Cathay was saved, can it be saved for a while, can it be saved for a lifetime?

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 Cathay was saved, can it be saved for a while, can it be saved for a lifetime?


Figure: Chen maobo, financial secretary of Hong Kong SAR, said the government would not hold a long-term stake in Cathay Pacific [2

Source: Wall Street Journal

Figure: Cathay Pacifics share price change from July 2018 to may 2020

Source: Wall Street Journal

But the main reason for Cathay Pacifics great impact and slow recovery is the operation mode of international transit that Cathay Pacific has always been proud of. As a network airline in Hong Kong, Cathay Pacific totally relies on trans regional and transnational routes to transport passengers from all over the world through Hong Kong as its hub. At present, the entry restrictions of countries caused by the epidemic are still continuing, which is a situation that Cathay Pacific has never encountered. Almost all international routes have been grounded, and the international to international transit business model has been devastated. In history, Cathay Pacific has experienced many crises, and finally survived by relying on excellent management, but these crises have never really endangered the core of Cathay Pacifics business model. The impact of the epidemic not only destroys the financial stability of Cathay Pacific in the short term, but also causes far-reaching damage to its international transit business model. Without strong economic assistance, Cathay Pacific may not be able to survive the disaster.

In fact, the international air transport service provided by Cathay Pacific is a typical epitome of Hong Kongs economic model. The deep reason why the Hong Kong SAR government has made an exception to assist Cathay Pacific is undoubtedly that it hopes to consolidate the position of Hong Kong as an international transit hub and sustain the international transit business model.

Similar to Cathay Pacific, Singapore Airlines and Emirates are also suffering from the suspension of international transit business. The outbreak at the beginning of the year resulted in Singapore Airlines Groups first net loss in its history in the 2019 / 2020 fiscal year (as of March 31), with a net loss of S $212 million (about US $149 million), while the loss in the second quarter is expected to be greater. In June, only 10 of Singapore Airlines Groups more than 200 airliners were flying, with a 96% reduction in capacity compared with the original plan. Emirates flight volume in the first week of April was 99.9% lower than that in the first week of January this year, and a large number of aircraft are still grounded. Emirates has cut nearly 600 jobs in May and announced a second round of cuts on June 10, possibly involving hundreds of pilots and flight attendants. In addition, the pay cut plan for employees will be extended to October.

Picture: UAE flight crew wearing protective clothing

Singapore Airlines and Emirates are more fortunate than Cathay Pacific that the government, as a shareholder, can provide more definite and powerful economic and policy support. Singapore Prime Minister Lee Hsien Loong once said: Singapore Airlines is Singapores pride. In order to support Singapore Airlines Group to survive the crisis, Singapore government provided 75% salary subsidy for local employees of Singapore Airlines Group, and reduced the fees of aircraft parking and equipment leasing that the company had to pay. According to the data of IATA on May 26, Singapore government has provided about 11 billion US dollars of economic assistance to the airline company, ranking the top among the governments of all countries and regions in the world, and most of these assistance will benefit Singapore Airlines. The Dubai government has also introduced assistance policies, focusing on supporting industries seriously damaged in the epidemic, and the aviation industry, as a pillar industry of Dubai, is also one of the key aid targets.

The recovery path of international transit business model is long, and the key to breaking the situation lies in policy liberalization and improvement of prevention and control technology.

The Singapore government has been actively promoting the signing of the bilateral open policy. At present, Singapore has signed a fast lane for public business travel with China [5], and a Green Lane with Australia [6]. Subsequently, Singapores bilateral opening agreement may extend to Malaysia, South Korea, New Zealand and other countries. Thanks to the bilateral agreements signed by the government, Singapore Airlines, Shengan airlines and kuhang will provide transit flights from designated cities in Australia and New Zealand from June 11 (currently, it is still unable to transit through Singapore from other countries other than Australia and New Zealand) [7], which is the first step for Singapores international transit business recovery. At the same time, Wu Junpeng, chief executive officer of SIA, said that flying without contact would be the general trend. In addition, he believed that the upgrading of technical means aimed at ensuring the safety of passengers travel would be a key to SIAs return to its previous glory [8].

