Cathay Pacific Post-COVID Recovery and Hong Kong Aviation Hub

Introduction and Background

The onset of the COVID-19 pandemic brought unprecedented calamity for the global economy, affecting every sector without exception. Among the industries primarily affected was the aviation industry. Many countries were forced to impose travel bans due to the speed at which the virus spread, and Hong Kong was no exception. This imposition immediately led to a drastic drop in aviation services and passenger volumes. As a result of the pandemic, nearly all air travel stopped between late 2019 and early 2020. The Asian region was not spared, as almost every scheduled international flight was suspended (Park, Villafuerte & Abiad, 2020).

Moreover, many countries implemented domestic flight bans to contain and lower the spread of the virus. In the 2020 annual report issued by Cathay Pacific, the chairman stated that global passenger traffic was not expected to return to pre-COVID-19 levels until sometime in 2024, according to estimates by the International Air Transport Association (IATA) (Tisdall, Zhang & Zhang, 2021).

The economic downturn began with the diminishing impact on the tourism and travel sectors globally, and airlines worldwide took a severe hit. Ideally, every economic shock to one country quickly spreads to others due to linkages brought about by globalization. According to a report by the United Nations Conference on Trade and Development (UNCTAD), the estimated global economic loss was approximately two trillion US dollars, including losses recorded by the aviation industry due to grounded aircraft and travel bans (Tisdall, Zhang & Zhang, 2021).

Although air travel is generally considered a safe mode of transport, the pandemic resulted in substantial layoffs and significant operational cuts. Airlines recorded losses of up to billions of dollars, and Cathay Pacific Airline of Hong Kong was no exception.

Cathay Pacific Airways of Hong Kong is the city's flag carrier, with its central hub and head office in Hong Kong (Tsui, Yuen & Fung, 2018). Its subsidiaries and operations offer cargo and passenger services scheduled to over 190 destinations in more than 60 countries globally. Passenger fleets operated by Cathay Pacific include the Boeing 777, Airbus A350, Airbus A330, and Airbus A321neo, while its cargo division operates two Boeing 747 models. The airline was established in 1946 in Hong Kong and has continuously expanded its presence in the region's aviation hub.

Among the most significant milestones of the airline was its acquisition of Dragonair on September 28, 2006, which granted it greater access to the mainland China market and additional opportunities to share resources. Dragonair was rebranded in 2016 and became known as Cathay Dragon (Malkani et al., 2005). However, the onset of the COVID-19 pandemic negatively impacted the global economy and led to drastic changes that brought the once-giant airline to the brink of collapse.

As of 2020, Cathay Pacific had already recorded a loss of HK$21.6 billion, approximately 2.8 billion US dollars. The airline's chairman described 2020 as the most stressful year in the airline's more than 70-year history. The 2020 annual report noted that quarantine requirements coupled with travel restrictions created unprecedented disruption in the global air industry, with consequences described as detrimental (Cathay Pacific Airways Limited, 2020).

Aside from the pandemic's impacts, the airline's operations were also paralyzed by a series of protests, including the 2019–2020 Hong Kong protests, in which Cathay Pacific's employees participated. This created negative publicity that compounded the pandemic's effects and contributed to a sharp drop in revenue and profits. Over two million people demonstrated against the proposed extradition of criminal suspects to mainland China in 2019, and as of 2020, Hong Kong was still gripped by a political crisis that further affected the economy. These activities reduced traveler demand and created widespread fear of political instability, further paralyzing the airline's operations.

During the pandemic, the airline was forced to reduce its international flights drastically. By March 2020, the group had slashed approximately 96% of flights for three consecutive months: March, April, and May. Hong Kong Express also suspended its flight operations due to reduced demand. At one point during the pandemic, the airline recorded only 582 passengers in an entire day. A report issued in December 2020 stated that the group expected losses in the second half of the year to be higher than those of the first half, due to fleet impairment, restructuring charges, and low demand. An early 2021 report confirmed a total annual loss of 2.8 billion US dollars for 2020, and the airline announced plans to cut approximately 8,500 jobs to minimize operational costs (Cathay Pacific Airways Limited, 2020).

This study aims to establish a full assessment of the impact of the COVID-19 pandemic on Cathay Pacific Airline Limited of Hong Kong, in order to understand and project the airline's future after the pandemic's effects. The research also seeks to determine how China's taking control of Hong Kong may affect the airline, and to examine Hong Kong's role as an aviation hub and how that role is expected to change as a result of these variables.

Three research questions guide this study:

1. What will the future of Cathay Pacific look like after the COVID-19 pandemic?

2. What impact will China's taking control of Hong Kong have on Cathay Pacific's future?

3. Will Hong Kong strengthen and maintain its role as an aviation hub in the region following the impact of the pandemic and China's increased control?

