Cover Story
WINNING FORMULA
The stars have been aligned for Ivan Chu since he took over as chief executive of Cathay Pacific Airways in March. Solid profits were announced, traffic growth is positive and the carrier was named Skytrax Airline of the Year for the fourth time. All he has to do is keep the good news coming.
October 1st 2014
The first thing that strikes you about Ivan Chu is his energy. He walks fast. He talks fast. He reputably hikes and skis fast - and there is no doubt he is operating at top speed as Cathay Pacific Airways chief executive. Read More »
 |
| Ivan Chu Cathay Pacific Airways chief executive |
Six months into the job, after his promotion from chief operating officer, Chu is clearing enjoying running an airline that many of his airline peers would envy. Within a month in mid-summer, he accepted the Skytrax Airline of the Year award 2014 on behalf of Cathay Pacific at the Farnborough Air Show. It was the fourth time the carrier has won the award, also taking the title in 2003, 2005 and 2009, and the only airline to achieve this feat.
A month later, the carrier announced an interim profit of US$45 million, compared with a US$3.1 million profit a year earlier. Producing the results had been a challenge, especially with persistent high fuel prices and a slowing China market, but they were impressive when most other carriers of Cathay’s size and stature lost money or saw profits dip.
Chu, a team player, accredits the results to the management team, especially his predecessor, John Slosar, and Cathay’s employees for both the Skytrax award and profit result..
But as a 30-year veteran of Cathay Pacific – he joined the airline as a management trainee in 1984 – he knows there are some hard yards ahead for him if the airline is to remain one of best global carriers in the world.
He ticked off the main challenges. To continue to run a safe airline, to provide superior service and product quality, to build the average daily customer base of 85,000 to 95,000 passengers, tight cost control, including managing a high and volatile fuel price, arresting declining yields, building the momentum of the air cargo recovery, adapting to the impact of the slowing China economy, dealing with relentless competition from both Gulf carriers and start-ups and expanding the Cathay network to new destinations that will build the airline’s connectivity.
| Cathay to spend HK$1 billion on social media “Social media is going to be more important and we will be investing about HK$1 billion in terms of providing the capability. We will improve our online booking systems and provide better services for our customers to book online, check in, redeem tickets and use our Asia Miles program to upgrade their seats. We need to have the behind the scenes systems to support passengers’ expectation and also to allow us to develop our online ancillary business, such as purchasing insurance. It takes years and multi millions of dollars to do this.” |
One battle looks won. Barring unforeseen developments, Hong Kong will build a third runway, scheduled to open in 2023, after a long, and at times conflicted, public consultation. “The majority of people support the third runway. But Hong Kong must balance its development objectives with environmental issues. We have got to look at air quality. We have got to look at noise and also the threat to white dolphins. We must have the space to look after them. I believe Hong Kong can do both and we can do it very well,” Chu said.
Like airport congestion, competition, he said, is a given, but he does not believe the carrier should be obsessed with it, he said in the company’s in house newsletter earlier this year. “We should watch the competition certainly, but the focus should be on ourselves. Cost is the issue,” he said. “We can only win in the market place if we can get ourselves to produce the service more efficiently.”
One example of that efficiency is fanfares, an ingenious competitive strategy that will be two years old this month. Cathay’s average load factor is 84%, which means it has roughly 16% of it seats - 2,000 to destinations worldwide - to fill each week. Every Tuesday, the airline’s website announces its fanfares, which sell these seats at close to budget carrier rates.
| Chu’s rise to the top At 52, Chu is a member of an outstanding generation of Hong Kong achievers who often came from modest circumstances. “We had quite a big family. My mom had five kids. Now they live everywhere,” said Chu. “We were very lucky to have started our working life in Hong Kong in the eighties. Hong Kong was really booming. All the locals were benefitting from the tremendous growth of the city and China.” Chu did his undergraduate studies at the prestigious Hong Kong University, where he specialized in economics. He later completed his Master of Commerce in Australia. Describing himself as an “OK student”, he had three job offers at graduation, including a bank, a multi-national consumer goods company and a management traineeship with Cathay Pacific. “One job was with the biggest bank in the world, which was Japanese. Now Chinese banks are the biggest. I could have been in finance. Most of my classmates made that choice. I was the odd one out and picked the aviation industry and Cathay. So destiny picked me and I picked Cathay Pacific,” he said. There were 1,000 applicants for the traineeship. “Cathay was quite small at the time. I think we had 17 or 18 aircraft. It was a regional airline that had just started flying to London. Peter Sutch was the boss. A good leadership guy,” he said. The romance of travel appealed to Chu. “All of us, including John Slosar, Peter Sutch, Rod Eddington, we all started as management trainees. It was fantastic,” he said. His first job was in ground services at Cathay’s office at Kai Tak international airport, which closed in 1998 after Hong Kong International Airport at Chep Lap Kok opened. He has stayed with the company all his working life. “You know, to be able to start at an airline in a services department was excellent basic training for understanding our business. We were small, but very interesting in what we offered,” he said. Chu said, however, that the most influential times in his career were the 13 years he spent working outside Hong Kong. A big part of that time was in Australia and New Zealand (six years) as well as stints in China, North and Southeast Asia, including Vietnam. “I was posted to Beijing by Peter because we had bought Dragonair and I was working in Vietnam in 1990. My job was to transfer the operations from Dragonair to Cathay Pacific and build up Dragonair, he said. “Beijing was very different then. There was no traffic in Changan Avenue, only bikes. So inner city travelling was easy, but inter city was hard. I looked after Tianjian as well as Beijing so I did a lot of driving between the two cities. It was a different world. You drove on roads with cows, horses, porters and bikes. It took two to three hours. Now it takes 30 minutes in a high speed train.” In a company with 67 nationalities and 32,000 employees worldwide, working outside his comfort zone in places with different cultures, language and religious differences and a lot less convenience was fundamental training for management of a multi-national airline, Chu said. |
“They are all sold,” said Chu. “We are addressing the low-cost market. We bring customers to us where they will have a better customer experience than at an LCC and hopefully they will stay with us. Students, retirees and young people love them because they are flexible about their travel times.”
