4 Years to Top: What's Next for Cathay?

Recently, Cathay Pacific has redefined its development strategy, and for Cathay, which has always been highly international, the phrase "leaning on the motherland" has taken on a new meaning.

If you are not familiar with this airline, your impression of it might still be stuck in last year's scandal where Cathay Pacific flight attendants mocked mainland passengers for not knowing how to ask for a blanket in English.

However, it was quite unexpected that Cathay not only quickly recovered from the "blanket incident" but also returned to its peak.

Let's look at a set of data: In 2023, Cathay Pacific achieved a net profit of 9.8 billion Hong Kong dollars, completely reversing the losses of the three years of the pandemic, and even setting the best performance since 2010; in contrast, the three major mainland airlines - Air China, China Eastern Airlines, and China Southern Airlines, despite significantly reducing their losses, have not yet turned a profit.

In the Skytrax ranking of the "Best In-Flight Entertainment System," Cathay Pacific stands alone globally, being the only airline based in China to make the list; in 2023, Cathay returned to the top ten in the Skytrax comprehensive ranking, and in 2024, it even rose to fifth, leading all Chinese airlines.

This reversal is not a flash in the pan; in the first half of 2024, Cathay Pacific achieved a net profit of 3.613 billion Hong Kong dollars.

From the low point in 2020 to returning to the peak, it only took a short four years.

This is definitely a miracle in corporate management, and globally, there are probably no more than a handful of companies that can achieve similar feats.

Moreover, the civil aviation industry is inherently asset-heavy and has significant operational inertia, making it difficult to reverse.

What exactly does Cathay Pacific rely on?

What is the deeper meaning behind the strategy of "leaning on the motherland"?

"Strive for progress actively until we become the best in the world" - Cathay Pacific is not a heavyweight player.

It only has 230 aircraft.

The smallest fleet among the "big three" airlines, Air China, also has 527 aircraft, more than double that of Cathay Pacific.

But it is such a "miniature" airline that has won the Skytrax World's Best Airline Award, known as the "Oscars of the aviation industry," four times in the past 80 years, making it a truly top-tier airline in the world.

This is due to its scientific internal management.

Over the past five years, Cathay's debt-to-asset ratio has been maintained at 70% or below year-round, which is surprisingly low in a capital-intensive industry; in 2023, its net operating cash flow was 26.4 billion Hong Kong dollars, very abundant.

Over the past five years, only 2020 showed a net outflow; even from the perspective of capital return, the net asset return rate of 17.38% in 2023 is enough to show Cathay's ability to make money.

Coupled with its focus on international routes, this means excellent profitability.

After all, most of the time, the gross margin of international routes in civil aviation is significantly higher than that of domestic routes.

The professional management system inherited from the Swire Group also allows it to maintain competitiveness in its organizational structure.

And the global layout allows it to sail away from the humid Hong Kong and park the planes in the dry deserts of Australia in the face of extreme situations such as flight suspensions, which is convenient for maintenance.

See?

Whether it's financial management, internal governance, or risk resistance, all are fully loaded.

You can say it has achieved the ultimate in corporate management.

This is also why, in Cathay's nearly 80-year history, there have been only three losses, and almost none of them were due to operational or decision-making errors: either due to two financial crises or the COVID-19 pandemic and political events.

Returning to the peak is inseparable from government support.

Looking back two or three years, the situation faced by Cathay was unprecedentedly complex.

The impact of the pandemic in 2020 reduced passenger revenue to only 2% to 3% of pre-pandemic levels.

You must know that passenger transport has always accounted for 60% of Cathay's revenue, and the direct consequence is a monthly loss of 2.5 to 3 billion Hong Kong dollars.

Even when the Hong Kong government eventually stepped in, it faced tremendous pressure.

In May 2023, the "blanket incident," Chief Executive John Lee even said he was "outraged."

After the COVID-19 pandemic, during the peak travel season, Cathay Pacific encountered a "pilot shortage," having to cancel hundreds of flights on a large scale, which left Hong Kong citizens who rely heavily on Cathay's travel stunned, and the special government also issued inquiries.

This even eroded Cathay Pacific's proud international influence.

At that time, a civil report showed that many people felt "strange" about Cathay.

In the midst of these events, Cathay Pacific also completed a "change of leadership."

In January 2023, Augustus Tang took office.

This new president did not give the market too many surprises at first.

Wearing black-framed glasses, agile, well-maintained, and polite and restrained image, there are plenty of similar ones in Central.

But he is actually an "old Cathay" person.

In his 30 years of service, he has witnessed several ups and downs of Cathay.

So, perhaps no one knows better than him what issues Cathay is currently facing.

Before he can make a move, he must first stabilize the situation.

For example, stabilizing personnel arrangements.

So far this year, Cathay has given all employees a 3.8% pay raise, optimized the pilot's compensation plan, and increased the educational allowance for pilots' children.

