China clips Cathay Pacific’s wings over Hong Kong protests

Airlines are fundamental to the self-image of sovereign territories. The largest one in any country is routinely dubbed a ”flag carrier,” as if it was the leader of a naval squadron. No wonder Beijing has it in for Cathay Pacific Airways Ltd.
China’s civil aviation authority has ordered Cathay to bar air crew who supported Hong Kong’s recent protests from working on flights to or from mainland China, citing bogus threats to aviation safety. It also told the airline to submit information about all crew
flying over mainland Chinese airspace for pre-approval. Cathay’s CEO Rupert Hogg swiftly responded that carrier would comply with new rules.
Hogg had little choice. Chinese airspace represents a great wall which Cathay must cross every day of its existence. While the airline could probably survive if it lost landing ri-ghts at mainland airports, mai- ntaining free passage over the country is an existential issue.
Flights to and from China account for only about 7 percent of the carrier’s traffic and Europe, where the shortest routes must inevitably traverse the mainland, is another 21 percent. Add up those two buckets and you’re looking at more than a quarter of the total — and a comparable portion of revenues — that could be affected by the new rules.
Cathay’s cargo unit, which accounts for about a quarter of revenue, is highly vulnerable to the current US-China tensions thanks to the outsize share of electronics in Hong Kong’s airborne trade. The volume of cargo carried fell 5.7 percent from a year earlier, or 59,000 tonnes, in six months through June. Revenue per tonne, per kilometer, dropped 9.8 percent. For the moment, air crew unions seem reassured that the rules on overflying China won’t be a dramatic change to current regulations — but Cathay’s management is on notice that Beijing can turn the issue into a more potent weapon.
The worst-case scenario, of an airline that’s forced to police the political views of its own workforce in order to maintain the open skies it needs to operate, would be a horrendous one for Cathay.
Waiting in the wings in that event is the risk that the long-rumoured takeover by Cathay’s second-largest shareholder, Air China Ltd., could finally come to fruition. The largest shareholder, Swire Pacific Ltd., would likely have to reduce or sell its 45 percent holding to get Air China’s 30 percent stake into a majority — but for all that Cathay is a prestigious jewel in the crown for ultimate shareholder John Swire & Sons Ltd., it represents only 13 percent of so of total revenue. There’d be no sense in the Swires sacrificing their broader relations with China for the sake of the airline.
That would be another small victory for China Inc. and larger blow to Hong Kong’s sense of itself as an independent territory. No wonder Beijing is so keen to clip Cathay Pacific’s wings.

—Bloomberg