Cathartic change at Cathay Pacific reaping rewards

Cathay Pacific Airways has been the only full-service carrier in the Asia-Pacific to resist launching a low-cost subsidiary. A flood of budgeteers – 20 or so of them at last count – operate into the carrier’s Hong Kong home hub. Is Cathay shifting its position on the subject? Maybe, maybe not, reports chief correspondent, Tom Ballantyne.

July 1st 2018

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Cathay Pacific Airways CEO, Rupert Hogg, definitely did not say the Hong Kong-headquartered carrier would launch a low-cost carrier (LCC) when he was questioned on the subject at the International Air Transport Association (IATA) AGM in Sydney last month. Read More »

But then again, he did not say it would not, which was a departure from the airline’s previous position on a Cathay Pacific LCC. “We are not blinkered in looking at all of these LCC models and how they are developing. We can learn lessons from them if there are lessons to be learned. We’ll make that decision if and when we get to a point where we can execute against it and we think it’s the right one,” Hogg said in a panel discussion at IATA meeting.

'We reorganized ourselves. We took the opportunity to slim down in Hong Kong. We are reorganizing ourselves in the regions as we speak. Notwithstanding all that, we intend to grow and we see big opportunities'

Rupert Hogg Cathay Pacific Airways CEO

Besides, there is a problem, Hogg said. Cathay would not even think about adding a budget carrier to its operations until at least 2024-2025, when the third runway is scheduled to be operating at Hong Kong International Airport. Until then, he said, the airport that handled 73 million passengers last year is full. There is no room to add flights.

Hogg said at the CAPA CEO conference that followed the IATA AGM that the LCC issue was worthy of debate, but it was something of a “false choice” to talk about premium carriers and LCCs since there was so much hybridization.

“The first point I’d make is we compete against a hundred airlines in Hong Kong. Everyone here has seen the nexus of aviation moving towards Asia. Of the 20 biggest city pairs, six of them touch on Hong Kong. There’s a lot of competition. Four or five airlines on some routes,” he said.

“We have to compete, and we do, with every proposition, every model that is flying against us. The second point is that if you take the LCC model in its purest form - the Ryanair form - there are factors in Asia that are slightly different. There are huge amounts of traffic [in Asia] that is very concentrated on these big city pairs. There are not a lot of secondary destinations. There are very few carriers that are operating on any uncontested city pairs. It is a different phenomenon to Europe.

“The other point I would make is that a lot of the capacity on these regional sectors is wide body. In Europe and other markets - and I’m generalizing – it is often single aircraft model against single aircraft model and it is often single aisle. It is not quite the same comparison. But we watch that model with interest. We are by no means arrogant or complacent with respect to it.”

In the meantime, Cathay is on the recovery path after reporting a net loss of $161 million in 2017, which doubled the losses of the previous year and were the first back-to-back losses in the 71-year history of the carrier.

It reported a profit in the second half of the year, which took analysts by surprise, and its full year loss was far lower than predicted. In Sydney Hogg said rising fuel prices and the threat of a global trade war would not affect Cathay’s plan to turn in a profit in 2019. “I’m not going to make any forecast about our future but that’s our target. At the moment, we are on track to do that,” he said.

The airline is eighteen months into a three-year transformation program that has included shrinking staff by 600, eliminating empty desk jobs and creating departments relevant to the digital era of the future.

Hogg said: “Not only have we reorganized ourselves, we have spent quite a lot of time building what I call a data infrastructure to gain insight not just into customers but into our operations and what makes them tick.

Cathay Pacific eyes Mainland millennial market “Just talking about China, 150 million international travel sectors this year is the prediction. That’s a very, very high number. Last year it was 135 million, said Cathay Pacific Airways CEO, Rupert Hogg, last month. “China is not one homogenous market. If you look at Millennials, people born in the 80s and 90s in China, there are 400 million Millennials by that criterion. They make up 60% of the overseas market and the market is changing very fast, particularly in the big urban centres of Beijing, Shanghai and Guangzhou. Tier one and tier two cities and the nature of traffic also are changing fast. “It is moving very rapidly from group travel to individual travel. People are looking for experiences so the opportunity is both big in volume and scale. Eighty per cent of passengers inbound to Australia are individual travelers. That’s clearly a big opportunity for us. We have Cathay and Cathay Dragon and between us we fly to 23 points in China, 400 services a week. So we are well placed to service that market.”

“We are into the second phase of the transformation. It is looking at the way we run our business and end to end processes, work streams if you like, and also determining where we can apply some of these new technologies to make such a difference to productivity.”

He said the driver of the transformation program was the growth in competition. “Although the markets are growing very fast, that was manifested by capacity growing faster than the markets. Eventually, this meant that on the passenger side we had two years of negative revenue growth and actually, subsequent to that, you’ve seen the results for last year, three years in a row.

“The revenue was very important for that reason. But we also looked at the way we were structured and the way we made decisions to make sure we were clear about the correct accountabilities and who was accountable for what.

The transformation program has three major goals: finding new sources of revenue and new markets, fully understanding its customers and identifying how productively the business is run.

“We are lucky,” said Hogg. “Hong Kong is really well situated geographically. With current technology aircraft we can do non-stop to both coasts of North America, we can do all of Europe non-stop and if you think of it we can funnel people down to the South West Pacific and Southeast Asia.

“We have always wanted to keep a balanced network, so we try to grow equally in all of these markets. Also, we have the opportunity presented by China. Sometimes, if you talk about China and the sheer scale of China, you can ignore the economic development going on elsewhere in north and Southeast Asia. We are well suited to service these markets as well.”

Hogg believed corporate travel numbers will hold up strongly. “Hong Kong is a very large international hub. It’s the largest in Asia and the third largest in the world. Finance has always been a very important component of the Hong Kong economy. We would not be flying five times a day to New York or six times a day to London if we did not have a lot of corporate travel giving us that yield mix. That has not changed,” he said.