Thu. Jan 27th, 2022

“Permanent quarantine” is how flight crews at Hong Kong’s flagship airline describe their current situation. As the Omicron variant spread, the city government strictly reinstated the air crew’s quarantine requirements. The effect of the rules will go far beyond the lifestyle of Cathay Pacific’s pilots and flight attendants.

After Hong Kong CEO Carrie Lam reinstated some of the most stringent restrictions this week, Cathay canceled most of its scheduled passenger and cargo flights for this month. This has implications for Hong Kong’s economy and global supply chains, not just the airline.

Its shares have fallen 15 percent over the past two months. Any pessimism is understandable. Political risks remain high. Lamb ordered an investigation into Cathay in connection with the crew violations of pandemic regulations and warned against possible legal action.

That leaves Cathay with just a fifth of its pre-pandemic cargo capacity and 2 percent of passenger capacity. Flights banned from key markets, including the US and the UK, are only exacerbating the situation.

The limitation of air cargo capacity hurts Cathay as it accounts for 60 per cent of total revenue. Compare that to less than 5 percent for U.S. counterparts because of Hong Kong’s status as the world’s largest air cargo hub.

But Hong Kong relies heavily on imports, including about 95 percent of all food consumed in Hong Kong. Rare flights and higher logistics costs, which analysts expect to rise by half in the coming weeks, will fuel more inflation.

In addition, delays for container vessels moving to and from Asia mean that Chinese companies on the mainland have increasingly relied on air cargo for exports and shipments of input materials. The peak lunar New Year season approaching later this month and major port closures on mainland China, due to cases of Omicron coronavirus variants, have boosted demand for air freight services.

Cathay should soon move into an increasingly dominant position as demand and prices for its services grow. This will boost its shares 50 percent lower from its pre-pandemic peak. The 2020 results offer reason for hope. Freight revenue for the full year increased by 16 percent from the pre-pandemic levels of the previous year, despite a sharp drop in flights. Freight sales exceeded those of passengers.

Global companies can expect even worse supply chain disruptions in the coming weeks. Cathay shareholders should have less reason to worry.

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