Great Wall in the sky stymies Cathay Pacific

By DAVID FICKLING / BLOOMBERG

AIRLINES are fundamental to the self-image of sovereign territories. The largest one in any country is routinely dubbed a “flag carrier”, as if it was the leader of a naval squadron. No wonder Beijing has it in for Cathay Pacific Airways Ltd.

China’s civil aviation authority has ordered Cathay to bar air crew who supported Hong Kong’s recent protests from working on flights to or from mainland China, citing bogus threats to aviation safety. It also told the airline to submit information about all crew flying over mainland Chinese airspace for pre-approval. Cathay’s CEO Rupert Hogg swiftly responded that the carrier would comply with the new rules.

Hogg had little choice. Chinese airspace represents a great wall which Cathay must cross every day of its existence. While the airline could probably survive if it lost landing rights at mainland airports, maintaining free passage over the country is an existential issue.

That shows up when you look at where Cathay picks up its passengers.

Flights to and from China account for only about 7% of the carrier’s traffic and Europe, where the shortest routes must inevitably traverse the mainland, is another 21%. Add up those two buckets and you’re looking at more than a quarter of the total — and a comparable portion of revenues — that could be affected by the new rules.

To get an idea of how damaging a wider embargo could be, consider how Cathay’s third-biggest shareholder, Qatar Airways, has fared since Saudi Arabia closed its airspace to the carrier in June 2017.

A 2.8 billion riyal (RM3.21 billion) profit in the year through March 2017 reversed into a 252 million riyal loss the following year. Thanks in part to the need to divert around Saudi territory, fuel costs went up about 30%, by more than three billion riyal, even as passenger numbers fell 8.9%. Matters would probably have been even worse if its planes hadn’t been pressed into service to airlift essentials to and from the country, with freight carriage going up by 205,000 metric tonnes during the year.

The situation would almost certainly be worse than that for Cathay.

For one thing, China is simply larger than Saudi Arabia and more comprehensively blocks key routes. The option of carrying out a minor diversion over neighbouring territory, as Qatar has done with Iranian and Iraqi airspace, simply wouldn’t work for European routes. For another, while both carriers are major cargo airlines, Cathay can’t fall back on the sort of airlift role that Qatar performed.

Quite the opposite: Cathay’s cargo unit, which accounts for about a quarter of revenue, is highly vulnerable to the current US-China tensions thanks to the outsize share of electronics in Hong Kong’s airborne trade.

The volume of cargo carried fell 5.7% from a year earlier, or 59,000 tonnes, in the six months through June. Revenue per tonne, per km, dropped 9.8%.

For the moment, air crew unions seem reassured that the rules on overflying China won’t be a dramatic change to current regulations— but Cathay’s management is on notice that Beijing can turn the issue into a more potent weapon.

The worst-case scenario, of an airline that’s forced to police the political views of its own workforce in order to maintain the open skies it needs to operate, would be a horrendous one for Cathay. Driving a wedge between management and staff inclined to support Hong Kong’s aspirations for greater freedom, and between the airline and customers who retain loyalty to it as an icon of the territory’s unique status, could quickly erase the gains from nearly four years of turning round the business.

Waiting in the wings in that event is the risk that the long-rumoured takeover by Cathay’s second-largest shareholder, Air China Ltd, could finally come to fruition.

The largest shareholder, Swire Pacific Ltd, would likely have to reduce or sell its 45% holding to get Air China’s 30% stake into a majority — but for all that Cathay is a prestigious jewel in the crown for ultimate shareholder John Swire & Sons Ltd, it represents only 13% of so of total revenue. There’d be no sense in the Swires sacrificing their broader relations with China for the sake of the airline.

That would be another small victory for China Inc and a larger blow to Hong Kong’s sense of itself as an independent territory. No wonder Beijing is so keen to clip Cathay’s wings. — Bloomberg


This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.