Change in air with Cathay downgrade

Editorial | 14 Nov 2017

It's sad but true that all good things must come to an end.

Friday's announcement that Cathay Pacific Airways will be removed from the Hang Seng Index as a constituent stock was hardly unexpected, marking the closure of a chapter for Hong Kong's de facto flag carrier.

It was only a matter of time, given its poor share showing.

Cathay could have stayed in the basket longer had it managed to please investors with stronger performance.

It ranks among the world's top 10 airlines. Compared to its peers, its service is among the most reliable - although its decision not to modernize its business model to include budget services is questionable.

Aviation - one of the first industries to develop and thrive after the Great Depression of the last century - is expanding with the growing importance of new markets in Asia, primarily China. Carriers accustomed to the old norm will have to rejuvenate themselves if they wish to remain relevant.

Cathay, founded after World War II, was listed in May 1986. A month after listing, it was included as a constituent of the HSI. While based in Hong Kong, it's mostly regarded as British. Perhaps, its destiny - like other British hongs - was sealed the moment Hong Kong returned to Chinese sovereignty.

Cathay has a market capitalization of less than HK$50 billion. It's a large sum, but hardly impressive when compared to mainland developer Country Garden Holdings (HK$276.39 billion), and smartphone camera lens maker Sunny Optical Technology (HK$163.45 billion), with the latter replacing the airline on the index in December.

A slow and steady process of mainland giants becoming formidable forces is evident in the property and other sectors of the local economy. A similar process could accelerate in aviation too.

I wouldn't be the least bit surprised if Cathay comes under pressure to give up market share to mainland competitors in the long term.

Listen to what Hong Kong Airlines vice-chairman Tang King-shing had to say recently. The younger airline - partly owned by mainland conglomerate HNA Group - has been expanding its fleet. The first of its 21 A350 jets were delivered in August. That will take it to destinations like London, New York, San Francisco, and Los Angeles.

Tang said Hong Kong Airlines will need more slots to allow its new planes to take off if they aren't to be left sitting on the tarmac. The question is where to find the extra slots before the third runway at Chek Lap Kok is built and ready for operation.

Tang didn't say, but his script is already written on the wall.

Cathay and subsidiary Cathay Dragon, with a combined fleet of 192 planes, share 40 percent of the airport slots, whereas Hong Kong Airlines, with its existing 31 aircraft, has 10 percent.

It goes without saying that given the two runways are already operating at full capacity, the only way to meet the additional needs of Hong Kong Airlines will be the reallocation of some of the slots already assigned to other carriers.

The landscape of the local aviation sector is set for broad changes.

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