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Consumers are becoming more rational, which is the consensus in the civil aviation circle this year.

In 2023, when the epidemic was just released, "revenge travel" became the mainstream, and there was an endless stream of holiday travelers. But this year's theme has changed to the pursuit of cost-effectiveness and high-quality services, and consumers prefer to "shop around" when buying air tickets. According to data released by the National Bureau of Statistics and the Civil Aviation Administration, since 2019, the aviation consumption capacity of the national per capita disposable income (median) has shown a downward trend.

The global aviation industry has seen some signs of improvement, but losses are still common in the domestic civil aviation market.Outside the industry, high-speed rail has exerted significant pressure on diverting traffic to short- and medium-distance travel; within the industry, air ticket prices have returned to rationality, international routes have not yet fully recovered, and many airlines have failed to continue their strong performance in the first half of the year.

Of course, there are exceptions. Cathay Pacific earned HK$3.613 billion in the first half of the year, continuing to "perform steadily". In 2023, this leading Hong Kong airline turned losses into profits, with shareholders' attributable profits of HK$9.789 billion, a record high in nearly 14 years.As one of the airlines that quickly turned losses into profits in the industry, Cathay Pacific has provided a sample of airline reconstruction after the epidemic in terms of flight organization, staffing, and service improvement.

How did China's most profitable airline come into being?

The epidemic is over, and reconstruction is entering deep waters

The recovery of the civil aviation industry is obvious. In the first half of the year, Cathay Pacific achieved revenue of HK$49.604 billion, a year-on-year increase of 13.8%; passenger revenue was HK$33.004 billion, a year-on-year increase of 19.7%.

Another more intuitive indicator is available seat kilometers, which is the sum of the flight mileage of each passenger plane multiplied by the number of seats available for sale. It is an extremely important performance value for airlines, equivalent to the position of stockholders and the accelerator pedal of drivers. In the first half of the year, Cathay Pacific's passenger capacity calculated by available seat kilometers increased by 42.7%; a total of 10.7 million passengers were carried, with an average daily passenger load of about 59,000, an increase of 36.4% year-on-year.

Behind the soaring performance is Cathay Pacific's reconstruction strategy, which is taking effect. Unlike the industry's general goal of recovery after the epidemic, Cathay Pacific proposed to "rebuild a better Cathay Pacific" from 2023, which is planned to take two years.

The prerequisite for making money is to dare to spend money. "Rebuilding Cathay Pacific" covers both "quantity" and "quality" work.

The "quantity" aspects include rebuilding the flight network and accelerating staff recruitment.Cathay Pacific is very concerned about capacity and manpower. Since last year, Cathay Pacific has started recruiting personnel including those from the mainland, and the first batch of about 100 mainland flight attendants have taken up their posts this year. Corresponding expenses are also increasing: in the first half of the year, Cathay Pacific's total operating expenses increased by 17.6% year-on-year, with employee costs, in-flight services and passenger expenses, and landing, parking and route expenses increasing by 17.5%, 57.3% and 29.7% respectively.

As of the end of the first half of the year, Cathay Pacific has restored 80% of its pre-epidemic capacity and plans to restore it to 100% of its pre-epidemic capacity in the first quarter of 2025.

The "quality" aspect of "rebuilding Cathay Pacific" includes improving service levels and capabilities, and rebuilding team morale.In January this year, Cathay Pacific opened its VIP lounge outside the airport for the first time. The opening of the VIP lounge at Shenzhen Shekou Cruise Home Port further improved the multimodal transport model and comprehensively upgraded the sea-sky transport service.

On flights to and from the mainland, passengers can hear Mandarin broadcasts, browse simplified Chinese menus, receive Mandarin-speaking service from flight attendants, and enjoy Chinese food with Hong Kong characteristics and more mainland movies. This undoubtedly increases the sense of familiarity for mainland passengers.

