Cathay, SIA May Fly Empty Premium Seats as Banks Cut Cost

Cathay Pacific Airways Ltd. (293) and
Singapore Airlines Ltd. (SIA) are spending $207 million fitting flat-
bed seats and larger TV screens in business-class. Finding
passengers to fly them may be a challenge.

Sales at the front of the cabin fell short of its
expectations in December, Cathay Pacific said last week, as the
Hong Kong-based carrier this month introduced promotional
business-class fares. Qantas Airways Ltd. (QAN), Australia’s biggest,
offered 28 percent discounts on return premium tickets to Hong
Kong during the holiday season.

Premium ticket prices between Asia and the U.S. averaged
$5,859 in December, their lowest level since 2009, while in
Australia an index of business-class ticket prices dropped 30
percent from a year earlier to a record low. Wall Street’s cost
cuts and dismissals, which have helped erase more than 300,000
financial-industry jobs in the past two years, aren’t over yet
as Citigroup Inc. (C) and Morgan Stanley (MS) announced a combined 12,600
job cuts in the past month.

“When financial institutions are firing people, traffic
and profits at airlines like Cathay and Singapore Airlines are
affected because they are known for serving premium passengers
like bankers,” said Li Lei, a Beijing-based China Minzu
Securities Co. Ltd. analyst, who has covered aviation for more
than a decade. “Their home bases are too reliant on financial
services and trade.”

Airlines that invested in entertainment systems, seats and
lounges to compete for business traffic may see growth in
business-class fares slowing further this year, according to
American Express Co. (AXP)

Travel Cuts

New York-based AmEx said Jan. 11 it will eliminate 5,400
jobs this year, mostly in travel services, as consumers and
businesses rely more on digital technology for bookings.

“When revenues are light, one of the first things to
happen is a cutback in travel,” said Michael Werner, a banking
analyst at Sanford C. Bernstein Co. in Hong Kong. “You’d
prefer to cut travel expenses before cutting headcount.”

Bank of America Corp.’s Merrill Lynch Co. unit, UBS AG (UBSN),
JPMorgan Chase Co. (JPM), and Royal Bank of Scotland Group Plc all
ordered staff to fly economy on short-haul routes during the
global financial crisis in 2008.

That pressure is returning as companies try to rein in
expenses, said Kelvin Lau, a Hong Kong-based transport analyst
at Daiwa Securities Group Inc.

BMW, Taj Mahal

“Many companies are trimming down their travel budgets,”
Lau said. “Even when there’s good macro data, it doesn’t mean
they’ll stop being cautious on their spending.”

Airlines have invested heavily in the front of their cabins
in recent years to capture valuable corporate accounts. While
business class and first class take up less than 15 percent of
total seats on long-haul flights, they account for half of a
flight’s revenue because of the higher prices.

Singapore Air last year hired the design unit of Bayerische
Motoren Werke AG, or BMW, and James Park Associates Ltd., the
interior designer of Mumbai’s Taj Mahal Palace hotel, to revamp
first-class and business class offerings.

Last week, the carrier started rolling out 76-inch full-
flat beds and larger TV screens on 10 Boeing Co. (BA) 777s at a cost
of S$95 million ($78 million), according to a company statement.

Lady Gaga, Marilyn Monroe

Cathay put on a laser show and hired Lady Gaga, Tina Turner
and Marilyn Monroe lookalikes for the December 2010 unveiling of
its HK$1 billion ($129 million) upgrade of business class
interiors on its Boeing 777s and Airbus SAS A330s. The carrier
said Jan. 18 it had 47 aircraft equipped with the new seats and
the upgrade will be completed by March.

“The overall performance in the premium cabins was weaker
than expected,” James Tong, a general manager at the airline,
said in a stock exchange filing last week. “Passenger demand
held up in the economy cabin.” Elin Wong, a company
spokeswoman, declined to comment on premium-class occupancy.

Cathay said in August that it posted a loss of HK$935
million in the six months ended June and Chief Executive John Slosar told staff in November the carrier was facing a “very
challenging year” in 2012.

Qantas spent A$270 million ($284 million) upgrading the
interiors of its 747-400s and 767s, as well as sprucing up
lounges in Singapore and Hong Kong. It and prospective partner
Emirates have also rolled out a chauffeur service to transport
premium passengers to and from airports.

Wall Street

Wall Street banks pared bonuses and fired workers after the
global financial crisis. Bank of America Corp. (BAC) and HSBC Holdings
Plc had said they would cut 30,000 jobs, while UBS AG had said
it would fire 10,000 workers. Citigroup said last month it will
eliminate 11,000 positions while Morgan Stanley was planning to
cut 1,600 jobs from its investment bank and support staff.

Deutsche Bank AG (DBK) trimmed 40 jobs in Hong Kong in September
and Bank of America planned to cut 40 jobs at global markets
unit in Asia, according to people with knowledge of the matter.

The operating environment continues to be challenging and
promotional activities are expected to continue to place
downward pressure on passenger yields, Singapore Air, the
world’s first carrier to operate the double-decker Airbus SAS
A380 superjumbo, said in a Jan. 15 statement.

World’s Longest Flight

Singapore Air is halting its all-business-class non-stop
services to New York’s Newark Airport and Los Angeles, the
world’s longest commercial flights, from fourth quarter of this
year. The carrier doesn’t provide a monthly breakdown for
business and economy class demand, its spokesman Nicholas Ionides said in an e-mail on Jan. 18.

The discounts on Qantas flights from Australia are driven
by usual lower demand during the country’s summer holiday period
and will finish at January-end, spokesman Andrew McGinnes said.

Still, discounts and capacity cuts are most commonly used
by airlines to discover a price at which there’s enough demand,
according to Tony Webber, a former chief economist of Qantas and
managing director of Webber Quantitative Consulting.

Demand for premium is closely correlated to the health of
stock-market indexes and while discounting may help to bring in
more business at the moment, a recovery in the markets would be
more effective in filling seats, Webber said.

“Carriers are having to work harder to gain and renew
corporate accounts as companies feel the squeeze from the
economic situation and the airlines are confronting more
competition,” said Will Horton, a Hong Kong-based analyst at
industry consultant CAPA Centre for Aviation.

To contact the reporters on this story:
David Fickling in Sydney at
dfickling@bloomberg.net;
Jasmine Wang in Hong Kong at
Jwang513@bloomberg.net

To contact the editor responsible for this story:
Anand Krishnamoorthy at
anandk@bloomberg.net

Enlarge image

Cathay, Singapore Air May Fail to Fill Front Cabin as Banks Cut

Jerome Favre/Bloomberg

A Cathay Pacific Airways Ltd. aircraft prepares to land at Chek Lap Kok Airport in Hong Kong. Sales at the front of the cabin fell short of its expectations in December, Cathay Pacific said last week, as the Hong Kong-based carrier this month introduced promotional business-class fares.

A Cathay Pacific Airways Ltd. aircraft prepares to land at Chek Lap Kok Airport in Hong Kong. Sales at the front of the cabin fell short of its expectations in December, Cathay Pacific said last week, as the Hong Kong-based carrier this month introduced promotional business-class fares. Photographer: Jerome Favre/Bloomberg

Cathay, SIA May Fly Empty Premium Seats as Banks Cut Cost