A leading regional aviation analyst has stated that the Qatar Airways decision to take out a nearly 10 percent stake in Cathay Pacific is a strategically important attempt to tap into the Asian and Chinese markets.
Other commentators are confident the arrangement has potentially substantial implications for the cargo sector.
The deal was said to worth HK$5.16B for a 9.61% stake in Cathay Pacific, and the sellers were Hong Kong based Kingboard Chemical, a manufacturing enterprise, as disclosed in The South China Morning Post. For Joanna Lu, Head of Advisory Asia, Flight Ascend Consultancy, the revised composition of ownership could have positive implications for Cathay Pacific.
Lu suggested the new owners – as industry incumbents – could have a “positive impact” on the airline sector; whereas the shareholders, Kingboard Chemical, who dispensed with their stake, she described as a “bargain-hunting group whose day job is making laminates, chemicals and circuit boards. With shareholders understanding your business, strategic decisions could possibly be agreed and moved faster.”
It has been known in airline industry circles for some time that Cathay Pacific has been undergoing a major overhaul of its business and this has included a cost-cutting strategy. The South China Morning Post also revealed that the company made a loss of HK$2.05B during the first six months of this year, following a deficit of HK$575 million in 2016. However, Lu suggested that, at this early stage of the deal, it is not known how much input the new part owners will be able to wield.
She stated, “It is not clear if Qatar Airways will even get a board seat in this deal and how much influence it can effect. Cathay definitely needs a bit of a fresh touch to its overall product strategy, which their new investor can probably provide.”
Lu believes Qatar Airways, as a new owner, may be playing a long-term game; and only time will tell if the deal proves to worth the substantial outlay of Middle Eastern treasure.
“For Qatar Airways the investment return is unlikely to be lucrative, at least in the short term. But it’s a strategically important attempt to tap the Asia-China market opportunity. Currently, the Middle Eastern market and airlines are facing challenges in growing further,” she insisted.
This latest purchase fits in with recent behaviour on the part of the Middle Eastern airline. Qatar Airways has, for about two years now, operated an investment strategy of acquiring slices of airlines based outside the Middle East, as reported in Air Cargo World. However, about three months ago the airline called a halt to a bid to acquire a 10% share in American Airlines, partly in response to resistance from several US-based carriers, who cited “illegal subsidies” as grounds for opposition.
In terms of the freighter sector, Cathay Pacific and Qatar Airways, in combination, boast 47 wide-bodied freighters. Some commentators have speculated this investment could facilitate cooperation between the two carriers in this market. However, Lu says Qatar Airways’ relatively minor stake in Cathay Pacific means collaboration in the freighter sector looks unlikely. She then qualifies this assertion by suggesting it may be too early to make a definitive judgement.
Referring to the airline sector in general, she added, “Though it looks like a purely financial investment, it is possible it will provide Qatar Airways with better access to Hong Kong and China markets in the long term. My gut feeling is that it is part of an umbrella strategy of diversifying global market entrance and mitigating regional risk.”
However, some analysts fear the new ownership structure may bring with it conflicts of interest. The three main shareholders of Cathay Pacific are now: Swire Pacific, a Hong Kong-based conglomerate ultimately owned by the UK’s Swire, controlling a 45% stake; Air China, a Chinese state-run business with a 29.99% shareholding; and Qatar Airways, now owning 9.61% of the total shares, also a state-owned enterprise, but based in the Middle East. This ownership structure will complicate life for Cathay Pacific, according to sources quoted in The Financial Times.
This was a theme echoed by Ellis Taylor, Asia Finance Editor at aviation intelligence provider FlightGlobal. He commented, “Given that Cathay has been more closely coordinating its operations and strategy with Air China, some commentators have tipped that the Chinese carrier could eventually take over Cathay, and the Qatar stake could block that.”
He believes resources and management attention could be diverted away from the relationship with Air China. Furthermore, taking a long-term perspective, the sale could lead to the resumption of a joint venture between Cathay Pacific and Qatar Airways on Middle East and Africa routes.
Taylor does not discount implications for cargo transport. He said, “There is also likely to be more link-up in the cargo market, which could give Qatar Airways more space in the key Chinese and wider Asian market. I imagine that some form of a cargo link-up between Cathay and Qatar will be a priority once the managements of both airlines start to look at the areas they might cooperate in further.”
There are opportunities to consolidate capacity and this could have implications for freight rates. He insisted, “Both carriers are major players between Asia and Europe, and although the freight market has been moribund of late, there is an opportunity to consolidate capacity between them. That could drive up freight rates in the long-term, but given that there remains a lot of capacity on most freight services, it will likely be at least 12 months before there is much of an impact.”
Another long-term consequence of this recent announcement is the emergence of a new major airline tie up. Qatar Airways is a significant stakeholder in International Airlines Group (IAG), one of the world’s largest airline groups. IAG is the holding company of Aer Lingus, British Airways, Iberia and Vueling.
Taylor concluded, “It seems inevitable that there will be some synergies for a major new tie-up that could help to counteract the recent Air France-KLM/China Eastern/Virgin Atlantic tie-up that is expected to play a large role in the Asia-Europe market over the long-term.