Abu Dhabi, UAESunday 31 May 2020

Cathay Pacific's dominance over Asia skies shaken as coronavirus and political turmoil hit demand

Hong Kong-based airline warned the first half of 2020 will be "extremely challenging financially"

Hong Kong’s Cathay Pacific reported a 28 per cent drop in profit for 2019. Reuters. 
Hong Kong’s Cathay Pacific reported a 28 per cent drop in profit for 2019. Reuters. 

Hong Kong's flagship airline Cathay Pacific may need to take even tougher measures to weather the twin plights of the coronavirus outbreak and the political turmoil at home that have dented air travel demand.

The airline may have to consider more drastic steps ranging from negotiating to defer new plane deliveries, postponing payments to suppliers, reducing headcount and further capacity cuts to seeking short-term credit in order to pull through the double crises, analysts said. It has already slashed capacity and asked staff to take unpaid leave to preserve cash.

"The carrier’s position is the most precarious in years: the double hit from protests and [the] coronavirus [outbreak] is pushing Cathay Pacific to its limits as well as testing Hong Kong’s aviation industry as a whole," Luya You, transportation analyst at Bocom International, said. "We do expect Cathay to pull through albeit with a significant hit to cash reserves."

Carriers in Asia-Pacific could stand to lose $27.8 billion (Dh102bn) in revenue this year due to the coronavirus outbreak that has resulted in declining demand, according to an initial assessment by the International Air Travel Association (Iata). The Geneva-based organisation now expects passenger demand for the regional carriers to shrink by 8.2 per cent in 2020, compared to an earlier forecast of 4.8 per cent. That is based on a scenario where the coronavirus has a similar V-shaped impact on demand as during the 2003 SARS outbreak, which was characterised by a six-month period with a sharp decline followed by an equally quick recovery.

Cathay Pacific, perhaps the airline outside mainland China most affected by the health crisis, is seeing its dominance in Hong Kong shaken by the rapid spread of the deadly virus that followed on the heels of months of widespread anti-government protests in the financial hub.

The outbreak, and subsequent plunge in demand, prompted the airline to cut about 40 per cent of its capacity across its network and slash 90 per cent of its flights to mainland China over the next two months, it said in a February 27 statement.

Around 25,000 staff in the airline group agreed to take unpaid leave through the Special Leave Scheme as its "business challenges remain acute," Cathay Pacific's chief executive said in an internal memo seen by The National. About 75 per cent of the 33,000 group employees took leave with two-thirds of the pilots also opting for the scheme, it said.

"Cathay Pacific is doing the right thing," Shukor Yusof, the head of Malaysian aviation consultancy Endau Analytics, said. "It may need to introduce harsher measures like retrenching staff if the outbreak worsens. It may need to consider slashing the number of employees and deferring plane deliveries in the near future."

The outlook for the airline, rocked by the major dual challenges, is grim.

The first half of 2020 is expected to be "extremely challenging financially", as the "significant drop" in passenger demand would mean "significantly" lower first-half earnings compared to the same period last year, Cathay said in a statement on February 17.

Analysts say the airline could incur a loss in the first quarter of 2020, as Hong Kong-based operators' earnings get squeezed by the near-collapse in demand over the recent weeks.

"Cathay could be loss-making in 1Q 2020, if not the second half of 2019, due to the Hong Kong protests last year and now the Covid-19," James Teo, transport industry analyst at Bloomberg Intelligence, said.

Despite the gloomy guidance, analysts agree that Cathay Pacific will survive through the difficult conditions given its resources, the Chinese government's recently announced economic stimulus plan and the possibility that its weaker rivals collapse or fail to revive services when conditions improve.

"Despite some near-term headwinds, we do not doubt that Cathay will be able to weather through this crisis," Ivan Su, equity analyst at Morningstar, said. "The carrier has a solid balance sheet to mitigate weak demand. As Hong Kong's flag carrier, Cathay will also benefit from the various government stimulus."

Cathay Pacific is not alone in the crisis that has rattled Asian carriers who could face a liquidity crunch if the virus outbreak drags on.

"Cathay may stand to benefit should financially weaker competitors fail to survive or have difficulty scaling services back up when demand recovers," Mr Teo said.

"The carrier could also further minimise cash outflow by by negotiating for deferred payments to suppliers, suspending non-critical capital expenditure projects, further reducing capacity, on top of obtaining additional lines of credit from financial institutions," Mr Teo said.

Financial institutions are still keen to provide Cathay with any short term liquidity it might need, given its balance sheet remains "relatively strong," he added.

Rivals are also feeling the pain, with Hong Kong Airlines axing 400 jobs and asking staff to take two weeks of unpaid leave per month or switch to three-day weeks. China Southern Airlines has asked its pilots to mandatory indefinite no-pay leave. Singapore Airlines was also forced to cut its flight schedule.

Still, the aviation industry is accustomed to hits from external shocks, including epidemics.

"Looking back at the effect of SARS had on the travel industry, I think the coronavirus can lead to a sharp, but short, impact on air travel demand," Mr Su said. "History teaches us that any effect on air transport would be temporary, so I believe things will eventually get better."

Updated: March 4, 2020 03:28 PM

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