Market dynamics take a toll on Cathay

Stunningly, Cathay Pacific, Hong Kong's de facto flag carrier and one of the city's biggest private employers, on Monday rolled out its biggest redundancy program in 20 years, shedding 190 management positions and 400 non-management jobs by next month, accounting for 25 percent of management staff and 18 percent of non-management staff respectively.

That the massive layoff comes at a time when Hong Kong's economy is doing fairly well, with its unemployment rate staying at a historical low of 3.2 percent, has made it all the more startling.

The announced job cuts are part of a three-year restructuring program the airline announced earlier after it reported a HK$575 million loss for last year in March. Understandably, the cost-saving move is intended to help the carrier turn around its losses. But it is unlikely to be a silver bullet.

Cathay's fortune going sour is a result of changing market dynamics rather than rising costs.

For years, the airline has positioned itself as an upmarket carrier, catering to demand for premium air travel. This proved to be a successful strategy when the global economy was in its heyday, demonstrated by Cathay's winning streaks in the past. But this strategy no longer works - at least not as well as it did previously - now when demand for premium air travel keeps sagging as major economies in the world teeter on the road to recovery following the 2008-09 global financial crisis. The palpable proliferation of low-cost, or no-frills, airlines - both regionally and globally - is evidence of changing customer habits amid economic changes.

Another equally - if not more - significant change in market dynamics that has contributed to Cathay's woes is fiercer competition from the Chinese mainland carriers.

As Hong Kong's flagship carrier, Cathay has benefited greatly from the city's role as middleman between the mainland and the rest of the world over recent decades. But now with the mainland increasingly enhancing its economic interaction with the rest of world as it deepens reform and further opens up to the outside world, more and more mainland outbound travelers prefer to fly directly to overseas destinations from home cities on international flights operated by mainland carriers, which have significantly improved their service quality over the years. Similarly, more and more mainland exporters now choose to airlift their cargoes from mainland airports directly to overseas destinations. Cathay's announced move to restructure its cargo unit as well is testament to this.

Cathay's misfortune in recent years can be blamed partly on its business strategy but changes in market dynamics due to economic shifts have also played a decisive role. Cathay's case tells us Hong Kong's unique role as middleman between the mainland and the rest of the world is a dynamic and fluid one. In a fast-changing world, Hong Kong simply needs to be fast on its feet. For Hong Kong businesses - as well as the city as a whole - to remain relevant to the mainland's economic development and continue to benefit from it, they must strive to fit in with national strategies.

(HK Edition 05/23/2017 page8)