Sustaining A Life Well Travelled
for Cathay Pacific
8 June 2017
Singapore Airlines recently revealed a surprise quarterly loss that was followed by a plunge in its share value. The airline has promised radical changes if needed and will be reviewing its fleet, network and services. Meanwhile, Singapore Airlines’ long time rival, Hong Kong’s Cathay Pacific, has suffered similar financial challenges reporting an annual loss for 2016 that has been followed by the news of 600+ redundancies.
Both airlines are facing increased competition from Gulf and China airline operators.
How will these premium brands navigate a turbulent aviation space? Perhaps clues can be found in the future prospects of their home cities.
The challenge for Singapore, a small independent island state, is to maintain and enhance its global relevance. As the winds of change blow across Southeast Asia this means staying ahead of competitors who have their own designs on the region’s rapidly growing markets.
China’s One Belt One Road initiative seeks to reshape the dynamics of regional logistics with high speed rail links via Myanmar and India to Europe. At the same time, Chinese direct investment in ports and transport infrastructure in Malaysia will diminish Singapore’s traditional position as regional middleman. While more obviously a threat to Singapore’s shipping and container industries than its role as an aviation hub, these developments create a long term challenge to Singapore’s regional significance.
There is also competition emerging on Singapore’s western horizon. Behind the cover of last year’s headlines criticizing the hurried recall of large-denomination banknotes, India has been flying under almost everyone’s radar with its nationwide move to a biometrically enabled, mobile, cashless, paperless society. Leapfrogging two generations of technological development should transform the economy at light speed in the coming decade. Even before this economic revolution hits its stride, the International Air Travel Association, IATA, is forecasting that passenger demand in India is set to double by 2025 displacing UK as the third largest aviation market.
As the pace of change accelerates Singapore cannot take for granted the regional leadership position it has enjoyed for so long. The technological and wealth gap with neighbours is likely to close and innovation is key to staying ahead.
In aviation, Singapore’s aim is to emulate the success of the Gulf which is now a growing hub for Europeans traveling to Asia and beyond by making Singapore a hub for travel from Europe and US to India, Malaysia, Indonesia and Thailand.
In its favour Singapore Airlines has long been regarded as a leader in aviation innovation. For example it was the first to fly the Airbus A380 and more recently the first to introduce double beds in private First Class cabins.
Perhaps the potential changes ahead at Singapore Airlines will bring new focus to innovation? This is something that Singapore is increasingly doing across medical, biotech and fintech developments.
Rival airlines already project a future focused brand idea. Emirates’ “Hello Tomorrow” tagline, for example, clearly promises the latest in contemporary air travel. Can Singapore Airlines elevate innovation through its brand and if so what are the implications for the traditional allure of the Singapore Girl?
In challenging times it is essential to protect the brand. With a portfolio that includes the airline’s regional wing, Silk Air, and budget airlines Scoot and Tigerair, Singapore Airlines has the opportunity to double down on the premium quality positioning of its flag carrier brand.
The challenge for Cathay Pacific is that today’s narrative is about bringing China to the world and the world to China rather than Hong Kong being a colonial entrépot. Mainland China airlines are fiercely competitive and gradually growing in stature. So positioning Cathay Pacific as the sophisticated Hong Kong premier carrier is getting more difficult to defend.
Unlike Singapore Airlines with it’s Scoot and Tigerair budget brands, Dragonair was never seen as a budget airline and, from the press announcements at the time of the airline’s 2016 rebrand as Cathay Dragon, going this route was not up for consideration according to Cathay’s senior management.
With passenger traffic set to soar in and out of China, the intent of the rebrand was for Cathay Pacific to leverage the Dragonair brand as well as lend to it the strength of the Cathay name. According to a forecast by Credit Lyonnais Securities Asia (CLSA), by 2020 it’s expected that 200 million Chinese will be flying out of China each year (vs 51.6 million in 2016 according to CAAC) with an estimated 130 million people flying into China from around the world. With such a burgeoning mainland China market the logic behind the name change seems sound.
But migrating to Cathay Dragon is a transition that appears not to have been well understood by the customer base. What is the purpose of this realignment? Does it signify a commitment to service standards of Cathay Pacific? As both brands are positioned as premium airlines, is Cathay Dragon actually Cathay Pacific but ‘now available in red’?
In the face of cut-throat competition and increasing challenges of maintaining a premium positioning what are the opportunities for Cathay Pacific and Cathay Dragon (collectively and colloquially known as ‘Cathay’)?
One area of strength is in Cathay’s sustainability story. For example, Cathay Pacific has been advancing its biofuels program and is among the world’s first airlines to adopt fuels made from landfill rubbish. Biofuels have the potential to reduce emissions by as much as 80 per cent when compared to conventional fossil-based fuels. More details on this and other initiatives can be found in Cathay’s online sustainability report.
With regard to sustainability in the broadest sense—profitability being very much part of the equation—might there be a ‘future fit’ strategy in Cathay positioning as China’s sustainability-focused international airline?
There is virtue in cost saving innovations driven by a sustainability focus. It’s a combination especially appealing to the next generation of environmentally conscious customers. Chinese consumers are now increasingly engaging with brands and surveys show that they are very much environmentally aware. This suggests they may even be prepared to pay a premium for ‘greener’ travel if they can see a clear benefit; for example, cleaner air for their children.
Sustainability leadership might provide a viable platform for the long-haul but meantime Cathay is challenged with harsh operating conditions and the need to manage two brand identities.
The Qantas turnaround is being vaunted as a possible model for Cathay Pacific to follow. Qantas has famously returned to profitability after filing for bankruptcy protection in 2014. Interesting to note that part of this success has been the partnership with Emirates. Will Singapore Airlines and Cathay Pacific remain as aviation ‘islands’? Or will they seek deeper partnership with rivals?
For Singapore Airlines, the challenge is to refocus on premium quality and innovation and not be tempted to join a cost cutting race to the bottom. As Singapore’s flag carrier it can act as an ambassador for Singaporean innovation in markets set for enormous growth.
Meanwhile, Cathay has opportunity to reinvigorate its brand by creating a singular sustainability-driven purpose. Perhaps eventually becoming one brand (albeit two companies) reflecting the One County Two Systems framework through which Hong Kong SAR is governed by China.
With the United States seemingly ceding leadership on climate change to China, China can burnish its credentials by tackling aviation sustainability head on. And what higher purpose for the Cathay brand than to be seen as the nation’s flagship in this endeavour.
Although both Singapore Airlines and Cathay face different branding challenges their respective futures seem tied to the evolving roles of their home cities. As both brands start to adapt to new realities now might be a good time for investors to climb aboard to make the most of the potential upside.