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Cathay Pacific (HKG:0293) – Geo-political risk impacts net value

  • Hong Kong protests escalated over the weekend
  • Chep Lak Kok International Airport becomes the focus for protestors
  • Authorities develop more complex methods aimed at managing the protest
  • The situation continues to escalate
  • Airline Cathay Pacific (HKG:0293) share price down almost 30% from its April highs

Hong Kong’s government moved to shut down the Chep Lak Kok International Airport Monday 12th August, cancelling all flights as thousands of protesters occupied the terminals. The two-runway airport is a major international hub, which matches London Heathrow for size. When not closed down by protesters, planes operate 24 hours a day, and the airport handles more freight than any other airport – 5 million tonnes in 2018.

An International Air Transport Association study dated 2014 calculated the airport and the sectors that support it added £27bn to Hong Kong’s GDP in 2014. It serves in excess of 75 million passengers and employs 73,000 staff. Harder to value is its role as a symbol of international prestige. It serves over 220 destinations, the majority of locations being on mainland China. The volume of international traffic is also considerable with approximately 15% of arrivals coming from Europe and the US.

Source: Los Angeles Times

Chep Lak Kok airport is the base of Cathay Pacific airlines. Whilst the wide-spread protests have caused Hong Kong asset markets to fall away, Cathay Pacific has been particularly sensitive to the unrest.

Between 15th July and 9th August the Hang Seng Index (HIS) fell 9.61% and Cathay Pacific fell 12.86%. The storming and closure of the airport on Monday 12thAugust brought about a further one day fall of 4.9% and the share price hit its lowest level in 10 years.

Source: TradingView

The airline is having to perform some considerable acrobatics to manoeuvre the political landscape. Whilst not wanting to alienate either side, it is obliged to comply with the regulatory requirements of the China Civil Aviation Authority (CCAA). The CCAA announced on Friday that airline staff supporting the Hong Kong protests would be barred from flights going to, from or through mainland China. Demonstrating his willingness to apply the letter of the law, Rupert Hogg, Cathay Pacific CEO was reported by South China Morning Post to have said:

“We are all obliged to abide by law at all times… Cathay Pacific Group has a zero-tolerance approach to illegal activities. Specifically, in the current context, there will be disciplinary consequences for employees who support or participate in illegal protests. These consequences could be serious and may include termination of employment.”

Source: South China Morning Post

That’s one box ticked, but operating within such a consumer-facing industry with many customers coming from the more libertarian west, means the airline also has to manage the risk of appearing too eager to side with the Beijing authorities.

Source: South China Morning Post

 

What next?

To date, the protestors have wisely applied the tried and tested methods of a guerrilla operation. With less apparatus and training than the security forces they face, protests largely began as high profile non-violent marches. It is now the pockets of physical confrontation that are catching the headlines. Small agile groups are becoming involved in skirmishes that include the seizure of the parliament chamber on 1st July.

Source: Malay Mail

The better news for Cathay and Chek Lap Kok airport authorities is that the protestors have to date moved on quite quickly, it’s not implausible that the parliament chamber protest could have turned into a siege. The stakeholders at Chek Lap Kok will be hoping the insurgent movement continues to move on to another target.

Source: South China Morning Post

If the situation is coming to a tipping point, then the airport could be the hill the protestors decide to take a stand on. The Los Angeles Times spoke with some protestors and found out more about their choice of location:

“Protesters filled both arrival and departures terminals of the airport Monday, holding up signs against police violence… Many said they’d chosen the airport as a protest site because police were less likely to fire tear gas and charge protesters in the presence of international travellers.”

Source: Los Angeles Times

Chinese authorities have stationed a convoy of armed vehicles in a mainland city bordering Hong Kong. The current narrative is that the convoy forms part of a regular exercise but footage of the trucks has been circulating online since Saturday.

Source: South China Morning Post

The South China Morning Post reported Beijing-based military specialist, Zhou Chenming, saying the armed police were taking part in regular drills and people should not feel nervous.

“The central government has repeatedly stated it will only interfere if there are large-scale riots and the Hong Kong government has applied voluntarily for support… If the situation does not reach that point, then this is only a deterrence measure, to deter these [small group of people] from stepping over the line,” Chenming stated.

Source: South China Morning Post

Dixon Sing Ming, a political-science professor at the Hong Kong University of Science and Technology, described the move as a “psychological warfare tactic”. He said:

“The drill is part and parcel of a well-coordinated attempt by Beijing to pressure the protesters and the general public to give up their five demands.”

Source: South China Morning Post

Military vehicles are a very effective way to subdue civilian protest but only in the short term. The legacy of such actions has been highlighted by the Tiananmen Square protests of 1989.

Source: BBC

 

Stranded

Stranded passengers face considerable uncertainty, but shareholders in Cathay Pacific are also feeling the pain. With minimal influence of the situation, they are the investors who are most acutely aware of how the global increase in geo-political risk can impact net value.

Source: South China Morning Post

The Cathay Pacific share price is nearing two significant previous lows: HKD 9.40 April 2003 and HKD 7.38 Nov 2008. To put the current price into perspective, the below share price chart notates both levels. A significant rally in share price could be brought about by something as simple as the protestors not visiting the airport premises.

Source: TradingView