As the epidemic fades away, the aviation industry enters an inspiring era.Boeing's "2024 Pilot and Maintenance Outlook" shows that by 2043, the civil aviation industry will need nearly 2.4 million new personnel to support the expanding civil aviation fleet and meet the long-term growth in air travel demand, including 674,000 pilots, 716,000 maintenance personnel, and 980,000 flight attendants.

The plan to rebuild Cathay Pacific has also entered deep waters. Cathay Pacific plans to add 5,000 group employees by the end of this year, bringing the total number of employees to 29,000. It also plans to recruit pilots, engineers, technical personnel, ground staff, customer service and other positions from the mainland.

Cathay Pacific has sufficient ammunition. As of the end of June, the group held HK$25.4 billion in unrestricted liquidity, and repaid the Hong Kong government's HK$19.5 billion preferred stock investment during the epidemic in full at the end of July, and also paid HK$2.44 billion in preferred stock dividends. For Cathay Pacific, this is an important sign that the most difficult period has passed and a new chapter is about to begin.

Localization and internationalization as dual-wheel drive

"Rooted in Hong Kong, backed by the motherland, and connected to the world" is the new positioning repeatedly emphasized by the new management represented by Cathay Pacific Group's current CEO Peter Lam after 2023.

Cathay Pacific's goal is to become an "internationalized local airline." This positioning has two meanings: facing the mainland market, Cathay Pacific has the advantage of international routes; compared with overseas airlines, the huge mainland market provides Cathay Pacific with solid support.

At present, the international routes of mainland airlines have not yet been restored. According to Flight Manager's calculations, in the first half of the year, the total number of international passengers transported by my country's civil aviation reached 44 million, recovering to 70.3% of 2019; the North American market recovered the slowest, with less than 20% of flights restored.

In contrast, since Hong Kong has no air rights quota cap, Cathay Pacific was able to quickly resume international routes, which also brought greater profit margins. In the first half of the year, Cathay Pacific's passenger service load factors in the Americas, North Asia, Europe, and Southwest Pacific reached 89.3%, 75.3%, 88.5%, and 77.6%, respectively, and the available capacity increased by 63.3%, 47.8%, 9.9%, and 47.7%, respectively.

Currently, the group's two airlines (Cathay Pacific and Hong Kong Express) fly passenger flights to more than 80 destinations around the world, and the number of destinations is expected to increase to 100 by 2025. Since the beginning of this year, the group has announced 11 new destinations, 8 of which have already started flights, and Riyadh and Cairns routes will also be put into service. It is expected that by October this year, flights from Hong Kong to the east coast of the United States will be fully restored; from April 2025, the route from Hong Kong to the west coast of the United States will also be fully rebuilt successfully.

Based on the advantages of international routes, Cathay Pacific is also strengthening its connection with the Greater Bay Area. Its sea-air transport services cover the six major ports in the Greater Bay Area. From Shenzhen, it takes only 30 minutes by boat to reach Hong Kong Airport, and then use Cathay Pacific's extensive route network to fly to all parts of the world. In terms of land-air transport, starting from April 10, passengers departing from designated cities in the Greater Bay Area such as Guangzhou, Shenzhen, Foshan, and Jiangmen can also enjoy free cross-border shuttle services from mainland cities in the Greater Bay Area to Hong Kong International Airport, making travel easy.

Arrive at the departure hall, go through security check, check in and check in luggage, and board the ship; after disembarking, arrive at Hong Kong Airport, go to a separate security check area, and prepare to board the plane. On social platforms, many Cathay Pacific passengers posted their experience of "checking in in the Mainland and boarding in Hong Kong", commenting on it as "seamless connection" and "smooth process".

Hong Kong and the Greater Bay Area are also regarded as Cathay Pacific's primary markets. In the first half of the year, revenue from mainland China, Hong Kong and Taiwan reached HK$29.235 billion, an increase of 10.43%, accounting for nearly 59% of the total revenue.

So far, the National Immigration Administration has implemented a 144-hour transit visa-free policy at 37 ports in Beijing, Tianjin, Shijiazhuang, Guangzhou and other places, and the visa-free countries are mainly in Europe and the United States. On the other hand, the list of cities for individual tourism from the mainland to Hong Kong has been expanded twice this year, covering 59 cities. All these policies have provided benefits for stimulating the recovery of international long-distance routes and routes from Hong Kong to the mainland.

