Cathay, SIA May Fly Empty Premium Seats as Banks Cut Cost
Cathay Pacific Airways Ltd. (293) and Singapore Airlines Ltd. (SIA) are spending $207 million fitting flat-bed seats and larger TV screens in business class. Finding passengers to fly them may be a challenge.
Sales at the front of the cabin fell short of its expectations in December, Cathay Pacific said last week, as the Hong Kong-based carrier this month introduced promotional business-class fares. Qantas Airways Ltd. (QAN), Australia’s biggest, offered 28 percent discounts on return premium tickets to Hong Kong during the holiday season.
Premium ticket prices between Asia and the U.S. averaged $5,859 in December, their lowest level since 2009, while in Australia an index of business-class ticket prices dropped 30 percent from a year earlier to a record low. Wall Street’s cost cuts and dismissals, which have helped erase more than 300,000 financial-industry jobs in the past two years, aren’t over yet as Citigroup Inc. (C) and Morgan Stanley (MS) announced a combined 12,600 job cuts in the past month.
“When financial institutions are firing people, traffic and profits at airlines like Cathay and Singapore Airlines are affected because they are known for serving premium passengers like bankers,” said Li Lei, a Beijing-based China Minzu Securities Co. Ltd. analyst, who has covered aviation for more than a decade. “Their home bases are too reliant on financial services and trade.”
Airlines that invested in entertainment systems, seats and lounges to compete for business traffic may see growth in business-class fares slowing further this year, according to American Express Co. (AXP)
New York-based AmEx said Jan. 11 it will eliminate 5,400 jobs this year, mostly in travel services, as consumers and businesses rely more on digital technology for bookings.
“When revenues are light, one of the first things to happen is a cutback in travel,” said Michael Werner, a banking analyst at Sanford C. Bernstein & Co. in Hong Kong. “You’d prefer to cut travel expenses before cutting headcount.”
Cathay Pacific shares rose 0.4 percent to close at HK$15.48 in Hong Kong. Singapore Air slipped 0.8 percent to close at S$11.03 and Qantas climbed 0.7 percent at A$1.53.
Merrill Lynch & Co. unit, UBS AG, JPMorgan Chase & Co. (JPM), and Royal Bank of Scotland Group Plc all asked senior bankers in Asia to fly economy on short-haul routes during the global financial crisis in 2008.
That pressure is returning as companies try to rein in expenses, said Kelvin Lau, a Hong Kong-based transport analyst at Daiwa Securities Group Inc.
Some companies, especially from Europe, are saving money by travelling less, Thierry Antinori, Emirates’ sales chief, said in an interview today. Still, Emirates is growing premium cabins on expanding network and features like showers and spas. The company is able to take a bigger share of a “smaller pie,” he said.
“Many companies are trimming down their travel budgets,” Lau said. “Even when there’s good macro data, it doesn’t mean they’ll stop being cautious on their spending.”
Airlines have invested heavily in the front of their cabins in recent years to capture valuable corporate accounts. While business class and first class take up less than 15 percent of total seats on long-haul flights, they account for half of a flight’s revenue because of the higher prices.
Singapore Air last year hired the design unit of Bayerische Motoren Werke AG, or BMW, and James Park Associates Ltd., the interior designer of Mumbai’s Taj Mahal Palace hotel, to revamp first-class and business-class offerings.
Cathay put on a laser show and hired Lady Gaga, Tina Turner and Marilyn Monroe lookalikes for the December 2010 unveiling of its HK$1 billion ($129 million) upgrade of business-class interiors on its Boeing 777s and Airbus SAS A330s. The carrier said Jan. 18 it had 47 aircraft equipped with the new seats and the upgrade will be completed by March.
“The overall performance in the premium cabins was weaker than expected,” James Tong, a general manager at the airline, said in a stock exchange filing last week. “Passenger demand held up in the economy cabin.” Elin Wong, a company spokeswoman, declined to comment on premium-class occupancy.
Cathay said in August that it posted a loss of HK$935 million in the six months ended June and Chief Executive John Slosar told staff in November the carrier was facing a “very challenging year” in 2012.
Qantas spent A$270 million ($284 million) upgrading the interiors of its 747-400s and 767s, as well as sprucing up lounges in Singapore and Hong Kong. It and prospective partner Emirates have also rolled out a chauffeur service to transport premium passengers to and from airports.
Wall Street banks pared bonuses and fired workers after the global financial crisis. Bank of America Corp. (BAC) and HSBC Holdings Plc (HSBA) had said they would cut 30,000 jobs, while UBS AG (UBSN) had said it would fire 10,000 workers. Citigroup said last month it will eliminate 11,000 positions while Morgan Stanley was planning to cut 1,600 jobs from its investment bank and support staff.
Deutsche Bank AG (DBK) trimmed 40 jobs in Hong Kong in September and Bank of America planned to cut 40 jobs at global markets unit in Asia, according to people with knowledge of the matter.
The operating environment continues to be challenging and promotional activities are expected to continue to place downward pressure on passenger yields, Singapore Air, the world’s first carrier to operate the double-decker Airbus SAS A380 superjumbo, said in a Jan. 15 statement.
Singapore Air is halting its all-business-class non-stop services to New York’s Newark Airport and Los Angeles, the world’s longest commercial flights, from fourth quarter of this year. The carrier doesn’t provide a monthly breakdown for business- and economy-class demand, spokesman Nicholas Ionides said in an e-mail on Jan. 18.
The discounts on Qantas flights from Australia are driven by usual lower business demand during the country’s summer holiday period and will finish at January-end, spokesman Andrew McGinnes said.
Still, discounts and capacity cuts are most commonly used by airlines to discover a price at which there’s enough demand, according to Tony Webber, a former chief economist of Qantas and managing director of Webber Quantitative Consulting.
Demand for premium is closely correlated to the health of stock-market indexes and while discounting may help to bring in more business at the moment, a recovery in the markets would be more effective in filling seats, Webber said.
“Carriers are having to work harder to gain and renew corporate accounts as companies feel the squeeze from the economic situation and the airlines are confronting more competition,” said Will Horton, a Hong Kong-based analyst at industry consultant CAPA Centre for Aviation.
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