Cathay to leave oneworld? Frequent Flyers and travel media overreact

Bloomberg reported (paywall - or via CNA) that the national airline of the People’s Republic of China, Air China, are seeking to increase their share in Cathay Pacific, the defacto flag carrier of Hong Kong. While I have no doubt that the story has some element of truth, especially as the journalist in question Danny Lee has a great track record and links with the Hong Kong aviation industry, reaction from travel media and frequent flyers have been over the top. Here’s the lowdown.

Air China already owns some of Cathay

Cathay Pacific has a complicated share structure already. It’s largest shareholder at 42.3% is Swire Pacific, a UK-headquartered but Hong Kong based conglomerate with business dealings across the region from real estate to the manufacture of Coca Cola in the region. Despite not being the outright majority owner of the airline, the Swire logo and company flag has featured on the aircraft since the 1997 handover in lieu of the Hong Kong or Chinese flag. Prior to 1997, the airline flew with a British Union flag and that of Swire Group.

The next largest is Air China with around 28%. The Chinese airline has held stakes of various sizes in Cathay Pacific since 2006 but many publications have omitted the fact that Cathay Pacific has a stake of 18% in Air China. For 95% of the ownership period, Air China has been a member of Star Alliance which has not stopped cooperation between the two airlines. For example, Cathay and Air China codeshare on a limited selection of flights between the mainland and Hong Kong along with limited frequent flyer perks.

Qatar Airways, who’ve had their own spat over the years with the oneworld alliance, have a 9.4% holding while the Hong Kong SAR government holds a 6% shareholding in return for a Covid-era bailout.

What have travel media reported?

Following the Bloomberg report which clearly stated Air China were only in preliminary analysis of acquiring Cathay Pacific, travel media went into speculation overdrive. Many speculated that the airline would exit oneworld soon after any announcement was made about acquisition. In short, this is all speculation at this moment with some frequent flyer comments and forums going further to say people should visit Cathay lounges with their oneworld status as soon as possible.

Why Star Alliance isn’t a shoe in for Cathay Pacific

Even if Air China acquires the Hong Kong-based airline, it isn’t immediately assured that they will join Star Alliance. Firstly, the Star Alliance already has the region covered very well:

Thai and Singapore Airlines in South East Asia
EVA Air in Taiwan
Air China and their sister company Shenzhen Airlines (more on them later) in the PRC
ANA in Japan

Secondly, and this is not directly reported by the Star Alliance, according to frequent flyer websites across the internet, existing airlines have the power of vetoing new members. While I can’t confirm this is actually the case without trying to create an airline and become a member, I wouldn’t be surprised to see Singapore Airlines and EVA Air veto a hypothetical Cathay application. Star Alliance would be a fit for Cathay Pacific, considering their exisiting partnerships with members including Air Canada, Air New Zealand, Lufthansa and Swiss. With small home markets, Cathay, Singapore and EVA are all competing for similar connecting business. Accepting and welcoming a competitor into the fold is unlikely to happen.

Shenzhen is just over the border

While acquiring Cathay Pacific could be a strategic and politically-motivated acquisition by Air China to tap into the Hong Kong market and pull the region closer to the mainland. With it’s glitzy modern home airport, Shenzhen Airlines is owned by Air China and it’s hub airport is just 24 miles from Hong Kong Airport.

While they serve two distinct markets, does it make sense for Air China to own two airlines with hubs so close together? On first glance probably not especially as integration in the Greater Bay Area improves.

That being said, there could be benefits for Air China as a group to expand their multi-hub strategy. While all the airlines would likely charge a premium for point-to-point travel, as all airlines do, the connecting models would differ:

Air China would provide value connectivity from Europe, Africa and the Middle East to China and East Asia through their hubs at Beijing Capital (PEK) and Shanghai Pudong (PVG).
Utilise Shenzhen Airlines as a lower cost connecting airline from the rest of the world to South East Asia.
Continue to position Cathay Pacific, and Hong Kong, as the premium connectivity hub from across the globe with a higher quality product on the ground and in the air - with better access to North America than Mainland airlines currently have.

This would be reflective of the current situation where Mainland airlines have restarted the ‘dumping’ of cheap fares after a pandemic-induced, zero-Covid lull. As a combined group, they would be able to capture more of the connecting market across the globe across all price sectors and without damaging the Cathay brand (even if that has been damaged somewhat by Covid cost cutting).

China Southern and Xiamen: an example to follow?

We don’t have to look too far at a similar-ish situation. After investments by American Airlines and Qatar Airways, China Southern left SkyTeam before opting for partnerships with these airlines as well as British Airways and others. Rumour had swirled that the airline would eventually join oneworld but that for as long as Cathay remained a member, it would be blocked due to China Southern’s home at Guangzhou (CAN) being less than 100 miles away.

Despite this, Xiamen Air, which is majority owned by China Southern, remained a member of SkyTeam. Likewise, after Delta’s shareholding in Latam, the airline exited oneworld but maintained partnerships with many of it’s former alliance partners including British Airways.

The Air China-Cathay Pacific situation is slightly different as we’d have the two airlines part of the same group but part of competing alliances.

My final thoughts

While most of the frequent flyer internet has jumped to the conclusion that this is a done deal and that Cathay will be joining Star Alliance, I certainly don’t agree with this.

Firstly, we will need to see if Air China actually decides to proceed with acquisition. Personally, I do not see the business logic for the Chinese flag carrier to fully acquire Cathay Pacific and struggle to understand why they do not opt to bolster their own offering instead. However, I won’t be surprised if I’m proven wrong - after all, these are airlines that are selling flights from the UK to South East Asia for half the price of Middle Eastern competitors.

Secondly, talk of Star Alliance membership has been overblown for the veto reasons outlined. If an acquisition were to proceed, I would see it far more likely the airline would exit oneworld (as not to be part of a competing alliance to its parent) and become non-aligned, similar to China Southern. While this is less than ideal, especially for frequent flyers, it would leave Cathay Pacific free to expand relationships on a bilateral basis with whomever they choose, even if that happens to an extent today.

Let’s see if this actually happens but for now, let’s all enjoy their excellent lounges in Hong Kong and London with our oneworld status…