Cathay Dragon flights with cargo-only passenger aircraft ended with the regional carrier’s shutdown Wednesday, leaving shippers with fewer options during the peak freight season.
Hong Kong-based Cathay Pacific Group (OTCUS: CPCAY) said it was immediately merging the Dragon brand into two other airline subsidiaries as part of a sweeping restructuring that will see the elimination of 8,500 positions and other downsizing measures precipitated by a steep fall in passenger business due to the coronavirus pandemic.
Cathay Dragon operated throughout Asia with a fleet of 35 Airbus aircraft, including 18 A-330 widebodies.
In a message to customers, the Cathay Pacific cargo division said Dragon’s demise after 35 years will have a limited impact on cargo network coverage in the short term.
Airports where Cathay Dragon exclusively operated regular cargo services were Fuzhou and Guangzhou, China; Kuala Lumpur, Malaysia; and Fukuaka, Japan. The carrier also operated passenger freighters to other destinations on an ad hoc basis.
Cathay Pacific Airways, a top-five cargo carrier by volume, said it will continue to operate freighters to Xiamen and Chengdu, China, and Hanoi, Vietnam, and is working to restore service to the other airports. The Cargo division operates 20 Boeing 747 freighters, as well as idle passenger planes for dedicated cargo flights.
It reassured customers that it will continue to follow through with plans to become a truly customer-centric business.
The parent company, which also owns all-cargo carrier Air Hong Kong, said it will seek regulatory approval for Cathay Pacific and Hong Kong Express to fly a majority of Cathay Dragon’s routes.
The start of the traditional peak season for shipping helped Group cargo demand improve in September by 7% on a monthly basis. Cathay said it operated a greater number of passenger aircraft as mini-freighters – a total of 525 round-trip flights – and continued to charter Air Hong Kong flights. It also began transporting mail for HongKong Post in passenger cabins using two Boeing 777-300 with Economy Class seats removed. The reconfigured aircraft are also being temporarily deployed to Pittsburgh International Airport in Pennsylvania under a charter with Unique Logistics.
Financial squeeze
In September, Cathay Pacific and Cathay Dragon carried 47,000 passengers, a 98% decrease from the prior year. The fleet is operating at about 9% of capacity.
The company expects to operate about 10% of its pre-pandemic passenger flight capacity for the rest of 2020, gradually rising to less than 50% in the second half of 2021.
Officials said becoming a smaller airline is the only way to stop bleeding financially and survive.
Despite slashing capacity to match demand, deferring new aircraft deliveries, eliminating discretionary expenses, implementing a hiring freeze, cutting executive pay and allowing workers to take voluntary unpaid leave, Cathay Pacific is not on a path to breaking even.
It continues to burn $193.5 million to $258 million per month, although the daily average of between $6.5 million and $8.6 million is less than at major U.S. carriers, which are burning through $20 million to $25 million per day. Officials said the changes will reduce the drain on financial reserves by about $64 million per month.
“The global pandemic continues to have a devastating impact on aviation and the hard truth is we must fundamentally restructure the Group to survive. We have to do this to protect as many jobs as possible, and meet our responsibilities to the Hong Kong aviation hub and our customers,” CEO Augustus Tang said in a statement.
“We have studied multiple scenarios and have adopted the most responsible approach to retain as many jobs as possible. Even so, it is quite clear now recovery is going to be slow. We expect to operate well under 25% of 2019 passenger capacity in the first half of 2021 and below 50% for the entire year,” he added.
Cathay is suffering more than most major airlines because its network is predominantly international and Hong Kong has very strict COVID border restrictions. Cross-border travel has been the hardest hit by the pandemic because people are fearful of getting sick or stuck somewhere far from home. International operations continue to decline. Industry officials predict international business will take at least until 2023 — a year longer than short-haul business — to fully recover to last year’s level of traffic and revenues. United Airlines, which operates a large domestic U.S. network in addition to its international routes, says it plans to be at 44% capacity in November.
The 8,500 job cuts represent a quarter of Cathay Pacific’s workforce, with 5,300 people being let go in Hong Kong and an additional 600 in locations around the world. The remainder of the positions are being eliminated through attrition.
The cost-cutting campaign also requires cabin and cockpit crews to accept reductions in compensation, extends executive pay cuts through 2021 and involves a third round of voluntary furloughs.
In early June, Cathay Pacific received a $1 billion loan from the Hong Kong government in exchange for warrants that would allow it to take a stake in the company. It also offered stock to existing shareholders to raise an additional $1.5 billion for operations and restructuring.
Industry woes
Cathay Dragon is the largest airline to go out of business in Asia this year, and likely worldwide. Travel data and consulting firm Cirium has logged 43 commercial airline failures — not counting bankruptcies — so far this year, compared to 46 all of last year and 56 in 2018.
The International Air Transport Association recently forecast airlines will take a $77 billion hit to liquidity during the second half of the year, as they face a slow, incremental return of travel demand and the threat of more government travel restrictions with new outbreaks increasing in the U.S. and Europe.
Governments have collectively provided more than $162 billion in direct and indirect support for airlines, but it hasn’t been enough to stop layoffs or the threat to viability.
IATA has warned that more airlines could go under without more aid to get them through the normally soft winter season.
Early this month, KLM Royal Dutch Airlines submitted its restructuring plan to the Netherlands Ministry of Finance, a key condition for receiving a government loan and guarantees worth about $3.8 billion.
KLM is preparing for an extended period of fewer flights because of the ongoing effects of COVID-19 by reducing its cost structure and becoming smaller.
The restructuring requires employees to accept graduated cuts in pay of up to 20% for the duration of the loan period. KLM said it has reached agreement with all unions for ground, pilot and cabin staff on key parts of the plan through 2022.
Another condition imposed by the government is that the airline reduce controllable costs by 15%. Significant cost savings will be achieved by phasing out leased aircraft and deploying a more efficient fleet. KLM is also meeting with suppliers to ask about accepting lower fees.
A voluntary separation program has reduced the ranks by 2,000 employees, and KLM said it will employ about 4,500 fewer people by the end of the year than it did before the pandemic.
Click here for more FreightWaves/American Shipper stories by Eric Kulisch.
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