Cathay Pacific's Future After COVID-19 and Hong Kong's Aviation Role

Introduction

The wake of the COVID-19 pandemic has negatively impacted global economies, with aviation being among the most severely affected industries. As of 2020, Cathay Pacific Airways of Hong Kong had recorded a total loss of HK$21.6 billion (approximately US$2.8 billion) amid the pandemic. According to Cathay's chairman, 2020 was the most challenging year in the airline's history. To this date, the airline remains in survival mode following the losses recorded that year. To recover, the group has made staff vaccination and cost-saving its top priorities. With the pandemic continuing to affect the global economy, the pace of recovery for Cathay Pacific Airways remains indeterminate. The company is, however, optimistic about recording positive improvements in the second half of 2021 (Tsui et al., 2021).

As of May 2021, Cathay Pacific planned to cut 5,900 jobs and close its regional Cathay Dragon brand as part of an effort to reduce costs, in line with what many of its peers were doing as the airline continued to suffer from the economic downturn caused by the coronavirus pandemic. The airline also planned to revise contracts with its pilots and cabin crew as an additional reform measure, a move expected to cost approximately HK$2.2 billion. In total, Cathay Pacific was set to eliminate 8,500 positions, including 2,600 roles already left unfilled through earlier cost-cutting initiatives. According to the airline's chief executive officer, restructuring is fundamental to the group's survival as the pandemic continues to devastate aviation (Lo & Kwan, 2019). An earlier report also indicated that these initiatives could cost the airline approximately a quarter of its consignment capacity.

Cathay Dragon had been responsible for operating the majority of the company's flights to and from China. However, even before the pandemic, the brand had been hit by reduced demand stemming from protests against the government in Hong Kong, which discouraged mainland travelers. Plans to close the brand had existed as early as 2021, but these were obstructed by China's aviation regulator amid the protests of 2020. The central question, therefore, is what Cathay Pacific Airways will look like after the pandemic. This research seeks to answer that question and to examine what the airline's future will look like following China's assumption of greater control over Hong Kong, as well as the broader impacts of the pandemic. The study also empirically investigates Hong Kong's role as an aviation hub in the Pacific region (Tsui et al., 2021).

A literature review was conducted to establish the existing body of knowledge on the research topic. This review examines what Cathay Pacific will look like after COVID-19 and China's consolidation of control over Hong Kong, as well as Hong Kong's role as an aviation hub. A total of seven papers were analyzed, with the majority originating from Hong Kong and China.

Literature Review

Malkani et al. (2020) document that passenger revenues declined drastically in 2020 due to low demand, and that the airline's operating capacity remained below 10 percent for most of the year. Despite this, the airline occasionally captured a slightly higher share of demand during the summer period, when students traveled from Hong Kong and mainland China to the United Kingdom and other European destinations. Nevertheless, the summer period — typically the peak season — remained extremely difficult in 2020. Man, Xu, and Ahmed (2021) corroborate this, noting that passenger revenue recorded an 83 percent decrease in 2020 compared to 2019, while revenue passenger kilometer traffic fell by 85.1 percent. As a result, the load factor declined by 24.3 percentage points, reaching a low of 18.2 percent in October 2020. Czerny et al. (2021) further confirm that the pandemic negatively affected Cathay Pacific and led to billions in recorded losses. They note that other subsidiaries and associates also reported massive losses: HK Express, for instance, recorded a loss of HK$1,723 million in 2020. Governments across Asia imposed travel restrictions that resulted in the airline's suspension of services from 23 March to 1 August. Overall, the airline's subsidiaries performed worse than in 2019 due to decreased cargo traffic and reduced passenger capacity.

While the airline's cargo business was also affected, it nonetheless performed better than in 2019. Czerny et al. (2021) write that cargo has been a considerably stronger performer despite the significant reduction in belly capacity that had previously been provided by large passenger volumes. This improvement was partly attributed to an initiative whereby the airline contracted services from Air Hong Kong — an all-cargo subsidiary — to carry selected cargo in the passenger compartments of certain aircraft. Additionally, seats were removed from the economy-class compartments of four Boeing 777-300ERs to create additional cargo space.

In a bid to reduce cash expenditure, the airline cut capacity, froze hiring, deferred capital expenditure, and suspended non-critical costs (Man, Xu & Ahmed, 2021). Executive pay was also reduced, and employees were invited to participate in voluntary special leave arrangements. Fuel costs recorded a 72.8 percent decline compared to 2019, though the steep reduction in fuel prices led to hedging losses (Malkani et al., 2020).

Regarding Hong Kong's role in aviation, several authors agree that it plays a pivotal role as a major air transport hub in the Pacific region. Malkani et al. (2020), Czerny et al. (2021), and Man, Xu, and Ahmed (2021) all agree that Hong Kong has retained its edge as a transport hub in Asia for DHL and other major logistics firms, despite competition within the Greater Bay Area. The city has long been the preferred option for companies such as DHL Express because it operates the highest number of scheduled flights to global destinations. Higher flight frequencies and faster customs clearance have helped the city maintain its status as the region's premier aviation hub. Hong Kong has also historically performed well as a tourism destination, an industry closely linked to aviation.

Furthermore, the airline serves as one of the major contributors to Hong Kong's GDP, thereby influencing the city's economic growth. However, all of this is at risk following the aviation industry's significant economic losses due to the pandemic. Hong Kong's future role in the aviation industry remains unclear, given both China's increasing control over the city and the ongoing impact of the pandemic on the airline (Czerny et al., 2021). Several scholars agree that the hub faces a serious threat of losing its position in the international aviation landscape.