For Cathay's new boss, fixing China tops lengthy to-do list

By Bloomberg News, April 13 2017
For Cathay's new boss, fixing China tops lengthy to-do list

After years of benefiting from China's growth, Cathay Pacific is being hurt by its strong ties to the mainland as travelers eschew the venerable Hong Kong-based airline and fly directly between Chinese cities and the U.S. or Europe.

Finding a way out of that conundrum will be the top challenge for Rupert Hogg, Cathay’s new boss.

When Hogg, 55, takes over as Cathay’s chief executive officer on May 1, he’ll also have to contend with Middle Eastern airlines expanding into Asia and a rash of budget upstarts taking customers away with cut-rate fares. Those factors contributed to the airline’s HK$575 million (US$74 million) loss in 2016, its first shortfall in eight years.

“As long as Cathay is based in Hong Kong and it cannot address these structural problems, it will continue to suffer,” said John Hu, an analyst at Morningstar Investment Services in Shenzhen.

Hu suggests Hogg strengthen ties with Beijing-based Air China, which already owns 30 percent of Cathay.

Though that may involve ceding greater control to the state-owned flag carrier, without such a move the future “will be very difficult for Cathay.”

The other two top state-owned mainland carriers have been posing a threat to Cathay as they forge partnerships with U.S. carriers to expand their offerings.

China Southern Airlines agreed to sell a minority stake to American Airlines Group Inc. last month for US$200 million in a deal that involves code sharing. Delta Air Lines acquired a small holding in China Eastern Airlines in 2015.

Hogg, Cathay’s chief operating officer, will replace Ivan Chu, who is leaving after three years in the job.

The change comes as Cathay embarks on a three-year reorganization plan aimed at reversing the decline. Though Cathay has been short on specifics of the revamp, in January it said changes “will start at the top” and that it would eliminate some key positions by mid-year.

The airline group, which employs almost 34,000 people, has set a target of 30 percent savings in employee costs at its Hong Kong head office.

“They are facing structural headwinds,” said Andrew Lee, an analyst at Jefferies Group in Hong Kong, adding Hogg will look to cut costs and focus on passenger yields. “They need to identify the main customer and how pricing works. It will be a strategic review of strengths and focus areas.”

Hogg joined Hong Kong property and trading conglomerate Swire Group, Cathay’s biggest shareholder, in 1986. He was appointed Cathay’s director of cargo in 2008 and later oversaw sales and marketing.

When Chu was promoted to CEO in 2014, Hogg was named COO and joined the board of directors.

Hogg “will probably implement strategies that have been laid out,” said Geoffrey Cheng, an analyst at Bocom International Holdings.

But given his experience at jobs across the company, “Hogg understands the challenges Cathay faces and will have some fresh thoughts” on addressing them.

Competition from budget airlines and mainland carriers such as China Eastern and China Southern has prompted Cathay to sell premium-class tickets at promotional prices. That cut Cathay’s passenger yield – the money earned per traveler per kilometer flown, a key measure of profitability – by 9 percent last year.

"Cathay’s deterioration in performance means Rupert will spend his CEO tenure addressing the tyranny of urgency,” said Will Horton, an analyst at CAPA Centre for Aviation in Hong Kong. “Ivan should’ve been replaced earlier, but the next generation of leaders were still honing their skills."