Airline Industry

According to the Board of Airline Representatives of Hong Kong (BAR), as of 21 May 2003, 12 international airlines had suspended services to Hong Kong and 37 worldwide destinations departing from Hong Kong had gone off-line.

The Hong Kong International Airport (also know as Chek Lap Kok or CLK airport) was designed to handle 35 million passengers and 3 million tonnes of air cargo a year when it was opened in 1998 and these can be expanded further. The flight capacity was 45 movements per hour. However, due to the SARS crisis, passenger number in April 2003 recorded a drastic decline of 68.9 per cent to 909,000 passengers compared with 2,923,129 passengers in April 2002. Overall aircraft movements dropped 27.9 per cent to 12,075 movements in April 2003 compared with same time last year. In April 2003, the number of flight cancelled each day was around 164, representing more than 30 per cent of all flights previously arriving at the Hong Kong International Airport. The loss in landing fees is estimated at a minimum of $3.5 million per day.

Cathay Pacific Airways, the de-facto Hong Kong flag carrier, carried 915,741 passengers in March 2003, down from 974,108 passengers in February 2003 and 13 per cent down from March 2002. For the month of April 2003, a sharp decline in passenger traffic due to the SARS outbreak was reflected in the historically low traffic figures. In April 2003, Cathay Pacific carried 340,691 passengers, or an average of just over 11,300 passengers a day, only about 34.3 per cent of what the passengers number was same month last year, a 62.7 per cent decline from the previous month. As of 13 May 2003, the airline was carrying approximately 7,000 passengers a day, a drastic drop of about 75 per cent compared with same period last year. In the worst case, some flights only have single digit number of passengers on board. Cathay Pacific has cut scheduled passenger flights by about 45 per cent and 16 aircraft have been temporarily parked to help adjust to the downturn in demand¹.

Dragonair, Hong Kong's airline with an extensive regional and mainland network, was hit even worse than Cathay Pacific. Average daily passenger loads of 12,000 have fallen to about 750, and the carrier has chosen to defer delivery of four Airbus aircraft. Dragonair slashed its passenger capacity by more than 50 per cent in response to the SARS outbreak. In March 2003, before the outbreak in China became apparent, Dragonair recorded a slight increase in passenger carried over March 2002, an increase of 7.5 per cent to 296,588 passengers. However, in April 2003, it carried only 71,283 passengers, compared with 296,797 passengers in April 2002, a drastic drop of 76 per cent².

On the bright side, the airlines' cargo operations have been largely unaffected. In April 2003, Cargo volume carried by Cathay Pacific and Dragonair continued to grow year on year even though both airlines have reduced passenger services by half since March, affecting belly cargo capacity. Cathay recorded an increase of 6.3 per cent to 408 million tonnes km and Dragonair showed a 45.5 per cent increase to 73 million tonnes km.

Since more than 50 per cent of export cargo is transported via the belly of passenger flights out of Hong Kong, the cancellation of more than 40 per cent of all passenger flights is affecting the normal operations of the logistics industry. Cathay Pacific has made up for the loss of belly cargo capacity on passenger flights by arranging more freighter services. On 1 May 2003, Cathay Pacific raised freight rates from Hong Kong to Singapore, Kuala Lumpur, Jakarta, Bangkok and Australia by about 10 per cent to compensate for the additional cost. Despite Taiwan's mandatory 10-day quarantine for travellers which means passenger seats would virtually be empty, Cathay Pacific continued to fly wide-bodies passenger jets to the island twice a day in response to cargo customers' demand.

Nevertheless, analysts warned that with the SARS outbreak which caused cancellation of business trips and trade fairs, the cargo throughput in the second half will be affected as autumn shipments were based on orders made in the months of April and May.

