domestic market to help fill some of the void left by the lack of international travel due to to the closing of borders.
“The future remains very uncertain,” Healy said Wednesday. “This crisis is deeper and the road to recovery is slower and more uneven than anyone thought possible a few months ago.”
When SIA announced its job cuts in September, including at its SilkAir and Scoot units, CEO Goh Choon Phong said it was unclear which of the world’s airlines would survive.
The city-state flag carrier initially managed to resist job losses thanks to the help of a government employment support program. Like Cathay, SIA dominates the aviation industry in its domestic market, saying it supports more than 12 percent of its gross domestic product and 375,000 jobs.
Pressure from china
Beyond the similarities, there is a striking difference: Cathay has to balance her Hong Kong roots with her ties to Beijing. The airline came under fire from China last year after staff participated in anti-government demonstrations and later faced backlash for agreeing to Chinese demands.
More broadly, the unrest in Hong Kong caused Cathay to suffer a drop in income prior to the pandemic, as people refrained from traveling to the city. Cathay issued earnings warnings towards the end of 2019 and said, even then, that the short-term outlook was challenging and uncertain.
“Hong Kong itself appears to be losing its importance and relevance in the larger scheme of things for China, and discontent there is also damaging its long-standing reputation as a good and stable place to do business,” said Sanjiv Kapoor, former CEO. . strategy and business operations at Vistara, SIA’s Indian subsidiary.
The rise of Chinese airlines also complicates Cathay’s position as they are capable of engaging in price wars and could reduce Hong Kong’s relevance as a hub with its direct flights from the mainland to the US and Europe.
While the Singaporean government guarantees that its flag carrier will not collapse, Cathay has to grapple with additional geopolitical challenges as China dictates rules on land, sea and air, said Shukor Yusof, founder of Malaysia-based aviation consultancy Endau Analytics.
“I am not as optimistic as the president of the airline that the cuts, however large they may seem, will be enough to get through Covid-19 in one piece,” he said. “I would bet my money that Singapore Airlines will come out of this stronger.”
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