Cathay has long been a staple of East Asia travel because of its higher quality, premium experience. Unfortunately for Hong Kong’s flag carrier, this has not helped it stay competitive, as growing outbound Chinese travel has boosted other carriers, especially domestic Chinese airlines and budget carriers. Cathay is has been called “analysts’ least favorite airline.” That hasn’t stopped Qatar Airways from buying a 9.6 percent, $662 million, stake in Cathay in hopes of entering the China air market.
”analysts’ least favorite airline“
Oil prices have been a factor that has harmed Cathay’s bottom line, but fundamentally it is Cathay’s lack of adaptability that has led to its inability to take advantage of the ongoing Chinese travel boom. This situation is partly because the infrastructure of Chinese airports has improved across the board, meaning that carriers can avoid transiting through Hong Kong altogether. Direct flights to Europe or the United States from Chinese cities are readily available and affordable.
A more significant factor may be that offering premium travel experiences is not enough. Price is proving to be the most significant competitive edge of Chinese and many Southeast Asian airlines. The era of Chinese tourism dominated by wealthy elites and nouveau riche is to a large extent over. Nowadays, more and more middle-class Chinese are traveling abroad and are substantially more budget-conscious.
Competing on price has become crucial for success
Other premium Asian airlines, like Korea Air, ANA, or EVA, have been able to stay profitable or reverse losses despite higher operating costs. A significant factor is that their target markets have not experienced the dramatic changes that Cathay’s has.
Moreover, other premium airlines launched budget affiliates to increase their presence in the budget market, like ANA’s Peach. Even so, this is something Cathay insisted for some time would not improve their overall profitability. Now, as they continue to lose out to other airlines, it’s clear they just can’t continue down the same path.
It’s ironic that the growth in Chinese tourism represents one of Cathay’s biggest opportunities and yet it actually seems to be damaging their long-term prospects. Cathay has already indicated that it cannot create its own budget brand due to lack of space at its transit hubs.
Instead, Cathay is attempting to take half-measures by discounting flights and providing hotel packages. This strategy may increase demand for their brand, but it won’t lower operating costs. If current trends hold, it may not be enough to reverse Cathay’s ongoing decline.
Cathay’s ongoing decline may be difficult to put into reverse
All of this makes Qatar Airways’ recent investment somewhat risky, despite the inevitable long-term growth potential for international Chinese travel. Less than 10 percent of Chinese citizens hold passports, and by 2020 the number of outbound Chinese tourists will surpass 200 million. By 2022, China will likely become the world’s largest aviation market.
For Qatar Airways to be a globally competitive brand, involvement in the Asia market as a whole, and the Chinese market, in particular, is mandatory. If Cathay can successfully diversify its offerings and expand its presence in Chinese cities, Qatar Airways’ investment may pay off.