All of this was done in an environment where the economic recovery outlook is bleak, market consumer confidence is insufficient, and the company has just emerged from losses.

Such practices show a big picture.

For example, after positioning the "blanket gate" as a cultural difference, Cathay began to increase the proportion of mainland flight attendants.

In January this year, the first batch of more than a hundred mainland flight attendants took office, and by next year, it will increase to nearly two thousand people.

Among the existing seven thousand flight attendants, three thousand can already broadcast in Mandarin.

Stabilizing people's hearts, opening up the mainland market, and reducing the probability of similar risks in the future.

This is Augustus Tang's management art.

On July 8th this year, in an interview with Fortune magazine, he called a series of measures after taking office "reconstruction."

Until Cathay's ranking returned to the top five globally and the situation stabilized, people finally had the opportunity to review his measures and read his ambitions: "Strive for progress actively until we become the best in the world."

Leaning on the motherland is written into Cathay's strategy under such a background.

"Too important to fail" - In fact, fluctuations are the norm in the civil aviation industry.

In June 2020, the Hong Kong Special Administrative Region government announced that it would personally inject funds into Cathay, and the scale of funds even far exceeded the market value of Cathay Pacific.

Before this, the Hong Kong government had never personally stepped in to inject taxpayers' money into a dying enterprise.

The news caused a sensation in the market.

In the face of obvious uncertainty in performance recovery, some investors even accused the Hong Kong government of "throwing money into the sea."

The question is, why is it worth the Hong Kong government making an exception?

Because finance is the lifeblood of Hong Kong, and aviation is the lifeblood of finance.

Looking at the data alone, you cannot fully see the role of Cathay in Hong Kong.

Its total market value is only 51.505 billion, which is nearly one-twelfth of AIA, and there are countless assets of the same scale in the Hong Kong stock market.

The direct contribution to the economy is even lower.

In 2022, air transport accounted for 1.7% of Hong Kong's regional gross product, and it was a bit higher before the pandemic, only 5%.

But if you pay attention to Hong Kong's pop art works, you will find that whether it is the popular TVB "Triumph in the Skies," or the ubiquitous plane close-ups in movies, or in the pop music circle, you can see many albums or singles named "Airport."

Aviation has penetrated into the flesh and blood of Hong Kong, growing up with generations of Hong Kong people, and to this day, this connection has not diluted but has become even closer.

Open the Basic Law of the Hong Kong Special Administrative Region, Article 128 is written like this: "The government of the Hong Kong Special Administrative Region shall provide conditions and take measures to maintain Hong Kong's status as an international and regional aviation center."

The legislation guarantees the status of Hong Kong's aviation center, only because for an area with almost no depth and an extremely single industrial system, efficient and convenient international air transport is the lifeline of capital and productivity flow.

It can drive economic development and trade and tourism, promote the development of related industries such as tourism and hotels, and support industries such as import and export trade and logistics transportation.

In short, the aviation center and the world financial center rely on each other and complement each other.

And Cathay Pacific is the support of the aviation center.

Specifically: Cathay Pacific has undertaken an average of 60% of the passenger volume and 40% of the cargo volume at Hong Kong International Airport in the past; among the more than 170 international stations connected by Hong Kong International Airport, 49 passenger stations and 14 cargo stations can only be served by Cathay Pacific, accounting for nearly 40%; Cathay also holds a huge aviation network and air rights and other assets.

Air rights are often obtained after a hard and extraordinary commercial struggle, and some high-profit, high-passenger air rights are also exclusive, making them extremely scarce.

Therefore, compared with other local airlines in Hong Kong, Cathay's position is irreplaceable.

Moreover, it has a long-term safe flight record and high-quality in-flight service, which has a very positive influence worldwide.

So, although Cathay's scale is not large, it has a "too important to fail" status for Hong Kong.

This means that most of the time, the special government is willing to do everything possible to ensure the normal operation of Cathay Pacific.

However, in 2022, the Hong Kong government's finances fell into a deficit, and in 2023, the Hong Kong government's fiscal deficit was 171.895 billion Hong Kong dollars.

So, if a shock similar to the pandemic is staged again: will the Hong Kong government still step in?

Subjectively willing, can it?

If not relying on the Hong Kong government, can Cathay Pacific get through it by itself?

The clouds of uncertainty once again shrouded the sky above the world's aviation center, but as before, Hong Kong is not alone.

The last piece of the anti-fragile puzzle - For Hong Kong, the motherland is always the backing.

For Cathay Pacific, it is even more so.

It is not only the "life-saving straw" in times of crisis but also the support and support for moving towards a broader strategic depth and creating a truly stable and lasting development environment for itself.This depth encompasses various aspects, including financial support, talent reserves, and market breadth.

Let's start with talent reserves.