The first two research questions are addressed together in one section, while the third is addressed independently. Additionally, the research examines how Hong Kong airport has grown from the Kai Tak era to its current location at Chep Lap Kok, and how ongoing airport development is likely to impact Cathay Pacific going forward. This research is important for the Hong Kong government to understand the airline's future and the city's continued viability as a regional aviation hub.

Literature Review

This section evaluates existing literature on the research questions outlined above. It begins by reviewing the pandemic's impact on the aviation industry and narrows to Cathay Pacific specifically. It then examines what the literature says about Hong Kong as an international aviation hub, identifies any gaps in that body of research, and reviews the historical development of Hong Kong International Airport (HKIA) from Kai Tak to Chep Lap Kok. The methodology literature is also assessed for its efficiency.

According to a report by IATA, the aviation industry received one of the most significant economic blows of the COVID-19 pandemic, resulting in a very sharp drop in revenues, operations, and profitability. Estimates by IATA indicate an approximate drop of 44 percent in passenger capacity and revenues as of March 2020, caused primarily by travel bans imposed by governments worldwide as a containment measure. Updated analyses by IATA indicate a drop of up to 314 billion dollars in revenue in 2020 alone, representing a 55% decline in passenger revenue compared to 2019 (Park, Villafuerte & Abiad, 2020).

The industry continued to be negatively affected even as other sectors received some relief in the second half of 2020, when many governments began easing social restrictions. Hotels, restaurants, shops, and public spaces such as gyms and libraries reopened in phases, and the reopening of these economies stimulated increased demand for services and products. However, this positive momentum did not translate to aviation, as travel restrictions were the last to be lifted. Even after travel bans were eased, people remained reluctant to fly due to fears of virus transmission in enclosed environments (Tisdall, Zhang & Zhang, 2021).

According to Park, Villafuerte & Abiad (2020), the two main drivers of reduced passenger demand and poor industry performance were travel restrictions and overall economic contraction. Travel restrictions had the most significant impact, deepening the recessionary effect on air travel, with the most severe impact occurring in the second quarter of 2020. As of April 2020, total global flights had dropped by 80 percent compared to 2019, with April alone recording a 90 percent decline. The authors argue that recovery depended largely on whether governments would ease severe travel restrictions — the principal obstacle to restored passenger and cargo demand.

An upturn in demand began in the third quarter of 2020, though only a limited number of airlines resumed operations, and international markets remained sluggish as cross-border restrictions remained in place. According to Malkani et al. (2005), the second driver of low passenger demand was overall economic contraction. Early analyses projected a GDP contraction of approximately 7 percent in the first and second quarters of 2020 — roughly double the contraction seen during the 2009 global financial crisis. The pandemic's economic shock was most severe in the second quarter of 2020, when global GDP fell by a further 6 percent, resulting in an overall shrinkage of 2.8 percent for the year.

Considering the magnitude of the economic impact, a decline in passenger demand was inevitable. Even after economies began reopening, passenger demand had not regained normalcy, though performance in 2021 showed improvement over 2020. The uncertainty surrounding the pandemic's duration and severity made projections difficult, as many variables continued to shift. Malkani et al. (2005) identify two scenarios likely to determine the aviation industry's recovery path.

The first scenario considers factors including consumer confidence, general economic conditions, and government support, with the most critical variable being the pandemic's magnitude, duration, and containment effectiveness. Two recovery shapes emerged from this analysis: the V-shaped path and the U-shaped path. The V-shaped scenario represents a sharp drop followed by a short contraction period and a smooth recovery. Historical pandemics, such as SARS, followed a V-shaped pattern, with operations returning to normalcy within approximately seven months. SARS caused an 8 percent reduction in annual passenger revenue and a 6 billion dollar loss in Pacific and Asian airline revenues. COVID-19 has far surpassed those figures. By the last quarter of 2020, the pandemic had caused a 48 percent decline in passenger revenues, translating to approximately 314 billion dollars in revenue losses. The Asia-Pacific region alone lost about 113 billion dollars — approximately 19 times the losses incurred during the SARS outbreak of 2003 (Yeung et al., 2010).

The second scenario, the U-shaped path, accounts for a prolonged contraction period with muted recovery and a limited short-term outlook. Unlike the V-shaped scenario, which would have predicted recovery by late June 2020 and normalization by September 2020, the U-shaped scenario indicates a slow recovery with limited demand growth. The trajectory of COVID-19 more closely resembles the U-shaped scenario, as the economic reopening took considerably longer, and operations have continued to recover at only a steady pace.