Building a moat after ticket prices return

The aviation industry is recovering, and as market supply recovers, air ticket prices are back to normal levels. As reflected in the financial report, Cathay Pacific's profit attributable to shareholders in the first half of the year fell 15.3% from last year to HK$3.613 billion, while the passenger yield, which reflects the average ticket price level, fell 11% year-on-year.

Lin Shaobo stated at the performance press conference that Cathay Pacific's current short-haul flight fares have returned to normal and are basically the same as pre-epidemic fares. Long-haul flight fares from Hong Kong have also fallen by more than 20% compared to 2023. The only exception is that the route between Hong Kong and the United States still maintains a relatively high ticket price.

According to data from the civil aviation travel service platform "Air Travel", from July 11 to August 31, the average price of domestic air tickets (excluding tax) was about 1,012 yuan, a year-on-year decrease of about 8%; the average price of inbound and outbound air tickets also decreased by about 6% year-on-year.

Civil aviation companies are very sensitive to ticket prices and passenger load factors.In the face of industry changes, Cathay Pacific is also building a new moat and plans to invest more than HK$100 billion in the next seven years in areas such as fleet, cabin products, VIP lounges, digital upgrades and sustainable development.

In essence, the civil aviation industry is a business of selling seats, so there is a ceiling on the revenue of each flight. On the other hand, airport resources are also fixed, and the number of aircraft takeoffs and landings that can be accommodated within a certain period of time is limited.

Hong Kong, which is building an "airport city", is breaking the latter bottleneck. With the commissioning of the third runway system, the annual passenger volume of Hong Kong Airport will reach 120 million and the annual cargo volume will reach 10 million tons.

At the same time, Cathay Pacific is also expanding its fleet, announcing an order for 30 Airbus A330-900 aircraft (one of the two models of the A330neo), with the option to purchase an additional 30 aircraft, with deliveries expected to begin in 2028.

The A330neo is a classic model that is widely praised in the industry and can operate long-distance intercontinental routes. However, Cathay Pacific defines it as a "regional wide-body aircraft" that mainly serves Asian routes. This decision is like a bus company purchasing a Toyota Alpha for city routes. Behind it is Cathay Pacific's attitude of breaking conventional thinking in providing services. In this regard, Cathay Pacific Group Chief Financial Officer Shen Bijia mentioned that this not only means a significant expansion of the fleet size, but also further modernizing and expanding Cathay Pacific's fleet to enhance its strength to a higher level.

Cathay Pacific's low-cost airline Hong Kong Express suffered a loss of HK$73 million in the first half of the year due to Pratt & Whitney engine problems that caused most of its A320neo aircraft to be grounded. The expansion of the fleet is to avoid similar problems from happening again and to serve a more diversified customer base.

After the fleet, investment in cabin products is also critical. This year, Cathay Pacific will install a new business class, premium economy class and a brand-new economy class seat on the redesigned Boeing 777-300ER aircraft. The world-leading first-class cabin experience will be launched on the 777-9 aircraft that will join the fleet next year. By 2026, a new cabin and flat-bed business class products will be introduced on the existing Airbus A330 aircraft.

In terms of ground services, Cathay Pacific plans to launch newly designed flagship lounges in Hong Kong and Beijing in the next three years, and open an exclusive lounge at New York's John F. Kennedy International Airport for the first time.

With a modern fleet, brand-new cabins, advanced equipment and uniquely designed VIP lounges, Cathay Pacific is building its own moat from the planes to the ground.After all, the future recovery of the civil aviation market will no longer be a simple replication of the pre-epidemic situation, but will face comprehensive structural changes.Cathay Pacific is striving to become a "hexagonal warrior" in the civil aviation industry by taking into account the high-end market and cost-effectiveness, achieving a balance between price normalization and profitability, and serving passengers from different countries and speaking different languages.