By the end of 2023, Cathay Pacific's total number of pilots was still 40% less than in 2019.

Hong Kong media reports suggest that it will take at least three years to return to pre-pandemic levels.

On the surface, layoffs and benefit reductions during the pandemic are the main culprits.

For a long time, Cathay's pilot team has been dominated by expatriate pilots.

Before the pandemic, the four airlines in Hong Kong had a total of 5,250 pilots, but only about 1,000 of them were locals, accounting for only 20% of the total number of pilots.

Expatriate pilots certainly have their advantages—they mostly have served in the military, professional, brave, and calm, which is the cornerstone of a long-term safe flight record.

They are Cathay's most valuable assets and thus have the common problem of all valuable assets: they are expensive.

Hong Kong media have exposed that a monthly base salary of 60,000 yuan, 126 paid sick days per year, and unlimited global medical insurance for partners and children are just the benefits of a co-pilot.

Above this, there are three titles: Senior First Officer, Chief First Officer, and Captain.

Such generous treatment was obviously unsustainable during the pandemic.

What about hiring more local pilots?

Emulating Singapore, where local pilots account for 80%, and the proportion of locally hired employees is as high as 85%.

It's not that they haven't tried; in fact, Cathay Pacific has been cooperating with major universities in Hong Kong to train pilots for a long time, but local pilots have always been a minority.

The deeper reason is that the vast majority of young people in Hong Kong have long lost the power to choose.

In "Four Generations of Hong Kong People," written by Hong Kong writer Lui Tai-lok, he classifies Hong Kong people born between 1976 and 1990 as the fourth generation, who emphasize competition in their children, making them lack individuality.

This trend has become more and more intense in the subsequent generations.

Becoming a pilot is not a sufficiently moving story because most people do not have the opportunity to try and fail, and the environment does not even allow for the existence of imagination.

Therefore, relying on the motherland has become a solution.

At the pilot level, this has already shown initial effects.

In 2023, Cathay recruited trainee pilots from mainland China for the first time, and nearly 50 mainland students joined the trainee pilot program.

After systematic training by Cathay, they are not only fully capable of performing the duties of a pilot but also have considerable cost-effectiveness advantages.

On the other hand, the Greater Bay Area, as the most economically active region in China, has a permanent population of 86 million, more than ten times the population base of Hong Kong, and can become a potential source of customers for Cathay Pacific.

In conclusion, actively integrating into the Greater Bay Area is actually full of challenges for Cathay.

This inevitably dilutes its scarcity.

It should be noted that there is no shortage of "regional and international aviation centers" stipulated by laws and regulations in China, and Beijing, Shanghai, Guangzhou, and Shenzhen are all positioned this way.

Especially in the Greater Bay Area, as one of the most complex airspaces in the world, two planes fly overhead every minute.

Here, the last thing you lack is airports.

Hong Kong Chek Lap Kok is only 80 kilometers away from the nearest Shenzhen Bao'an, not to mention the main airports in Guangzhou, Shenzhen, Zhuhai, and Macau.

They can all serve as transfer stations for international routes and have the capacity to deal with busy air traffic.

Not to mention that the bases of domestic civil aviation giants such as China Southern Airlines and Shenzhen Airlines are also in the Greater Bay Area, with the former having more than 900 aircraft, a scale that Cathay cannot compare with.

Although Cathay currently has advantages in routes and service quality, what about in a few years?

It should be noted that it is "too important to fail" for Hong Kong, China, but not necessarily so for mainland China.

This piece of anti-fragile puzzle, can it really be as it wishes?

You might say that although scarcity has been diluted, Cathay has also gained a broad market, and it's not a loss.

But there is also uncertainty.

In 1946, a DC-3 plane full of supplies flew over the "Hump" of the eastern Himalayas and landed in Shanghai, which was just beginning to recover after the war.

The pilots quickly found opportunities to grow and expand.

They established an airline called Cathay Pacific.

Cathay is a direct translation of Khitan, an elegant name used by European nobles for ancient China, and Pacific embodies their ambition to cross the Pacific.

This was the first time Cathay Pacific had a connection with mainland China, but after that, its connection with the mainland was not deep.

Its largest shareholder is Swire Group, and although Air China is its second-largest shareholder, it is difficult to see the dark green tail logo in most airports in mainland China.

Having a more international perspective and high-quality onboard service inherited from European and American airlines is an advantage of Cathay.

But this also increases the complexity of its situation.

If incidents similar to the "blanket gate" happen again and are not handled properly, they can easily be painted with national emotions.

The ultimate question derived from this is, who should control such an airline.

This means that Cathay needs to continue to invest patience and resources to rebuild and strengthen its brand reputation.

The difficulties have not actually decreased.

Fortunately, the long suspension has passed, and the airways have reopened.

All Cathay Pacific needs to do is to hold the control stick and fly through the wind.