Narrowing to Cathay Pacific specifically, the impact was broadly consistent with that of the global industry. The airline's operations and performance declined drastically in 2020, representing its worst year in history. Reduced cargo and passenger revenues resulted from decreased demand, travel restrictions, and civilian protests that created fear among travelers, particularly those from mainland China. The airline is most likely subject to the U-shaped scenario — a prolonged impact followed by a gradual recovery. While projecting the airline's future with certainty remains difficult, the trend has shifted with the pandemic's broader impacts on the global economy beginning to diminish. Vaccine development has offered hope for a return to normalcy, and the results of this research provide a more detailed analysis of the situation.

Regarding Hong Kong's role as an international aviation hub, existing literature identifies it as the critical hub for both cargo and passenger capacities in the Asia-Pacific region and globally. The primary drivers of its hub status include high-quality airport infrastructure, a liberalized air transportation policy, an excellent strategic location serving the Asia-Pacific region and the Chinese Mainland, and an openness policy that welcomes foreign competition. This competition has compelled the airport authority to continuously improve services and infrastructure, building trust with passengers and increasing both cargo and passenger volumes (Tsui, Yuen & Fung, 2018).

Several studies have investigated air passenger service quality at HKIA and consistently concluded that Hong Kong offers high-quality services, enabling it to attract and retain passengers traveling to destinations worldwide. Studies on Hong Kong's tourist arrival demand have also established tourism as a key factor in the city's development, facilitated significantly by air travel. Tourism and aviation reinforce each other — tourism drives aviation growth, and aviation facilitates tourism by providing access — and together they play an essential role in Hong Kong's economic development and that of the broader Asia-Pacific region.

Literature on HKIA's international air cargo hub consistently identifies Hong Kong as the region's leading global air cargo hub, capable of handling extensive cargo networks through well-designed facilities. This status is reinforced by China's massive hinterland and rapidly growing economy, combined with Hong Kong's strategic positioning and liberalized transport policy. Chapman & Georgoulias (2010) note that Hong Kong has maintained its edge as the most critical air transport hub in Asia for logistics companies such as DHL, attributed to its high volume of scheduled flights, greater flight frequencies, and faster customs clearance. Efficiency, reliability, and speed are among the key performance metrics used by logistics companies, and Hong Kong excels on all three.

Hong Kong's exports and imports are largely transported by air due to their time-sensitive nature. This necessity gave rise to the express delivery service model — a value-added, personal delivery service ensuring goods, merchandise, and parcels are delivered reliably and on time. Such capabilities have cemented Hong Kong's partnership with major logistics firms and contributed significantly to the city's GDP, as well as that of China and the Asia-Pacific region (Chapman & Georgoulias, 2010).

However, various factors — including competition from other aviation hubs within the Asia-Pacific region — have been identified by numerous studies as potential threats to Hong Kong's hub status (Kan, 2012). Notably, there has been minimal research on the potential impact of disease outbreaks on the city's aviation hub, representing a significant gap in the literature. This gap suggests the city was not adequately prepared to manage a health pandemic such as COVID-19. Had such research existed, contingency measures might have been developed and implemented at the onset of the pandemic, potentially averting some of the catastrophic revenue losses that followed.

The development of HKIA from the old Kai Tak Airport to the current Chep Lap Kok has taken place over several decades, driven by the need to meet growing air traffic capacity. Prior to COVID-19, HKIA recorded a steady growth rate in air traffic capacity. Plans are underway to develop a third runway to accommodate projected post-pandemic airport traffic through 2030 and beyond, with the primary goal of securing and maintaining Hong Kong's status as the most significant aviation hub in the Asia-Pacific region — and providing a substantial boost to Hong Kong's and the broader region's economic development.

Research Methodology

The methodology employed for this research project was a quantitative approach that allowed for the production of data that could be analyzed and communicated clearly. Additional information was obtained as secondary data. Quantitative methods were selected for their capacity to concentrate on collecting quantifiable data and applying statistical methods to represent research findings in numerical form for easy communication and analysis. Research data are also displayed graphically to provide visual clarity and facilitate interpretation.

Data were collected on Cathay Pacific's performance in terms of passenger and cargo capacities and revenues both before and during the pandemic, generating a comparison that illuminates the economic impact of the pandemic on the airline. This data is also intended to help project the airline's future after the pandemic, accounting for other variables such as China's taking control of Hong Kong. The data collected enabled a comprehensive analysis of the airline's current status and a projection of its future based on existing trends, measures, and strategies (Tisdall, Zhang & Zhang, 2021).

Data collection occurred in two phases. The first phase involved collecting data on the airline's performance from before the pandemic through the last quarter of 2020. Variables collected included hedging costs, cargo capacity, passenger capacity, and overall operations. Data on the airline's employee reduction plans — including the total number of positions cut — were also gathered. These data were then compared and analyzed to draw logical conclusions about the airline's current status and future trajectory.

