China’s top official in HK pushes for security law

22-Jan-2020 Intellasia | TheStar | 6:02 AM Print This Post

Revenue passenger kilometres

Not all passengers are statistically equal. If counting merely the number of people on flights, a Los Angeles-Hong Kong passenger is the same as a Hong Kong-Taipei passenger. To take into account the differences in how far passengers fly, there is the metric revenue passenger kilometres (RPK).

The trend for RPKs during SARS nearly matches that of passenger volume. For the current protests, passenger volumes have been down for five consecutive months, but RPKs have declined for three months, each time at a lower rate than the passenger volume decline.

The protests vary from SARS due to geography and politics. SARS prompted a global decrease in travel to and through Hong Kong. Cathay’s current downturn is driven by its mainland China traffic decreasing by a quarter. The protests, considered by some to be against mainland China, are prompting reduced business and leisure demand. Transit traffic is also impacted as mainland Chinese passengers avoid Cathay, which is seen as sympathetic to protestors.

Luo Huining, China's new top official in Hong Kong, cited the neighbouring former colony of Macau and its adoption of a strict national security law as a model. (AFP)

Luo Huining, China’s new top official in Hong Kong, cited the neighbouring former colony of Macau and its adoption of a strict national security law as a model. (AFP)

While the decrease in mainland China traffic is significant, overall RPKs show a more modest decline as short-haul reductions are partially offset by Cathay’s long-haul routes. One flight from Hong Kong to New York can produce the same RPKs as ten A330 flights from Hong Kong to Shanghai, or eighteen A321 flights.

Regional Asia has been put off from travel to Hong Kong due to safety concerns, with Japan and Korea especially skittish. Holding up better are long-haul markets Europe, North America, and Australia/New Zealand. Long-haul traffic tends to book earlier in advance, and spare capacity can be linked to a nearby connecting market.

Load factor

Looking only at the load factor during SARS would show a crisis: for two months Cathay’s load factor was approximately 40 percent more seats empty than filled. During the protests, load factor has been less impacted. There were initially declines for three months, with load factor bottoming out at 74%, far better than during SARS. The load factor has recently rebounded to 80 percent levels, including 85 percent in December 2019, which was better than the 82 percent rate a year prior when there were no protests.

Overall load factor is impacted by the weak mainland China network, which since October has had a load factor around 63%, down from 73 percent a year prior. The largest regional gap in load factor, excluding mainland China, was in September with a 22 point difference. In December this tightened up to a 6 point difference.

Since the protests began, mainland China’s load factor decreased the worst while Australia/New Zealand and Europe have held up the best with almost no year-on-year change in load factor, perhaps partially explained by large transit traffic opportunities between Australia/New Zealand and Europe.

Sustaining the overall load factor is Cathay’s pivot from local traffic to transit traffic. Demand has weakened for local Hong Kong travel with inbound demand down 46 percent in December (unchanged from November) and outbound demand down 4 percent (versus 8 percent in November). Replacing lost local demand and the mainland China transit traffic is other transit traffic. Cathay increased transit traffic 15 percent in December.

Compared to SARS, boosting transit traffic is possible since there is no health concern about flying Cathay or passing through Hong Kong airport. Cathay’s balance today between long-haul and short-haul capacity is similar to 2003. The net growth Cathay’s Europe and North America capacity has doubled provides a wider network, creating more city-pairs, and Cathay has better tools to sell transit traffic.

Weak load factors typically indicate poor finances, but strong load factors do not necessarily indicate revenue strength. Cathay is replacing high-yielding local traffic with low-yielding transit traffic, although specific financial figures will not come out until Cathay reports annual results in March. Its anecdotal comments continue to be pessimistic, expecting 2020 will be “highly challenging.”

