Cathay plans 30 percent staff cost cuts under reform pressure

Cathay Pacific Airways Ltd. set a target to save 30 percent in employee costs at its Hong Kong head office as part of the biggest revamp in two decades, amid mounting competition that caused the carrier to post its first annual loss in eight years.

The savings will come from changes to middle to senior management that will be announced by June, Asia’s biggest international carrier said in an emailed statement Friday. A transition to the new structure will occur over the summer, Cathay said.

“It is clear that there is a need for an organizational structure that will allow the Cathay Pacific Group to succeed,” the airline said. “We need a leaner, simpler structure that is driven by real insights into our customers and their needs, one that will allow us to respond quickly to change.”

The statement sheds more light on a “critical review” Cathay announced five months ago. The airline has been discounting its premium offerings in a bid to fill seats as it competes against airlines such as China Eastern Airlines Corp., weighing on passenger yields. It has kicked off a three-year “transformation program” to revive earnings, and has said changes would “start at the top.” The marquee carrier expects the operating environment in 2017 to remain challenging.

“It’s a wonderful opportunity for them to look at what is happening now, not just the numbers but look at the structural issues and make a clean break from the old days,” Shukor Yusof, founder of Endau Analytics, an aviation consulting firm in Malaysia, said by phone. “This year is going to be the threshold for them, and if they don’t do anything by the end of this year, they’re going find themselves a lot deeper in trouble.”

Shares of Cathay rose 1.4 percent to HKD11.28 in Hong Kong on Friday, narrowing losses in the past 12 months to 18 percent. The city’s Hang Seng Index has gained 19 percent over the same period. Swire Group is the parent of Cathay, while Air China Ltd. holds almost 30 percent.

The Hong Kong carrier recorded a net loss of HKD575 million (USD74 million) for 2016, it said March 15. Losses from fuel hedging totaled HKD8.46 billion, and the airline said it expects further such losses in 2017 though the amount should be smaller.

Cathay Pacific Group employed more than 33,700 people worldwide, including about 23,400 for the main airline, according to the interim report for the half year ended June 2016.

Increases in staff expenses are harder for Cathay to contain because of unions’ involvement, said Will Horton, an analyst at CAPA Centre for Aviation in Hong Kong.

“Staff costs saw increases due to wage growth at unions for frontline staff. That is a trickier cost element to control,” Horton said in an email. “Stating the 30 percent figure seems to be a clear message Cathay’s restructuring starts at the top and all employees are in this together if they are to secure Cathay’s future. That means pilots then need to come to the table, too.” Bloomberg