Cathay Pacific to Christchurch: contentious Air New Zealand JV as Cathay seeks greater "agility"

21 February, 2017

As Cathay Pacific is being forced to undergo a competitive metamorphosis, it is exploring all options. The latest example is an expected announcement of a new Cathay Pacific route from Hong Kong to Christchurch in New Zealand's South Island. The service is expected to be seasonal (for the New Zealand summer), and is only Cathay's second seasonal long haul route after the Jan-2017 announcement of northern summer service to Barcelona.

New Zealand is a small network component for Cathay but one of its last strongholds, due to a joint venture with Air New Zealand. The New Zealand government reluctantly extended approval for the JV despite Cathay and Air NZ reneging on an offer to use it to link Hong Kong with Christchurch, as well as Auckland. This would thereby have extended the JV to benefit more of New Zealand - a sensitive local matter based on the assertion that Auckland was receiving disproportionate air service benefit.

Air NZ's JV with Cathay arch rival Singapore Airlines has resulted in SIA growing its presence in Christchurch. Cathay has been more frugal, and the NZ government determined that although the JV reduced competition, there was no prospective third competitor, so no harm done.

But now that Hong Kong Airlines has entered Auckland, and then expanded, the Cathay-Air NZ JV faces disbanding. By finally committing to a Christchurch route Cathay appears to be bidding to keep the JV in play. But the New Zealand government will still probably withdraw approval of the Air NZ-Cathay JV.

Christchurch is an unusual destination for Cathay in that it is expected to be limited to a seasonal service. Cathay's mantra has long been consistency, and thus it has not operated seasonal long haul destinations, although frequency and capacity on other routes have been adjusted during the year.

Seasonal Christchurch service follows the Jan-2017 announcement that Cathay would fly to Barcelona seasonally in the northern summer. General Manager Airline Planning Lavinia Lau told an internal publication about Barcelona representing Cathay changing and dropping its previous rigid approach to flying:

"We believe that adopting a more agile approach towards network planning is the way forward. In an increasingly competitive market, we aim to be more experimental and flexible when we see the right opportunities. Barcelona is a good start to test this model"

Outlook: A time for reevaluation as markets change and China looms

As market dynamics across the region undergo seismic shifts and airline partnerships invite close scrutiny, the small New Zealand market is confronted with some complex decisions.

Governments never want to be responsible for losing an air service. New Zealand faced this prospect twice with Cathay and Air New Zealand, which argued that without the JV one of them would have to exit the market - seemingly implausible, but the tactic worked.

This time the balance may be more delicate for the New Zealand government. If it does not continue approving the JV and rebuffs any application from Hong Kong Airlines, Cathay might pull the Christchurch route on the grounds that it could only work under a JV.

Certainly the profitability of a Hong Kong-Christchurch route is highly questionable. Cathay's two main beyond traffic offerings would be to mainland China and Europe. To mainland China, China Southern (and others) will capture more demand and can offer cheaper yet more sustainable fares. To Europe, Singapore Airlines serves Christchurch and has a more extensive European network than Cathay's.

Globally, in an era of growing protectionism, airlines cannot assume they can take regulators for granted. This calls for increasing sophistication both in tailoring and presenting JVs for approval.

In turn, regulators must not be afraid to do their job, and ought not give in to counter factuals of mooted increased service. There may be some losses if services are cancelled, but where routes and services are interconnected, regulators will need to make some tough - and more refined judgments that take account of the wider market. Agile planning requires similarly agile oversight.