Cathay Pacific Restructuring – Biggest Job Cuts Since 1997 Financial Crisis

Facing the inevitable, Hong Kong’s Cathay Pacific Airways has finally executed the last thing every employee wants – retrenchment. Close to 600 jobs, its biggest in 20 years, are to be cut thanks to a combination of complacency, arrogance and mismanagement. Under the excuse of “challenging business environment”, the airline announced the humiliating restructuring.

Employees were informed on Monday that 190 management jobs would go immediately while 400 non-management staff will be cut by mid-June. The cuts represent 25% of management staff and 18% of non-managerial positions, more than 30% cut revealed by Cathay’s top management in March. Hence, the news about the retrenchment was already made known 2 months ago.

Cathay Pacific Airlines Air Stewardess

However, employees were still hoping that it would not materialize and their rice bowl could be secured. But the financial trouble hitting the company was too serious. The premium airline unexpectedly swung into its second loss in 9 years – a shocking loss of HK$575 million (US$74 million; £60 million; RM328 million) for the financial year 2016.

Analysts had expected HK$369 million (US$47.5 million; £38.4 million; RM211 million) of profit instead. A year earlier in 2015, the airline made a staggering profit of HK$6 billion (US$773 million; £625 million; RM3.4 billion). Out of HK$93.2 billion in costs, Cathay’s army of 33,700 employees (June, 2016) amounted to HK$19.9 billion – about 21%.

Cathay Pacific Plane Flies Over Kowloon

In comparison, Singapore Airlines Ltd. had 13,983 employees (March, 2016) while Air China Ltd. had 27,442 (June, 2016). Ivan Chu Kwok-leung, its CEO (Chief Executive Officer) for three years since March 2014, was replaced with COO (Chief Operating Officer) Rupert Hogg on May 1. The post of COO was scrapped.

Essentially, the 600 jobs cut – its largest since the 1997-98 Asian Financial Crisis – would save it at least HK$500 million (US$64 million; £49 million; RM276 million) annually or roughly 6% of total staff costs. In 1997-98, about 800 employees were axed. Staff retrenched on Monday will receive a redundancy package of 12 months salary, extended medical benefits and counselling.

Cathay Pacific Airlines - Crew Members

Cathay Pacific said no frontline employees, cabin crew or pilots would be affected by the latest job cuts because the airline was still growing, but staff in those positions would be asked to deliver productivity improvements. However, sources said additional 200 junior-rank jobs could be axed in second phase – most likely in the summer – including those in the cargo, finance and human resources departments.

Besides bloated employees, including excessive 350 senior managers, the Hong Kong flagship carrier also faces fierce competition from mainland China. While its competitors offer more direct flights, more seats and lower fares, Cathay greedily continues charging more with inferior services. Customers can fly “Business Class” for the same price that Cathay charges for “Premium Economy”.

Cathay Pacific Airlines - Business Class - Champagne

Once a dominant player in Asia’s premium air travel market with few serious rivals, Cathay Pacific hits turbulence, despite the booming travel demand in the region. The fact that it could fire 190 management staff immediately goes to prove that they were not needed in the first place, clearly a mismanagement but ignored by top management completely until it’s too late.

Cathay’s most serious problem was its losses in fuel cost. Cathay has had a bad practice of hedging fuel jet for as long as 4 years, obviously not a clever business decision considering the collapse of crude oil back in 2014. Now, Cathay Pacific said it will only hedge jet fuel for 2 years. In the first half of 2016 alone, the airline’s loss was HK$4.49 billion on fuel hedging.

Cathay Pacific Airlines - Planes On Tarmac

In addition to job cuts, the airline has said it will consider shifting more routes to its short-haul arm, Cathay Dragon. But Cathay Pacific needs more than job cuts and routes shifting for its long-term solution. The airline business model was hatched during the era where low-cost carrier was non-existent. What it needs is a total reboot and re-engineering of its business model.

The fact remains that Cathay has been slow in responding to changes such as the rise of both low cost operator and premium player – Air China Ltd., China Eastern, Emirates, Etihad Airways and Qatar Airways. Gone were the good days where Cathay could tell their customers “take it or leave it”. They do not monopolize the premium sector anymore.