Figure: Singapore Airlines flight attendants with protective equipment for cabin service

Source: Straits Times

For the development of international transit business model in the post epidemic era, SIA Group believes that the world after the epidemic will be a new world, and the competitive situation of the aviation industry will also change significantly. SIA group will adjust its route network and reduce operating costs, design new products and services to meet the new requirements of passengers, and establish its own new in the post epidemic era Normal . However, Emirates statement is very conservative. Tim Clark, President of Emirates, said that it will take at least four years for Emirates to fully recover its previous operation level. As a leading enterprise in the international transit business of the aviation industry, this expectation implies that it is not optimistic about the recovery and development prospect of the international transit hub airport in the short term.

What is the markets view on the subsequent development of this business model? After Cathay Pacific announced the restructuring, a number of institutions issued research papers to sing air Cathay shares [9]: Daiwa Securities Group said that there was a potential dilution effect in the capital restructuring and recommended investors to sell; Credit Suisse predicted that Cathay Pacific would suffer a serious loss this year, underperforming the market; JPMorgan also recommended investors to reduce their holdings in Cathay Pacific shares. Since the beginning of June, SIAs share price has been in a downward trend. As of Friday (June 12), SIAs share price closed at $5.83, 53% lower than its highest value this year. Wall Street analysts also hold a bearish attitude towards SIAs shares [10], and other analysts believe that SIAs shares still face many adverse factors due to the recovery of international travel.

It can be predicted that in the post epidemic era, it is urgent to build a new international transit mode by combining policy, technology and management. The success of this new mode will determine the future fate of a number of international hub airports, as well as Cathay Pacific, Singapore Airlines, Emirates and other airlines.

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[1]CathayPacific,9June2020,< https://www.cathaypacific.com/dam/cx/about-us/investor-relations/announcements/sc/20200609_ announcement_ Sc_ locrechk.pdf >

[2]JoanneChiuandJingYang,2020,u2018CathayPacifictoGetBailoutLedbyHongKongGovernmentu2019,June9,2020,WSJ,< https://www.wsj.com/articles/cathay-pacific-to-get-bailout-led-by-hong-kong-government-11591684785 >

[3]ManuelBaigorriandDanielaWei,2020,u2018Insidethe$5Billionu2018Apollou2019DealtoSalvageCathayPacificu2019,12JUNE2020,Bloomberg,< https://www.bloomberg.com/news/articles/2020-06-12/inside-the-5-billion-apollo-deal-to-salvage-cathay-pacific >

[4]BulentImat,2020,u2018EmiratesLaysOff600Pilots,6,500CabinCrewinSecondWaveofJobCutsu2019,9JUNE2020,AirlineGeek,< https://airlinegeeks.com/2020/06/09/emirates-furloughs-600-pilots-in-the-second-wave-of-layoffs/ >

[6]DavidFlynn,2020,Australia-Singaporetravelcouldrestartundergreenlaneplanu2019,May312020,ExecutiveTraveller,< https://www.executivetraveller.com/news/australia-singapore-travel-could-restart-under-green-lane-plan >

[7]DavidFlynn,2020,SingaporeAirlinesopensChangiAirporttransitforAustralia,NZu2018,June112020,ExecutiveTraveller,< https://www.executivetraveller.com/news/singapore-airlines-changi-transit >

[8]Thinkingoftravelling?Hereu2019showSingaporeAirlineswillhandletheseunparalleledtimesu2019,10JUNE2020,TheIndependence,< https://www.google.com.hk/search?q=singapore+airlines&safe=strict&hl=zh-CN&source=lnms&tbm=nws&sa=X&ved=2ahUKEwjp89i40YDqAhVUgp4KHajmC_ YQ_ AUoAnoECBIQBA>

[9] Hong Kong stocks close: the Hang Seng Index fell 0.03%, Cathay Pacific opened higher and left lower, 10june2020, Dongfang fortune.com< https://finance.eastmoney.com/a/202006101516861562.html >

[11]u2018Singapores tockwatch:SIA ,SGX,StarhillGlobalReit,AccordiaGolfTrust,UOIu2019,JUN12,2020,TheStraitNews,< https://www.straitstimes.com/business/companies-markets/singapore-stock-watch-sia-sgx-amtd-international-starhill-global-reit-uoi >