Cities and thrones

The Decline and Fall of Asia's Airline Empires

The cities are falling victim to a global power struggle.
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The Venetian Republic and the British Empire built their economies on ocean trade. Dwindling naval power heralded their decline and fall.

It's a thought that should provoke a shiver of recognition in Hong Kong and Singapore, given the way their airborne fleets are falling victim to a new Great Power struggle.

Cathay Pacific Airways Ltd. will cut jobs and carry out the biggest review of its business in more than 20 years, Hong Kong's flag-carrier said Wednesday. It will also try to improve profits by hedging its jet-fuel bill over a shorter period (an expedient that Gadfly recommended 10 months ago), the carrier said this week.

Singapore Airlines Ltd. is in a comparable predicament. Its shares haven't broken north of S$10 ($7) in more than two months, the longest stretch since 2009 below a level that appears to matter deeply to management. Stock buybacks, the usual remedy, are notable by their absence this time.

The two carriers have long been tied up with the destinies of Asia's great trading cities. When the Boeing Co. 747 shrank the world in the 1970s, it was Cathay and SIA that connected the wealthy population centers of Europe, North America and Japan with Asia's emerging economies. That helped transform their home territories from backwaters surrounded by a wilderness of poverty into global hubs of banking and commerce.

Those times are gone, and the new world order is looking markedly less friendly -- both to the entrepot cities, and the airlines that link them to the world.

High Flyers

Singapore Air and Cathay Pacific were pioneers of long-haul travel. Capacity at the big Chinese and Gulf carriers has long since overtaken them

Source: Bloomberg

Note: ASK = Available Seat Kilometers, the distance flown by an airline's aircraft multiplied by the number of available seats on board.

In their heyday, Singapore Air and Cathay lost little sleep worrying about their rivals in China and the Persian Gulf. Nowadays, they can't afford not to: China Southern Airlines Co., China Eastern Airlines Corp., Air China Ltd., Emirates Airline and Qatar Airways Ltd. all exceed them in capacity terms, and Etihad Airways PJSC is rapidly catching up.

That's left the two cities' airlines exposed. Long-haul international aviation is a cutthroat business, and its best practitioners historically have had either state support or an easily dominated domestic market at their backs. Cathay and Singapore have never had the latter, and it's a hotly contested debate whether they benefit from the former -- especially when compared with their aggressive new state-owned competitors.

Staying in the game has required cutting ticket prices to worryingly low levels. Yield, a measure of revenue per passenger, per kilometer, fell to its lowest level since 2009 at Cathay in the six months ended in June, and the 2016 fiscal year figure at Singapore Air was the weakest since 2010.

Air Goes Out

Ticket prices at Cathay and Singapore Air, as measured by passenger yields, have been falling

Source: Bloomberg, company reports

Note: Figures converted from local currency. RPK = revenue passenger kilometers, distance flown by aircraft multiplied by the number of paying passengers per plane. Only annual and June 2016 figures shown. Singapore Air numbers backdated to align with Cathay, so Dec. 2015 figure is for the fiscal year ending March 2016.

Crushed between the tectonic plates of the Chinese and Gulf carriers, the cities' airlines are also geographically disadvantaged. Two-thirds of humanity lives within an eight-hour flight of Emirates' base in Dubai, making it particularly well-placed to link global travelers. Qantas Airways Ltd.'s 2012 deal with the Gulf carrier, which saw it give up connections via Changi and Chek Lap Kok to serve a wider array of European destinations through the Gulf, is a warning that geography is destiny for airlines.

While the carriers try to fight a rearguard action against this -- see Singapore Air's flights to Houston via the English city of Manchester, or the nonstop polar trips to Newark it plans to restart next year -- they are working from a position of weakness.

Fall From Grace

Analysts expect Cathay Pacific to post its third annual net loss in more than two decades this year

Source: Bloomberg

Note: Cathay Pacific has a December year-end, Singapore Airlines has a March year-end. Figures for e.g. Singapore Airlines' fiscal year ending March 2016 have been lined up with the 2015 calendar year for clarity.

With ultra-long-haul jets such as the Boeing 787 and Airbus SE's A350 opening up unheard-of routes such as direct Perth-London flights, and Chinese airlines hitting their stride, the old roles connecting Asia to Europe and North America are disappearing. Where they still have an advantage -- using the hub-and-spoke model to fill more seats on planes, thus improving profitability -- the Gulf carriers' geographic advantage means Emirates and Qatar can do it better.

The short-term solution is likely to be local.

Local Hero

Regional and budget operations are taking up a growing share of available seat kilometers at Singapore Airlines Ltd.

Source: Bloomberg

Note: Tiger and Scoot ASKs weren't consolidated with the group until 2015.

Cathay Pacific may hand more routes to its regional affiliate Cathay Dragon, Australian Business Traveller reported Wednesday, citing an internal memo. Singapore Air has gone in a similar direction, doubling passenger capacity at its regional SilkAir unit in the seven years through 2016 while the measure stood still at its core long-haul business, and adding low-cost brands in the form of Tiger Airways and Scoot.

That's a high-stakes strategy, though, because regional routes are where budget carriers come into their own. Ryanair Holdings Plc, EasyJet Plc and Wizz Air Holdings Plc now constitute three of Europe's top five airlines by market capitalization. Tony Fernandes is working to repeat the trick in Cathay and SIA's backyard with AirAsia Bhd.

In a race to the bottom, do either Singapore Inc. or Hong Kong Holdings really want to be the winner?

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    David Fickling in Sydney at

    To contact the editor responsible for this story:
    Paul Sillitoe at

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