The second phase involved secondary data collection from various academic articles, publications on the research topic, the airline's official website, and the airline's annual reports. These sources provided relevant, credible, and reliable information on issues such as Hong Kong's role as an aviation hub and the implications of China's increasing control. The information obtained was subjected to systematic analysis, and logical conclusions were drawn. The airline's annual reports proved especially vital for both phases of data collection. A limitation of this research is the inability to obtain certain sensitive internal information due to restricted access.

Conclusion and Recommendations

This research paper aimed to establish the future of Cathay Pacific in the wake of the COVID-19 pandemic and China's taking control of Hong Kong, as well as Hong Kong's role as an aviation hub and what its future looks like. The paper has documented the pandemic's devastating impact on Cathay Pacific and on Hong Kong's international aviation hub, and has examined the range of measures and strategies the airline has implemented to cut operational costs and return to viability.

The paper has established that the first half of 2021 brought an improvement for the airline, with operations increasing relative to the prior year. The cost-cutting strategies implemented — including layoffs, the closure of Cathay Dragon, and the restructuring of pilot and cabin crew contracts — contributed to reduced losses. As a critical player in Hong Kong's development and the aviation industry at large, the airline also received government financial support to help it recover (MELAS & MELASOVÁ, 2020).

Being the most significant airline in Hong Kong's aviation hub and a key driver of the city's economic development, Cathay Pacific recorded the worst drop in both cargo and passenger volumes in its history. The first few months of 2020 were the most challenging, with passenger loads plunging by 99.6 percent to approximately 458 per day. The first quarter of 2020 saw passenger loads fall by 64.4 percent from 2019, while cargo loads fell by 26.6 percent. The resulting losses amounted to billions of dollars. To mitigate these impacts, the HKSAR government announced plans to recapitalize the airline with HK$27.3 billion from the government's land fund.

Questions were raised about why the government prioritized Cathay Pacific when many other companies were also suffering. The HKSAR financial secretary responded by noting that Cathay Pacific is too central to Hong Kong's hub status and aviation industry to be allowed to fail. Cathay Pacific handles approximately 41% of cargo and 57% of passengers at HKIA, and operates 14 cargo terminals and 49 passenger terminals around the world on Hong Kong's behalf. These statistics confirm that Cathay Pacific is not simply an airline, but a key institutional component of Hong Kong's international standing and economic development.

The financial secretary emphasized that investing in Cathay Pacific was necessary to promote and maintain Hong Kong's status and general growth. The law requires the government to provide necessary measures and conditions to sustain Hong Kong as a local, regional, and international aviation hub. The aviation industry also boosts the city's economic development, tourism, hospitality, and related industries, consolidating Hong Kong's global reputation. Therefore, the government should formulate diversified and long-term objectives for developing the aviation industry and other sectors once the pandemic and social unrest have subsided. With HKIA's current location at Chep Lap Kok opening up numerous opportunities for increased air traffic and capacity, the airline's future operations are well-positioned to capitalize on those advantages (MELAS & MELASOVÁ, 2020).

In conclusion, the pandemic has had devastating impacts on the airline and the aviation industry globally. Even as economies slowly reopen and attempt to return to normalcy, the global economy continues to recover losses incurred between 2019 and 2020. Passenger capacity is expected to remain relatively low but higher than in 2020, while cargo capacity should record more significant improvements. The first half of 2021 already showed the airline registering better performance than the prior year. Should this trend continue, coupled with government support through recapitalization, the airline is expected to bounce back to its former standing sometime after 2024. These combined efforts indicate that Cathay Pacific still has a strong future, which will directly impact the economic development of Hong Kong city and its aviation industry, ensuring that both continue thriving in the years ahead.

Hong Kong's role as an aviation hub is far too critical for the region's development to be neglected. To consolidate Hong Kong's position, there is a need to build management training capacity and develop aviation financing services, aircraft leasing, and high-value-added cargo transportation. Additionally, expanding aviation education, promoting industry financing, and establishing dispute settlement centers should become focal areas for the Hong Kong government. These centers would help resolve disputes before they escalate to a point where they paralyze aviation operations. The government should pursue these priorities to ensure the delivery of efficient, high-quality services capable of attracting cargo and passengers to the hub.

Currently, a three-runway system has been scheduled to commence construction in 2022 and is projected to be operational by 2024. If successful, the overall cargo and passenger volume of HKIA will expand significantly, representing a promising future for both the airline and Hong Kong's aviation hub. Given intense regional competition, it is essential to maintain Hong Kong's reputation by cooperating and coordinating with other airports in the region in the years before 2024. This collaborative approach should help unify resources and allocate them effectively so that all involved parties can achieve mutually beneficial outcomes.

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