Chinese state-run firm tells employees to stop flying Cathay

A Chinese state-run company told employees to avoid flying Cathay Pacific Airways Ltd., according to people familiar with the matter, widening the fallout for Hong Kong’s dominant carrier after its employees took part in anti-Beijing protests that angered the government in the mainland.

China Huarong International Holdings Ltd., a Hong Kong-based unit of China’s largest bad-debt manager by assets, sent out a message to workers on Friday to choose airlines other than Cathay or its Dragon Air unit when flying on business or personal trips, said the people, asking not to be identified as they aren’t authorized to speak publicly about the matter.

Cathay shares closed at a 10-year low yesterday, with the airline becoming the most visible corporate target for China. Beijing appears to be losing patience over the demonstrations, which have gripped the former British colony for more than two months and prompted airport authorities to take the extraordinary step of canceling all remaining flights in and out of Hong Kong. Huarong’s move also serves as a reminder of how Chinese boycotts can apply enormous economic pressure on companies and countries that fall out of favor, with South Korean and Japanese companies targeted in recent years.

Representatives for Huarong International and Cathay didn’t immediately respond to requests for comment over the boycott.

Cathay, one of the most high- profile brands in Hong Kong, came under fire last week from Chinese state media after many of its employees took part in a general strike yesterday that resulted in the cancellation of hundreds of flights. The actions of Cathay’s employees prompted the English-language Global Times, a nationalist paper published by the Communist Party, to warn the company would “pay a painful price.”

Then on Friday, the Civil Aviation Administration of China turned up the pressure by issuing a swathe of demands to the carrier. The directives included an order for Cathay to ban all employees who supported or joined the protests from flying to the mainland.

Cathay caved in. Over the weekend, the carrier said it suspended a pilot who had been detained while participating in a protest and fired two workers for “misconduct.”

In a message to Cathay staff yesterday, Chief Executive Officer Rupert Hogg said the company plans to fully comply with the CAAC demands and warned that the carrier will discipline employees who “support or participate in illegal protests” with penalties including termination of employment.

Cathay shares lost 4.9% to HKD9.80 yesterday, their lowest level since June 2009. Swire Pacific Ltd., Cathay’s parent, fell 6.2%, the most in almost four years.

Over the weekend, signs emerged that Hong Kong authorities used more aggression against demonstrators, with riot police videotaped beating demonstrators in subway stations.

For Cathay, the aviation regulator’s directive forced it to choose between fueling the wrath of its workers, or those of China – possibly the company’s most important market. Though the carrier doesn’t disclose a breakdown of its mainland China business, flights originating from there and Hong Kong account for about half the firm’s revenue.

The Chinese authority’s order could threaten not only Cathay’s direct flights to China but also those to Europe and the U.S. because those routes fly over Chinese airspace, Jefferies Hong Kong Ltd. analyst Andrew Lee wrote in a note to clients.

The Hong Kong Cabin Crew Federation expressed “deep regret” over the Chinese regulator’s demands and criticized the CAAC for making policies restricting Hong Kong people’s legal rights and freedom, and damaging the “one country, two systems“ principle by which the city is governed.

Cathay is controlled by the U.K.’s Swire family, though the airline counts government-run Air China Ltd. as its second-largest shareholder.

In its warning on Friday, the Chinese regulator ordered Cathay to submit a plan for boosting internal controls, flight safety and security by Aug. 15.

Cathay’s actions, or lack thereof “have led to a severe threat to aviation safety, created negative social impact and increased the risk of flying from Hong Kong to the mainland,” according to the CAAC statement. Bloomberg