Cathay Pacific Airways Ltd. (293)’s new chief will face the dual challenges of finding customers for premium seats as China’s economic growth cools and budget airline flights start from its home turf.
Ivan Chu, 51, was last week named as the next chief executive of Cathay, and will take over after annual results are announced in March. Chu has worked at Cathay for 29 years and has been chief operating officer since March 2011. His strategy will determine whether the airline will retain its dominant 50 percent share of passengers flying out of the former British colony.
China’s expansion slowed for a second straight quarter to 7.5 percent in the three months ended June, extending the longest streak of expansion below 8 percent in at least two decades. That is critical for the prospects of Hong Kong’s marquee airline because of the city’s stature as a financial and trade hub for the world’s second-largest economy.
“It’s becoming increasingly difficult to fill premium-class seats, not just because of job cuts in Wall Street, but also because of economic slowdown in China,” said Shin Ji Yoon, an analyst at KTB Securities Co. in Seoul. “Fewer people are flying from the U.S. to China these days and that hurts financial hubs like Hong Kong.”
Chu will take over from John Slosar, who will become chairman, the Hong Kong-based airline said in a statement Aug. 16. Swire Pacific Ltd. (19), the carrier’s biggest shareholder, said separately that Slosar, 57, will also become its chairman.
The appointment comes after Cathay last week reported first-half profit that was the lowest in at least 15 years. The earnings missed analyst estimates as cargo revenue dropped and declining yields in North Asia offset gains from carrying more passengers.
China has set a 2013 expansion target of 7.5 percent after gross domestic product rose 7.8 percent last year, the least since 1999. The country’s potential growth rate has fallen to a range of 7 percent to 8 percent, the State Council Information Office has said.
Cathay -- with its “brushstroke” image in a white and green tail -- in June won the award for the best flight crew from Skytrax. The airline was also within the top 10 for premium seats, according to Skytrax’s website.
Hong Kong’s Budget Airline
Filling premium seats will become more challenging as companies such as Wall Street firms cut back.
The number of people employed in New York City in “securities and commodities contracts intermediation and brokerage,” which includes investment banking and securities dealing, fell to about 101,200 in March, a decline of more than 30 percent from the peak in December 2000 and the fewest in Bureau of Labor records dating to 1990.
Slosar, who took over in March 2011, cut capacity and phased out planes to revive earnings.
“They’ve demonstrated shrinking is the way to profitability, yet they want to grow in the long term,” said Will Horton, an analyst at CAPA Centre for Aviation. “Even if markets rebound, the traffic isn’t necessarily for Cathay’s taking.”
The airline should also brace for competition from a Hong Kong-based budget carrier. In June, Qantas Airways Ltd. (QAN) and China Eastern Airlines (670) Corp.’s planned venture to be based in the city sold a stake to a company founded by Stanley Ho and held by his family. That may help pave the way for an operating license for the budget airline Jetstar Hong Kong.
Jetstar Hong Kong aims to have its first flights by the end of this year, China Eastern Vice Chairman Ma Xulun said in March. Also, Hong Kong Express, an affiliate of Hong Kong Airlines (1055), will convert to a low-cost model later this year, Executive Vice President Sun Jianfeng said in June.
No budget carrier has a hub at Hong Kong Airport, an opportunity that lured gambling billionaire Stanley Ho’s group.
“He’s got his job cut out for him,” said K. Ajith, Singapore-based aviation analyst at UOB Kay Hian Research. “There’s competition coming from low-cost carriers and declining demand for premium cabins. The setting up of a low-fare carrier in Hong Kong is a threat for Cathay.”
Oasis Hong Kong Airlines Ltd., which operated budget long-haul flights, collapsed in 2008 after racking up losses of about HK$1 billion in less than two years.
Chu will also need to fix Cathay’s cargo business, where revenue fell 5.2 percent in the first half of the year.
“I had thought Slosar would have had a longer time in the pilot seat,” said Timothy Ross, Singapore-based transportation analyst at Credit Suisse Group AG. “At some point, the carrier was likely to have had an executive of Chinese ethnic origin to run the company.”
American Roy C. Farrell and Australian Sydney H. de Kantzow founded Cathay Pacific Airways on 24 September, 1946, according to the airline’s website. Initially based in Shanghai, the two men eventually moved to Hong Kong and established the airline.
Chu joined Cathay in 1984 and has worked with the group in Hong Kong, mainland China, Taiwan, Thailand and Australia. Before he became COO, he was director for service delivery. The post of COO has been a stepping stone for the top job at the airline for the last three incumbents.
“There’s some continuity,” said Andrew Orchard, an analyst at CIMB Group Holdings Ltd. in Hong Kong. “At least, there seems to be some succession structure that the company is following. That could only be a good thing.”
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