Flights and available seat kilometers

Cathay may have better algorithms than during SARS to sell connecting traffic, but it is also forced to sell flights rather than cut them. The growth of aviation since SARS has outpaced airport infrastructure, leading to more airports that are constrained with stringent slot policies. Typically the 80/20 rule applies: if a slot is not used 80 percent of the time 24 days a month then the airline risks losing the slot.

Hong Kong has lifted the 80/20 rule through the end of the northern winter scheduling season in March, but foreign airports have not. So if Cathay cut a Hong Kong-Sydney flight, it could retain the Hong Kong slot but lose the slot in Sydney and likely never get it back. Traffic has not weakened as sharply as during SARS, so retaining flights and the slot by suffering through a few months of weak performance is the trade-off for being able to make a strong profit off the slot in the future.

The number of flights Cathay has operated shows different trends than other metrics. Flights declined in August, due to the airport closure, but then rose in September as demand weakened but Cathay did not have enough forward time to trim its schedule. Since then, flights have been consecutively cut, reaching a 7 percent contraction in December.

Cathay may be getting a better understanding of demand and its own capability, but by this point in the SARS crisis, flight cuts were easing. In June 2003, Cathay was projecting a full schedule in September (it was mostly achieved in October). This would equate in the protest downturn to Cathay in November 2019 expecting a full schedule in February 2020, which does not appear likely.

Compared to SARS, Cathay has been slower in the current downturn to cut capacity. It did not carry out sharp flight or capacity reductions until the fifth month of the current downturn, by which point during SARS there were already improvements.

Cathay does not report flight movements by region, but there is some indication from its available seat kilometers. It has cut mainland China ASKs by 10-12%, far less than the 24 percent drop in RPKs, which has produced weaker load factors for the mainland China network. This reduction could be through selective cancellations as well as down-gauging that uses a smaller aircraft but preserves the slot. Most of Cathay’s mainland China flying is in slot-restricted airports where it risks losing slots.

Cathay in the past such as during the 2012 downturn did not cut flights as sharply as it could have since it wanted to broadly maintain its schedule for the passengers still flying, believing its commitment to passengers would be reciprocated rather than passengers feel Cathay abandoned them and they should look for another airline. Further, demand usually returns faster than an airline can predict and respond to by adding flights back. Minimising the capacity taken out maximises the demand that can be realised once the market rebounds.

Whereas Cathay ended 2003 with an 18 percent decrease in passengers and six point drop in load factor, 2019′s strong first half and mixed second half saw Cathay end the year with only a 0.7 percent decrease in passenger volume and two point decrease in load factor. But this is of little consolation.

Forward bookings continue to be low, especially for critical premium demand. Cathay’s future relationship with the mainland Chinese market is unclear. Cathay was once a conduit linking China to the world, but the growth of mainland Chinese airlines and foreign carriers serving China means Cathay now needs mainland China more than mainland China needs Cathay. A business restructure to adjust to decreased Chinese transit traffic could be difficult, but the outcome not unprecedented: Taipei-based China Airlines and EVA Air carry almost no mainland Chinese transit traffic.

Unlike during SARS, once most traffic rebounds from the protest movement there are long-term concerns about ability to grow. Slots from Hong Kong’s upcoming third runway will be quickly used. Yet this is the last runway that can reasonably be accommodated at the current site of Chek Lap Kok, which replaced famed Tai Kak. The third runway’s approval was contentious with the Hong Kong public, and Hong Kong’s government will be hard-pressed to lobby so quickly for further expansion, however it is to be achieved.

Perhaps most challenging, Hong Kong’s aviation expansion an economic growth engine and social reward will need the approval of mainland China. Shenzhen and Guangzhou are two major mainland Chinese airports nearby that could be expanded instead as Beijing re-calibrates priorities, rewards and punishments as a result of the Hong Kong protest movement. In absence of significant flight expansion, revenue growth at Cathay will be possible as connecting traffic is replaced by higher-yielding local traffic, as has occurred with British Airways in London Heathrow, but limits future prospects for the Hong Kong aviation hub.



Category: Hong Kong

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