This opinion piece in the South China Morning Post suggests that Cathay Pacific’s ownership dump the airline “while it still holds valuable assets like landing slots, a decent cargo business and maintenance facilities.”
They’re eroding their brand with cuts, and as a result mitigating their ability to compete in the premium sector and unable to fully compete in the low cost sector.
Granted a good portion of current financial woes come from fuel hedging losses, something very familiar to US airlines.
- Two years ago Delta lost over a billion dollars in a single quarter on fuel hedges while the airline’s Vice President of Fuel was frontrunning his own trades.
- United lost over half a billion dollars in a single quarter in 2008 on its fuel hedges. And that’s after decrying the evils of oil speculation. The irony was completely lost on most observers.
- Southwest long benefited from its fuel hedges, until they didn’t, and when they didn’t it was evil GAAP accounting’s fault.
Cathay Pacific had a more or less government-granted monopoly in Hong Kong. It conspired with the government and its home airport to limit competition from low cost carriers. But that’s been eroded by the growth in nearby Chinese hubs. In response, they’ve pursued cuts.
Sustaining the cost, and passing on the pricing structure of a premium airline to passengers is unsustainable when confronting the onslaught of competition from mainland airlines.
Cathay is mired in a stuck-in-the-middle strategy – unable to compete as a discount airline and unable to sustain a premium brand. They respond in the typical, smug, self-immolating Hong Kong (and I mean Hong Kong British and Chinese) fashion that characterises many of the local businesses when confronted with real competition – they cut quality.
…Controlling your brand is paramount when your business is in turmoil. Instead of reinventing the business or innovating, management chooses to die by a thousand cost cuts over time.
I noted Cathay Pacific’s substandard new business class seats last week.
What lesson are observers drawing from Cathay Pacific? Ben Sandilands points out,
cutting into quality (and legroom in economy class) is pretty dumb if you expect to continue to sell as a quality carrier, and not just another, absurdly cost burdened attempt to become a quality low cost carrier.
It is very difficult, although maybe not impossible, to retain historic expectations of full service quality in a low cost business model.
For the American carriers, Basic Economy — certainly as practiced by American and United where full fare customers one day cannot even bring on a rollaboard bag the next — erodes their brand. Surprising absolutely no one earlier this month American Airlines was screwing up and rebooking even paid first class passengers into Basic Economy on flights that weren’t even supposed to offer it during irregular operations.
As JetBlue’s Marty St. George pointed out last summer, “We still want to make sure that when a customer walks on a JetBlue airplane, no matter where they sit, they will have the best experience of any airline.” The US legacy carriers have walked away from this approach, and Cathay Pacific seems to have done so as well.
The problem legacy carriers face though is an eroding of what was traditionally business they’d see. Devaluing their brand won’t help them grow, but it’s a natural if uninspired reaction. While Singapore Airlines is pursuing a strategy of separating out low cost carriers (the merged Tiger Air and Scoot) from the full service airline, that only works if you can separately fill planes on each. And US airlines have a decidedly negative experience with low cost airlines within an airline — such as Delta’s Song, US Airways MetroJet, United’s TED (derived from the last three letters of the airline’s name, also known as ‘the end of United’).
Cranky Flier interviewed Willie Walsh, CEO of the parent of British Airways, Iberia, Aer Lingus, Veuling, and Level, and he seems to think the reason US ‘low cost carriers within a carrier’ failed was because the parent airlines didn’t want those new brands to succeed.
Delta has gone out and acquired stakes in foreign airlines, diversifying away from the US market. They own chunks of Virgin Atlantic, Gol, Aeromexico, and China Eastern for instance. United is seeing litigation from its recently announced deal with Avianca. American is reportedly close to investing in China Southern. These may ultimately prove better strategies than their simultaneous attempts to undermine their own brands.