Air Freight News

Cathay Pacific joins global jobs cull, retires Dragon brand

Hong Kong’s Cathay Pacific Airways Ltd. will slash more than 5,000 jobs and close a regional carrier, the latest airline to enact a sweeping restructuring as the virus’s resurgence in the U.S. and Europe and the lack of a vaccine underscore the ongoing uncertainty in global aviation.

Another 600 Cathay workers outside of Hong Kong may be affected, and 2,600 unfilled positions will be eliminated. The entire reduction of some 8,500 positions amounts to about 24% of Cathay’s headcount, one of the largest hits in the aviation sector globally since the outbreak started.

The third prong of Cathay’s overhaul involves changing the contracts of Hong Kong-based cabin and cockpit crew members as the company tries to reduce its monthly cash burn, which stands at as much as HK$2 billion ($258 million), by about HK$500 million. Some 600 pilots from both Cathay Pacific and Cathay Dragon, the unit being shuttered, are expected to be let go.

“The actions we have announced today—however unpalatable—are absolutely necessary to bring monthly cash burn down to more sustainable levels,” Chairman Patrick Healy said during a media briefing that was broadcast online. “This crisis is deeper, and the road to recovery slower and more patchy than anyone thought possible just a few short months ago.”

Covid-19 has had a devastating impact on aviation. As many as 46 million jobs are at risk, and airlines alone face about $420 billion in lost revenue this year. Carriers with no domestic market to fall back on, like Cathay and Singapore Airlines Ltd., have been hit especially hard as international travel ground to a halt. Cathay’s job cuts are outnumbered by only a handful of others such as American Airlines Group Inc., Delta Air Lines Inc. and Germany’s Lufthansa.

Cathay’s shares, which have tumbled 41% this year, jumped as much as 6.6% Wednesday. The South China Morning Post reported late Tuesday that the airline would cut 6,000 jobs and close Cathay Dragon.

Monthly Burn

Cathay’s restructuring plan was approved by the airline’s board on Tuesday and will cost about HK$2.2 billion. The management team concluded that the most optimistic scenario for next year is to operate at well under 50% of the passenger capacity operated in 2019. More pessimistic scenarios are perfectly plausible, Healy said Wednesday.

The airline had about $949 million in cash and cash equivalents as of June 30, Bloomberg-compiled data show. Assuming the run rate can be reduced to the stated goal, that gives Cathay around 15 months before it’s running on empty.

Cathay Dragon’s operations will cease from Wednesday and regulatory approval will be sought for the majority of its routes to be operated by Cathay and the group’s low-cost carrier, Hong Kong Express Airways Ltd. Its Airbus SE aircraft will be incorporated into Cathay’s fleet, including the A321neos it has on order.

“In these straitened 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 said. “There are substantial operational and marketing efficiencies to be gained by combining our fleets.”

Cathay took over Hong Kong Dragon Airlines Ltd., now known as Cathay Dragon, in 2006 for HK$8.22 billion, allowing the marquee airline to expand in China.

Dragon operated mainly narrow-body aircraft such as Airbus A320s and A321s to destinations across Asia and more than 20 mainland Chinese cities, including the lucrative Beijing and Shanghai routes. The carrier had a fleet of 48 aircraft as of June 30 and firm orders for 16 Airbus A321neo jets, according to Cathay’s website.

Cathay, one of Hong Kong’s biggest employers, introduced an unpaid leave program for staff earlier in the year as monthly losses climbed to as much as HK$3 billion, and trimmed salaries and closed crew bases overseas. Healy said in August that those cost control measures wouldn’t be enough.

Executive pay cuts will continue into 2021 and a third voluntary leave plan for ground staff will be introduced in the first half of next year, Cathay said. There won’t be salary increases for 2021 or annual bonuses this year. Severance packages for those laid off are well in excess of statutory requirements, Healy said.

“It’s possible there will be more cuts and more pain in the year ahead,” Luya You, a transportation analyst with Bocom International Holdings Co. in Hong Kong, said Wednesday on Bloomberg Television. “Cathay’s forecast moving forward is very optimistic. Any deviation from that scenario does mean there will be more cuts.”

In June, Cathay flagged it had raised HK$39 billion through a recapitalization plan that gave the Hong Kong government a 6.08% stake and deferred delivery of aircraft to save funds. Cathay’s other main shareholders are Swire Pacific Ltd., Air China Ltd. and Qatar Airways.

Every Possible Action

If an effective Covid-19 vaccine is widely adopted in key markets, there should be a gradual recovery in capacity in the second half of 2021, Cathay said, while warning that the future remains “highly uncertain.” The International Air Transport Association has said that travel won’t return to levels seen before the pandemic until 2024.

A vaccine still could be months away. U.S. inspectors found quality-control problems at an Eli Lilly & Co. plant used to help produce its Covid-19 antibody therapy, and there have been other recent setbacks, including a pause Johnson & Johnson’s trial. Virus cases worldwide now top 40.7 million while deaths exceed 1.1 million.

Cathay has “to become leaner and more efficient,” said Brendan Sobie an analyst and consultant at Singapore-based Sobie Aviation. “The job cuts were inevitable.”

Sobie said that while Cathay has no domestic market to lean on, the airline has enough liquidity to weather the years-long recovery in international travel.

Aviation Hub

Equity analysts have started turning more bullish on Cathay, too. The company’s Hong Kong-listed stock has five buy recommendations, eight holds and only three sells, data compiled by Bloomberg show. Although the shares are down since January, they’ve ticked up in recent months, rising 16% from a low in early August.

Cathay was struggling with losses before the pandemic as anti-government protests in Hong Kong led to a sharp reduction in traffic last year and a change in management.

The Hong Kong government on Wednesday requested Cathay take full account of its potential impact on the city’s status as an international aviation hub.

“The business restructuring plan is a commercial decision by the Cathay group,” Financial Secretary Paul Chan said. “Though without the right to vote, the two observers appointed by me to the board have expressed opinions on its plan and reminded the group’s management of the need to keep the impact caused to its employees and the society to the minimum.”



© Bloomberg
The author’s opinion are not necessarily the opinions of the American Journal of Transportation (AJOT).

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