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Cathay Pacific will face fight to keep Dragon flight routes

Upstart Greater Bay Airlines to challenge for regional traffic rights

Stock analysts following Cathay Pacific have applauded the shutdown of Cathay Dragon as a boost for efficiency.   © AP

HONG KONG -- Embattled Hong Kong flag carrier Cathay Pacific Airways will have to vie with rivals for rights to serve the flight routes operated until now by subsidiary Cathay Dragon after abruptly shutting the unit this week as part of a major restructuring.

Cathay Dragon, originally a startup rival known as Dragonair, was grounded on Wednesday after 35 years of connecting Hong Kong to regional cities, mostly in mainland China.

The move came as Cathay announced it would cut 8,500 jobs to cope with the grounding of most of its passenger flights amid the COVID-19 pandemic and would focus on serving premium customers with Cathay Pacific-branded flights, with budget unit Hong Kong Express serving other fliers.

Stock analysts following Cathay applauded the move as a boost for efficiency.

"We think that simplifying the brand structure for the business should help to reduce overlaps and streamline the business," wrote Ben Hartwright of Goldman Sachs in a client note.

However, calling Cathay Dragon's traffic rights "important public resources that belong to the HKSAR government," a spokesman for Hong Kong's transport and housing bureau told Nikkei Asia that Dragon's rights "shall be returned to the government for reallocation and cannot be automatically transferred to other airlines."

Other local airlines will be able to submit applications for the 40-some routes previously operated by Cathay Dragon and the bureau "will reallocate the traffic rights in accordance with the established mechanism," the spokesperson said.

The spokesperson, referring to the city by its official name, the Hong Kong Special Administrative Region, noted that the process will consider "the enhancement of healthy competition, the enhancement of the HKSAR's position as an aviation hub and the development of the HKSAR's civil aviation industry."

Following Cathay's takeover last year of Hong Kong Express, its only remaining locally based competitor is Hong Kong Airlines, which has been under even greater financial pressure than Cathay.

However, Greater Bay Airlines, a new startup, last week began recruiting staff, though it is still waiting to receive an operating license.

Andrew Cowen, who previously served as chief executive of Hong Kong Express and now runs aviation consultancy Genki Partners, said he expects that Cathay will not be allowed to completely take over Dragon's routes.

Calling the flight rights "public goods," he said the process of distributing them will be "like a land grab."

Huang Chubiao, owner of Greater Bay Airlines, told reporters for several local media outlets that he will apply for some of Dragon's rights.

"We will try our best to vie for some routes," he said this week, according to the South China Morning Post.

Huang, also known as Bill Wong, is the founder and chairman of Shenzhen-based Donghai Airlines too. Wong's Shenzhen Donghai Group had not replied to requests for comment by time of the publication of this story.

The intentions of Hong Kong Airlines, which is controlled by China's cash-strapped HNA Group, are unclear.

Asked whether the company would apply for Dragon's rights, a spokesperson stressed the carrier's need to focus on its own survival, including "protecting the jobs of most of our employees," and noted it was only operating "a handful of scheduled passenger services weekly and ad hoc chartered cargo services."

Fu Xiaowen, who researches transport economics as a professor at Hong Kong Polytechnic University, questioned how much competition Cathay's rivals will pose to it taking over Dragon's rights, noting that Greater Bay Airlines still faces a long path to launch and Hong Kong Airlines faces "the same problem of unused capacity."

Indeed, one industry veteran said that some of Dragon's routes were unprofitable even before the pandemic and may not attract any interest for the time being.

There are also questions about how open competition for the routes will be.

The South China Morning Post reported on Friday, citing multiple unnamed sources, that Cathay has "received assurances from the Hong Kong government and other stakeholders that it would hold on to most of the regional carrier's traffic rights."

Cathay had not responded to questions about this report by the time of publication.

Cathay Chairman Patrick Healy on Wednesday said the shutdown "absolutely does not mean turning our back on networks previously served by Cathay Dragon." He said then that Cathay Pacific and Hong Kong Express would "apply for previously served traffic rights and slots to those destinations" operated by Dragon.

Another variable facing Cathay is the stance of the Civil Aviation Authority of China, the mainland's regulator on reassigning Dragon's routes.

The CAAC last year issued a safety warning regarding risks posed to fliers from the involvement of Cathay staff in anti-government protests in Hong Kong and directed the company to fire such employees. In the following weeks, the group's chairman, chief executive and chief commercial officer all resigned and a number of employees were fired.

Industry observers declined on Friday to speculate on how the CAAC would view moves by Cathay to try to take over Dragon's mainland routes. Until now, few mainland routes have been served under the Cathay Pacific brand.

The CAAC has not commented on this week's developments.

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