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Cathay Pacific: The week Hong Kong's top airline bowed to China

China is furious at the challenge of its authority and has threatened cohabitation if the situation worsens further. More demonstrations are planned this weekend.

None of that was enough to save two of the company's highest-ranking executives, and news of their departures first broke on Chinese state media.

"International businesses must face a new reality here," said Ronald Wan, chief executive of Partners Capital International in Hong Kong.

For more than 20 years, the former British colony has operated under a rule known as "One Country, Two Systems", giving the city political and legal freedoms not available on the Chinese mainland. This has helped protect Hong Kong's status as a formidable economic hub, and reassured foreign companies that the city is a safe and stable place to operate.

But the Cathay crisis indicates a shift in how China views the city ̵[ads1]1; and how it expects companies to operate there.

"Beijing is becoming increasingly tough on issues of sovereignty and territorial integrity," Wan added. "Hong Kong is no longer a shelter. It's not & # 39; Hong Kong, China. & # 39; It's China."

A two-week tumor

The political turmoil started months ago when Hong Kong residents began to protest a controversial bill that would have allowed extradition to China. The bill was gradually shelved, but the demonstrations have evolved into a broader call for greater democracy and an investigation into alleged police brutality.

Cathay's central role came into focus much more recently. More than a thousand employees took part in a strike last week that forced the airline to cancel over 150 flights. Days later, China said it would not allow Cathay flights manned by people involved in "illegal demonstrations, protests and violent attacks" to use the airspace. It forced the airline to provide crew IDs.
  Cathay Pacific lost hundreds of flights this week as protesters targeted Hong Kong airport.

The airline had little choice but to comply with the order, as Cathay not only flies in and out of mainland China, but also through its airspace to reach Europe and the United States.

"It is impossible to ignore the threat from Chinese civil aviation authorities to essentially ban flight crews participating in protests in Hong Kong against operating China flights, and affect half of the carrier's revenue," said David Bandurski, China's co-director Media Project. "I think we can expect to see many more examples like this in the future of China using its economic leverage to push its political agenda."

But Cathay's capitulation did not end there.

On Monday, the company hardened the language and warned that it could fire employees participating in illegal protests. Chinese aviation authorities met Merlin Swire – billionaire chief of Cathay's largest shareholder, Swire Pacific ( SWRAY ) – the same day.
  Hong Kong billionaires ask for restoration order

Cathay said Wednesday it had terminated two pilots, without giving a reason. A well-placed source in the company told CNN that the pilots were fired in connection with activities related to the protests.

Cathay constantly struggled with threats to the bottom line. Hundreds of more flights were canceled earlier this week as protesters raided the airport and bookings are affected. The stock has fallen more than 12% over the past month.

By Friday, the company would announce that CEO Rupert Hogg and Chief of Trade Paul Loo were out.

"The sins" of Cathay Pacific

China Central Television, the mainland outlet that broke the news that Hogg was out, later published a lengthy post Friday night on the Chinese social network Weibo which characterized Cathays acts such as "sins."

"No zuo no die!" wrote the state-owned medium of slang that translates to: "If you don't do stupid things, they won't come back and bite you in a."

CCTV pointed out that Cathay "said some employees' behavior does not represent the company's position" only after the Chinese Aviation Authority acted. It accused the airline of having "deficient" professional ethics.

Cathay did not give specific reasons for the leadership changes. But Chairman John Slosar said in a statement that "recent events have called into question Cathay Pacific's commitment to aviation safety and security and put our reputation and brand under pressure."

Meanwhile, Hogg told employees in a note to the staff that it was a "serious and critical time" for the airline.

"There is no doubt that our reputation and brand are under tremendous pressure, and this pressure has been building up for a few weeks, especially in the most important market in China," Hogg wrote in the note, which the airline shared with CNN Business . "Could we have done things differently? In retrospect," yes. "

Greg Waldron, Asia's managing editor of the aviation news source FlightGlobal Group, said he did not want to speculate on the reasons for the departure. But he said the episode highlights the challenge for

"It's outstanding," Waldron said. "Obviously it won't upset Beijing. It will avoid politics and stay focused on its business. "

Part of a trend

What happened to Cathay this week probably won't be an anomaly, said William Reinsch, Scholl chairman of international activity at the Center for Strategic and International Studies in Washington.

He said that the Chinese government is already increasing its efforts to control companies and push them to align with the party line.

"In [President] Xi Jinping's administration is the number one priority to maintain party control, "Reinsch added." It's self-preservation, and it's more important than anything else. "

Hong Kong businesses can feel a cool effect. Financial sector relies on stability, he added Without it in the city, some businesses may feel the need to revolt and move elsewhere in the region, such as Singapore.

"It creates tremendous uncertainty about the government's intentions," Reinsch added. a people tend to do when there is uncertainty is that they either do nothing and wait, or if they envision the situation continuing, they move. "

Wan, CEO of Partners Capital International, said that there are likely to be major consequences for other companies.

"I'm afraid Cathay is not the only one to compromise," he said. For Western businesses like HSBC ( HBCYF ) or the Jardines conglomerate, "if you can't move your business out of Hong Kong, you must also compromise."

– CNN Business & # 39; Laura He and Michelle Toh contributed to this report.

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