Date
17 October 2018
High labor cost is a big disadvantage faced by traditional airlines like Cathay Pacific compared with their budget rivals. Photo: HKEJ
High labor cost is a big disadvantage faced by traditional airlines like Cathay Pacific compared with their budget rivals. Photo: HKEJ

Cathay Pacific likely to shift to a flatter structure

Cathay Pacific (00293.HK) unveiled a disappointing restructuring plan on Wednesday night. An apparent lack of clarity has left investors worried.

Investors said the restructuring plan offers few details and stokes fear on how it could turn around the company.

At one point, the stock slumped more than 5 percent on Thursday before closing down 3.9 percent.

Part of the drop might also be attributed to rumors of a restructuring plan involving Air China (00753.HK) raising its stake in Cathay to become the largest shareholder, surpassing Swire Group.

The Wednesday announcement said nothing about Air China buying more Cathay shares, interpreted by the market as a denial of the rumors.

Cathay also mentioned in an internal e-mail that the organizational structure would remain unchanged.

Nevertheless, it’s believed Cathay will come up with more specific action plans later, with a focus on cost reduction.

Cathay’s net profit slumped 80 percent in the first half of last year, and the management called the situation a “significant challenge”.

To regain competitiveness, job cuts involving mid-level and back office positions might be part of the reform strategy.

In fact, high personnel cost is a common issue faced by the world’s leading full-service airlines.

Over the years, a large number of long-time employees have been promoted to middle management roles, weighing heavily on the bottomline.

By contrast, newly established budget airlines have far less such burden.

Both full-service and budget airlines have similar cost levels in fuel, fleet and maintenance. Therefore, labor cost is the main factor that differentiates them.

“In terms of specific job functions, some jobs will no longer be needed, some will be redefined while other new jobs will need to be created,” the company said.

It has become a big trend for companies to shift toward a flat organizational structure. For example, new-economy companies only have the chief executive and several core senior managers at the top, with a large number of frontline employees. Middle management positions almost disappear.

Such a lean organizational structure would enable companies to deploy resources to frontline workers and become more agile and responsive to changing market conditions.

Meanwhile, technological advances also make it easier for top management to directly monitor and communicate with frontline staff, eliminating the need for a large team of middle managers.

This article appeared in the Hong Kong Economic Journal on Jan. 20

Translation by Julie Zhu

[Chinese version 中文版]

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RT/RA

Hong Kong Economic Journal columnist

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