Cathay Pacific in Australia: the anatomy of a network

Cathay Pacific has a long and important history in Australian aviation, some might even say illustrious. It was a pioneer in the development of more efficient routes between Australia and Europe with the introduction of the B747-200B in the 1970s and 1980s, and the B747-400 in the 1990s. In addition to Europe, it has become an important connecting point between Australia and Asia, and even Australia and South Africa.

Prior to the COVID-19 pandemic, Cathay was the 6th largest airline to/from Australia (excluding trans-Tasman and the Pacific Island; 8th largest overall), behind Qantas, Singapore Airlines, Emirates, Jetstar, and Qatar. In 2019, Cathay provided more than 1.1 million seats in each direction between Australia and Hong Kong. Cathay’s post-pandemic return has been mired in operational challenges, difficult domestic political conditions, and the slow post-pandemic reopening of Hong Kong (and China).

Consequently, in 2023 Cathay returned only 62% of their 2019 Australia-Hong Kong capacity. While this improved to 74% in the 12 months to June 2024 (compared to the 12 months to June 2019), this is still significantly slower than almost all competing carriers. For example, Singapore Airlines returned 86% of their Australia-Singapore capacity by 2023 (98% when including Scoot). Even Qantas, whose post pandemic recovery has been particularly slow returned a greater proportion of their capacity. Excluding trans-Tasman and the Pacific Island, Qantas retuned 76%, or 85% when combined with Jetstar.

It begs the question, why have Cathay struggled to return capacity? We’re not proposing to look at the obvious and simply blame it on operational challenges, domestic political conditions, and the slow post-pandemic reopening of Hong Kong (and China). Rather, we propose to analyse this from a network perspective. As a network carrier relying on a hub-and-spoke model, rebuilding the network can be challenging enough, nevermind when faced with the challenges highlighted above.

Simply put, there is little point adding capacity to several spokes in Australia if there isn’t the concomitant or countervailing capacity to and from other spokes to support it.

How much of Cathay’s capacity is connecting?

It’s overly simplistic to label Cathay a connecting carrier in the way we might apply this label to Emirates or Qatar since the market for travel between Australia and Hong Kong is substantial, and significantly larger than between Australia and the UAE or Qatar.

For example, ABS data show that 217,750 Australian residents traveled to Hong Hong in 2019, while 315,150 Hongkongers visited Australia, for a total market size of 532,900. This compares to just 57,500 Australian residents visiting the UAE and 40,390 visitors from the UAE to Australia for a total market of 97,880). The market between Australia and Qatar is insignificant, so small that the ABS aggregate Qatar along with other countries.

Cathay isn’t the only airline flying between Australia and Hong Kong. At present, Qantas offer daily flights from both Melbourne and Sydney, and prior to the pandemic also offered flights between Brisbane and Hong Kong. One shouldn’t also forget Virgin Australia, who also flew to Hong Hong prior to ending long haul operations during their bankruptcy. In 2018 and 2019, demand to/from Hong Kong as measured by ABS visitor data amounted to 32% and 31% of the direct seat capacity provided by Cathay, Qantas and Virgin.

Since the pandemic, the market has changed on both the demand and supply side. Firstly, travel to/from Hong Kong has declined. In the 12 months to March 2024 (latest month for which ABS data is available), demand is down 34% compared to the same 12 months ended March 2019. This has been driven by larger declines in Australian residents traveling to/from Hong Kong (39% decline) than Hongkongers visiting Australia (30% decline). Given that travel recoveries to/from Australia have generally been driven by more rapid recoveries by Australian residents traveling abroad, this outlier is suggestive of Hong Kong specific factors, likely domestic political conditions and slower post-pandemic reopening.

Secondly, supply returns have varied between carriers. Virgin have not returned at all, while Qantas have have only returned 44% of their Hong Kong capacity, thus delivering 56% less capacity compared to before the pandemic (year ended March 2024 compared to year ended March 2019). This is important given how bullish Qantas have been on capacity elsewhere in Asia (including India, Japan, and Singapore). During the same period, Cathay only returned 70% of their Australian capacity, thus delivering 30% less capacity compared to before the pandemic. In total, market wide seat capacity is down approximately 44% compared to the pandemic baseline.

When we consider demand and supply simultaneously, the slower recover (or greater loss) of market supply relative to demand means the proportion of supply accounted for by market demand increased from 32% to 37%. Conceptually, this should make Cathay slightly less reliant on connecting traffic than they were before the pandemic.

Where is Cathay connecting the Australia to?

Airlines generally do not publish data on connecting traffic flows and are considered proprietary. Various private sector firms estimate traffic flows, including airline and route specific traffic flows using a variety of methods. They’re available for price - a very significant price! Our philosophy is to use publicly available data or generate our own estimates using transparent methods on publicly available data. In this case, we’re reliant on some add-hoc reports from regulatory findings.

So what do we know? In addition to Australia-Hong Kong traffic, Cathay are also connecting passengers to/from everywhere! For example, accounting to Qantas and Emirates in their application to the Australian Competition and Consumer Commission (ACCC) for approval of their joint venture, they estimates that in 2019, Cathay had a 7.2% market share between Australia and the UK, and a 4.3% market share between Australia and the rest of Europe. When comparing these market shares to the ABS arrivals data, we estimate the number of passengers to be 99,306 (UK) and 92,758 (Europe). This amounted to approximately 8.8% and 8.2% of Cathay’s total capacity to Australia in 2019.