SARS' Impact on Airline Industry

1. 1. During the first half of this year, Cathay Pacific was estimated to have a break-even load factor of between 50 to 55 per cent. With April's load factor hovered around 30 to 40 per cent, the airline was losing US$ 3 million a day. A rumour that Cathay would ground the entire passenger fleet was widespread in the market in April until senior executives of Cathay denied having such plan.
2. 2. It was forecasted that even the travel advisory is lifted, the recovery will not come quick and strong enough, hence Cathay announced on 5 May 2003 that the year-end dividends to shareholders would be cut by half to HK$0.28 a share. The savings from the dividend cut was projected at HK$935 million, thought to be enough for about 40 days of operations in such a climate. This unprecedented move signalled a red alert that Cathay could be facing the worst year in its history.
3. Even though Cathay has liquid funds of HK$ 13.3 billion, it was forced to drastically slash capacity and staff costs. Cathay's employees were asked to take an unpaid leave scheme which equals to a forfeit of 25 per cent of their income for four months. Dragonair, United Airlines and the Hong Kong Aircraft Engineering Company (HAECO) joined Cathay Pacific in asking employees to take unpaid leave. Although unpaid leave is preferred over job cuts, it has inevitably created tremendous pressure on the airline industry workforce.
4. With cargo traffic holding up well, Cathay put in more freighter services this year to compensate for the reduction in belly freight capacity. Analysts forecasted that Cathay would earn up to 40 per cent of its revenue from cargo operation this year compared with 30 per cent last year.
5. 5. Dragonair derived about 25 per cent of its revenue from cargo operations last year. The proportion of revenue from cargo is also expected to rise for 2003.

Positive Outcomes of the SARS Crisis

1. Carriers from outside Asia-Pacific that operated to and from the region pulled out the most capacity and not all of them seemed to plan to come back. British Airways halved its capacity to Hong Kong which pushed some of the capacity on to Cathay. As a consequence, the market share of the regions' carriers should go up.
2. According to Hong Kong Shippers Council, because of the superior supporting facilities and efficiency, shippers and freight forwarders still prefer CLK airport to mainland airports despite a reduction in Hong Kong flights.
3. Because of the SARS crisis, Cathay Pacific pilots took the first step towards breaking a two-year stalemate between their union and the airline's management. The Aircrew Officers' Association (AOA) recommended their members to support the cancellation of a call to pilots worldwide not to work for Cathay Pacific. The so-called recruitment ban was a cornerstone of the union's action in its battle with the airline over rostering and other issues.

Actions

1. The airlines' priority is to minimise expenditure and conserve cash reserves before travellers' confidence is rebuilt and return to air travel.
2. Cathay Pacific took a leading role in the 'We Love Hong Kong' campaign, offering discounted air-ticket to consumers.
3. Hong Kong Airport Authority announced a Recovery Stimulation Programme on 25 May 2003. Airlines reinstating cancelled flights will entitle to discount on landing charge. A higher percentage of discount will be offered when a flight resumes with a passenger load factor, up to a maximum discount of 50 per cent. For existing flights, more passenger carried will result in higher discount in landing charge, also up to 50 per cent, For example, a 10 per-cent-point increase in load factor will result in 10 per cent discount on landing charge.
4. Travel industry would have to map out a tourism "come back" campaign once the atypical pneumonia outbreak is under control to attract both tourist and business travellers back. It is difficult to revive the airline industry in short term, however, the Government should re-build the confidence of overseas. It was suggested that Hong Kong should host large scale conferences and invite international political leaders to visit Hong Kong to show that Hong Kong is safe.
5. Immediately following the lifting of travel advisory by the World Health Organisation (WHO) on 23 May 2003, Cathay Pacific and Dragonair offered discounted air-tickets promotion to boost sales.

Last Modified Date : Tuesday, January 27, 2004 5:10:56 PM

Sources of information:

1. Press Release, Cathay Pacific Airways. URL: www.cathaypacific.com, 27 May, 2003.
2. Press Release, Dragonair, URL: www.dragonair.com, 27 May, 2003.
3. Interview with Mr. Robert Cutler, Chairman, Board of Airline Representatives Hong Kong. 20 May 2003.
4. South China Morning Post.