Thu. Jan 20th, 2022

Hong Kong’s Omicron outbreak is giving a double whammed to businesses.

Not only will new social distancing hamper revenue for retailers and restaurants, a cut in flights they rely on to bring everything from Australian cherries to Wagyu beef into the financial center is poised to raise costs and raise inflation.

Cathay Pacific Airways Ltd., the city’s most connected airline, has canceled hundreds of flights. Load capacity can drop to below one-fifth of pre-pandemic levels. Logistics costs can increase by 40% within three weeks. Importers expect the price of fruit to rise by 10%.

Planes at Hong Kong International Airport As Hong Kong scraps flights amid Omicron
An aircraft operated by Cathay Pacific will take off from Hong Kong International Airport on January 6.

In pursuit of a “Covid Zero” strategy, Hong Kong has closed pubs, gyms and theaters. At the same time, an already broken supply chain for a city that imports most of its goods has reached a breaking point, with businesses seeing delays in deliveries of staple foods such as berries and yogurt and of premium seafood and cheeses.

The threat of an omicron-driven boom has shocked Hong Kong, where the vaccination rate is among the lowest for developed economies. Although officials have so far found only dozens of cases in the community, they follow up on at least three separate transmission chains.

Amid fears of the omicron variant, the government scrapped airmen’s quarantine exemptions it had previously granted, forcing Cathay to cut cargo flights. The airline will only operate about 20% of its pre-pandemic capacity this month due to a lack of manpower. Passenger flights were also banned from eight countries, including the US, UK and Australia, further reducing cargo capacity.

Hong Kong Cathay Express, DragonAirlines have reduced flights to Hong Kong due to the government’s stricter quarantine rules [File: Paul Yeung/Bloomberg]

Those two separate blows create “a severe shortage of cargo space,” said Gary Lau, chairman of the Hong Kong Association of Freight Forwarding & Logistics.

Businesses that are heavily dependent on imports bear the brunt of the disruptions. Suppliers are expecting shortages of everything from eggplant to lobster. Flowers from Europe for the coming Moon New Year can also be a shortage, as well as fruit and vegetables being flown in from places like the UK and the Netherlands.

Hong Kong’s retail and restaurant sectors, which have only just begun to recover after months of previous restrictions, may now miss a peak spending window during the Chinese holiday season. Sales from both sectors reached HK $ 326 billion ($ 42 billion) for the first three quarters of last year after the city relaxed social distancing rules. That figure was nearly 30% lower than the same period in 2018, the last year before a series of protests gripped Hong Kong, causing further economic damage.

Many businesses endure logistical nightmares. Richard Poon, managing director of On Kee Dry Seafood, said orders for canned abalone and conch were stuck in Australia. His team now relies on air cargo for more than 30% of their inventory, he said, adding that the store has increased orders delivered by plane around November to prepare for the holiday.

“The offer will now be even stricter,” he said. “We are concerned that some goods may run out to sell to customers.”

Jacques Derreumaux, co-founder of Cheese Club and WHAT’sIN, delivery services offering French cheeses and fresh fruit and vegetables, said he had turned to diverting shipments by restricted cargo flights now that passenger flights from France have been banned. Continued disruption of air travel will become “very problematic for all importers” if extended, he said.

‘Logistics chain is collapsing’

Hong Kong’s strict virus rules are largely in line with those of mainland China, which still maintains no infections as a target, even while most of the world is adapting to live with the virus. Yet the city of 7.4 million relies on imported goods for survival in a way that the vast continent does not, raising concerns that a virus strategy that requires isolation is unsustainable.

Travel restrictions will eventually lead to an increase in retail prices, said Michael Li, the vice-honorary secretary of the Hong Kong Chinese Importers and Exporters Association. Li predicted longer delivery times and a possible increase in transportation costs of about 30%.

For example, consumers may see fresh flower prices rise by 20% to 30% because they are usually flown from Europe to Hong Kong, Li said. Prices could also rise in Japanese restaurants, which use premium seafood ingredients, as well as Chinese restaurants that provide seafood festivals during festivals.

Lau, of the Hong Kong Association of Freight Forwarding & Logistics, said there were already signs that “the air logistics chain is collapsing.”

“As long as the government does not facilitate its pandemic controls, we believe the situation will not change in the short term,” he said.

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