A seperate ACCC applications, by Qantas and Japan Airlines, indicated that Cathay had a 6% market share between Australia and Japan in 2019, amounting to 120,877 passengers or 10.7% of Cathay’s total capacity to Australia in 2019.

Smaller connecting markets include India and South Africa. Our recently published analysis on the Australia-India market noted Cathay carrying 5% of Australia-India traffic, while other ACCC submissions have noted meaningful market shares to South Africa. Other historically relevent connecting markets include Israel.

These examples only consider medium and long haul connections, and not even the wide range of short haul connecting options that Cathay provide to/from China and the rest of Southeast Asia.

Notably, the share of traffic on each connecting route is small, highlighting the diversity and redundancy of connecting traffic. Generally, network carriers focus on developing diversity and redundancy in their networks, but it is also the Achilles heel when rebuilding a network after a large exogenous shock. Let’s delve a little deeper …

The anatomy of a network

Airline networks are complex and forever evolving. Similarly, no two networks are the same with airlines focusing on different traffic mixes (e.g., long and/or short-haul traffic) and strategy (e.g., banking versus non-banking). Added into the mix is the proportion of O&D traffic on specific routes and network wide.

While these strategies can vary between carriers and over time, the higher the proportion of network traffic, the greater the diversity and redundancy the network requires to remain operationally stable. Too high a concentration of traffic to/from a small number of points, the more vulnerable the operation becomes to the poor performance or loss of a single spoke.

For example, if Cathay carries a very high proportion of passengers on Hong Kong-Melbourne to/from Zurich, then the closure of Hong Kong-Zurich for any range of operational or exogenous reasons would compromise Hong Kong-Melbourne. In turn, if this resulted in the close of Hong Kong-Melbourne, it in turn would compromise the performance of other routes. The more reliant a route is on feed to/from Melbourne, the more likely it is to be vulnerable. Thus, the greater the diversity and redundancy of the network, the less vulnerable the network is to cascading challenges resulting from a localised challenge. Too little diversity or redundancy, the more vulnerable the entire network and operation is to a single point of failure.

An airline can generate diversity by flying to more destinations. This is obviously simplistic since adding destinations for the sake of generating network diversity doesn’t generate strong financial performance and may come at significant short term cost. Redundancy can be generated through greater frequencies to destinations, opening up more connecting options, especially when the countervailing destinations may not have sufficient demand for multiple daily frequencies. Alternatively, airlines may choose to design schedules to connect flights to/from connecting banks where arrivals and departures are concentrated at fixed times to generate more connecting options. However, this generates costs, often requiring lower aircraft utilisation and and over supply of airport infrastructure.

How have Cathay dealt with these challenges? Let’s consider Cathay’s westbound long haul network to Europe and Africa. Prior to the COVID-19 pandemic, Cathay served 16 destinations with approximately 137 weekly flights. 12 destinations were served at least daily, with 3 receiving multiple daily flights. At present, Cathay have only returned to 10 of the 16 destinations, flying only 78 weekly flights. Only 4 are receiving at least daily flights, and only London (Heathrow) is receiving multiple daily flights. This highlights the significant loss in Cathay’s network diversity and redundancy.

As we showed earlier, more than 17% of their 2019 capacity was accounted for by European traffic. Yet, they’ve lost nearly a third of their European destinations and frequencies.

Similarly, they’ve lost network diversity and redundancy in Asia as well, with a range of destinations in China, Japan, Taiwan and South Asia yet to return, not even accounting for frequencies.

Conclusion

We opined on social media this week that Cathay’s addition of a 4th weekly frequency on the Hong Kong-Johannesburg route from January 2024 was symptomatic of the challenge of rebuilding a network. Cathay has a long history on the route, having served the route daily before the pandemic. Hong Kong-Johannesburg is one of those countervailing routes we referred to earlier. Given the connecting traffic between Australia and South Africa, alongside many other connecting routes over Hong Kong, adding capacity to each route becomes a question of which came first, the chicken or the egg?

Adding the 4th weekly frequency to Hong Kong-Johannesburg builds the momentum for continued capacity additions between Hong Kong and Australia, as seen by similar announcements this week taking Cathay’s Hong Kong-Brisbane and Hong Kong-Perth back to its full complement (as reported by aeroroutes).

But why Cathay? Why didn’t Singapore or Emirates have similar challenges? It would be hard to argue that they didn’t suffer from some operational challenges. For example, Emirates are still struggling to return capacity. Firstly, Cathay had a significantly slower start to their post-pandemic return, with the delayed reopening of Hong Kong and China. This also allowed competitors to gain market share in key markets. Secondly, a greater reliance on China traffic has hampered them. This has also been a challenge for Singapore, however they have adapted their network accordingly and were less reliant on China traffic to begin. And finally, Cathay took more radical steps to reduce the size of their flight deck crew during the pandemic. Combined with greater challenges with expat crews leaving and entering Hong Kong, they have suffered from greater crew shortages compared to other airlines. It certainly was a perfect storm, which they are still recovering from.