While legacy carriers across Asia have introduced their own budget carriers, Cathay Pacific steadfastly refused. Ironically, credit may go to the disgraced former CEO of United Airlines.
In a university speech last week, Cathay Pacific Chairman John Slosar told students that a dinner with ex-United CEO Jeff Smisek a few years convinced him Cathay Pacific should not start a low-cost subsidiary.
The South China Morning Post shares details from the Slosar’s speech:
The most important thing he said was, ultimately the idea that you could have a separate [budget] airline … and your main brand doesn’t compete turns out to be a false assumption.
Smisek reasoned that a new low-cost subsidiary would cannibalize Cathay’s premium business model and points to United’s failed TED division and Delta’s failed SONG division as examples.
Slosar then argued that passengers choose an airline because they offer the most convenient service and schedule, not because they are full-service or budget.
That’s a tricky hypothesis if price is also not factored in…
Critics argue Cathay Pacific is missing out on a golden goose by failing to start its own budget carrier. They point to Hong Kong Airlines filling the gap and note that the region’s low-cost carriers from outside Hong Kong are capitalizing on Hong Kong.
Labor is the missing element to this discussion. Labor relations hit rock bottom during the Smisek tenure at United and think how important labor is for a budget carrier to thrive. Across Europe and Asia the recent boom of low-cost carriers is predicated, at least in part, on cheap(er) labor.
Cathay Pacific could easily turn Cathay Dragon into a budget carrier and expand its route map to more leisure destinations. But unless it sheds labor costs, cutting in-flight services and cutting ticket prices isn’t going to be a game-changer. Cathay Pacific captains currently earn $326K/year (USD). Meanwhile, junior FAs only earn about $25K/year.
Cathay has lost money for two years. While poor fuel hedging is partly to blame, Cathay faces fierce competitive pressure from all directions. Starting a new budget airline may indeed cannibalize its regional premium traffic, but reduced labor costs could return the airline to profitability.
Does Hong Kong need a new airline?
photo: ErinB / WikiMedia Commons
It’s always smart to do the exact opposite of whatever Smisek would do.