Asian Airlines Battle to Survive

Cathay Pacific imposes a hiring freeze while Indian and Chinese airlines consider cost-cutting measures as demand declines

Cathay Pacific Airways announced Friday that it is suspending all recruitment activities, its first official move to cut costs in the intensifying credit crunch.

In a notice to employees, Cathay Pacific stated: "We will begin by suspending all recruitment at both Cathay Pacific and Dragonair. Controlling our headcount will play an important role in helping us keep our costs under control."

The Hong Kong-based airline has continued hiring throughout this year, while airlines in North America and Europe have frozen hiring and even asked for voluntary furloughs from their employees. As recently as a week ago, Cathay was still hiring new flight attendants for its bases in North America.

Cathay Pacific's hiring suspension comes after a 0.7% decline in passenger traffic in September (traffic grew 0.5% in August) and a loss of HK$663 million ($85 million) in the first half. Despite the negative traffic growth, Cathay Pacific increased its passenger capacity by 14.2% in September. In the same month, it added its 119th aircraft, an Airbus A330, to its fleet.

But while it has continued to increase capacity, the rhetoric of Cathay Pacific's management has painted a very different picture. Commenting on corporate travel in an interview, the general manager of sales for the Pearl River Delta and Hong Kong, James Tong, said: "A lot of companies are now trading down—from first to business class, or from business to economy—and a number are cutting travel altogether. This is just the beginning."

Of Cathay Pacific's largest corporate travel clients, 16 out of 20 are financial services companies and one-third of the airline's Hong Kong revenues come from financial institutions. By all rational measures, corporate travel by bank employees will drop further as the finance industry continues to get hammered by volatile stockmarkets, almost nonexistent credit markets and a whirlwind of mergers and acquisitions.

In FinanceAsia's 2008 Business Travel Poll, 60% of respondents reported that their corporate travel budgets have decreased. A plurality of respondents, 38.4%, said that they travel in economy class more this year than last.

In Hong Kong trading Friday, Cathay Pacific's shares closed down HK$0.28, or 2.75%, to HK$9.90. The airline has lost 59.8% of its market value since it hit a high of HK$24 on October 29, 2007.

Elsewhere in Asia, airlines are not faring much better. On October 14, India's largest and second largest airlines, competitors Jet Airways and Kingfisher Airlines, announced a comprehensive alliance. The agreement is estimated to save the carriers a combined $307 million.

Cost-saving measures are desperately needed among India's airlines. According to India's oil ministry, the country's airlines have defaulted on at least $185 million in outstanding fuel charges. In reports, petroleum secretary RS Pandey says Jet Airways has defaulted on $53.2 million in fuel payments, while Kingfisher Airlines has failed to pay $12.4 million.

India's airlines remain some of the weakest in the region. Since the airline industry's liberalisation in 2003, new carriers—especially the low-cost ones—have proliferated. While many analysts have predicted a shakeout in the industry for some time, it has not yet occurred. Today's falling demand coupled with a 24% rise in fuel prices year-on-year may precipitate the expected consolidation.

Already, state-owned carriers Air India and Indian Airlines have combined, Jet Airways has acquired rival Air Sahara and Kingfisher has bought Air Deccan. Some speculate that the Jet Airways-Kingfisher alliance could be a precursor to merger, although the management at both airlines deny such rumours.

The Federation of Indian Airlines predicts that the country's airline industry will post total losses of $2 billion for 2008. Kingfisher Airlines reported Thursday a Rs1.88 billion ($37 million) loss for the nine months ending March 31.

Meanwhile, China's airline industry continues to see its own difficulties. The country's big three—Air China, China Southern Airlines and China Eastern Airlines—reported losses in the third quarter, partly due to much lower-than-expected demand during the Olympic Games in August. Last week local media reported that the Shanghai government had given its approval for a merger between Shanghai-based competitors China Eastern and Shanghai Airlines, which is deemed necessary by many analysts to keep ailing China Eastern afloat.

As with the financial sector, news about the airline industry changes every week. Last month, International Air Transport Association (IATA) CEO Giovanni Bisignani stated that 28 airlines around the world have gone bankrupt and 20 more are at risk. Today, that number stands at 29 as Spain's LTE shut its doors last week.

Tony Tyler, chief executive of Cathay Pacific Airways, summed up the situation in his monthly message for October: "Cathay Pacific—and the airline industry as a whole—has entered another very troublesome period. We've battled our way through hard times in the past, and we will do so again." Battle away.