Another aspect of budget carrier competition that favours Cathay is its longevity. There is not much space left for budget start ups. “A factor to consider is that Hong Kong International Airport (HKIA) is getting very full. There are 100 airlines flying in and out of Hong Kong, including some 15 or so LCCs. The traditional model of turning an aircraft around very quickly cannot happen until 2023 (when the third runway is scheduled to open). So it is like setting up an LCC at Heathrow. It is not possible. And bear in mind that Hong Kong is not a low-cost environment so Cathay and Dragonair, with their premium full service models, work very well,” he said.
 |
Regardless of the above, said Chu, Cathay competes very well with LCCs on many routes. “For example, we fly ten times a day to Singapore where there is a lot of budget competition on the route. We have kept our market share and grown our load factor by two per cent,” he said.
Chu attributes this staying power to Cathay’s strong business model. “ We have a very high yield in the premium cabin. We get good yield from our belly cargo (a drawback for LCCs). We have a very good short haul network that feeds into our long haul flights. More than 50% of our customers feed onto other Cathay flights.”
Winning more slots, an issue often blamed for curtailing airline expansion also is not high on Chu’s “To Do” list. “There is a slot challenge for everyone, but compared with new entrants we actually have a lot of slots in a lot of airports. We have been in business for 68 years. I would not say we have spare slots, but we have the slots we need. If you fly to a city five times a day, like New York, then you have covered the key slots,” he said.
Building frequency is a key tenet of Cathay’s full service premium model. “I can see in five years that Cathay will be strengthening its network frequency to provide the largest number of choices for time of travel, time of arrival, connectivity, and the number of destinations in Europe, North America, Australia, New Zealand and the region. It’s not just about inter-continental hubs, but small and big points. This is critical for a network carrier – that we link all of them together,” he said. “That is a very strong competitive advantage.”
| Cathay’s China strategy As a shareholder in Air China, Cathay can’t help but be effected by the fall off in premium travel at Mainland carriers as well as the general economic slowdown. Again, Chu takes the long view. “We are big operators into China. We have a major strategic alliance with Air China. We have exposure from our investment in China air Cargo. So to us, the Cathay story is going forward with the China story,” he said. “Now, we have a downturn. But look at the last 20 years. Three to four hundred million people have moved into the middle class and the number is still growing. The economy is still vibrant. The fact that it is not growing in double digits does not worry me. It is still expanding at 7% a year. “In the next decade, the production centre of the world may have moved away from the east coast of China to Bangladesh or Vietnam, but Asia will still be its centre. Creating that new middle class will continue to drive travel and tourism. Looking at the China inbound story, it will be the biggest in airline history.” |
To build that global connectivity, Cathay has made substantial investments in North America and has now turned to Europe where it will re-start services to Manchester and launch Zurich. “We will announce more new destinations as our ordered aircraft arrive. These new B777s will allow us to fly five times a day to London with a cargo capacity that is much bigger than the passenger payload.”
Frequency benefits Cathay, said Chu. “People love our frequency. Five times a day to London and New York. Four times daily to Sydney. This is why we are not buying the super jumbo. It is not what passengers like about us. They like the frequency and connectivity we provide.”
In the last 18 months, Cathay and its 100% owned subsidiary, Dragonair, have been adding more short-haul/long-haul connectivity to the network. “We will compete very well with new forces like the Middle East carriers because people don’t like to fly, stop and then change planes to reach their final destination,” he said.
| Global tracking partnership ‘We have been working with IATA and his team. We would rather use a global standardized system than do it on our own. We also think this will be beneficial in sourcing the right technology. It is better to work with airlines together,” Chu said. |
“Also, we are very fortunate to be within five hours flying time of half the world’s population, where there is a big demand for travel as well as freight.”
To bring home the spoils in this huge new market, Chu believes that the quality of service that an airline offers is a crucial factor in winning over passengers. How then does Cathay differentiate itself from their rivals?
“If you look at the last ten years, everybody has improved so the competition is intense. Even the European carriers are improving,” he said. “First of all, it is about both product and services. I think Cathay does very well on both. Many carriers focus on products. Getting the right seat and spending money on the biggest hardware. At Cathay, we really believe we serve the customer very well – from the chief executive to the general manager and middle management and airport managers, to our cockpit crew and our almost 10,000 cabin staff, “ he said.
| The threat from China’s carriers Chu said Chinese carriers have improved significantly on issues of safety, especially as they are investing new fleets. “China has a huge population and we can continue to do well even as other carriers are improving. We are confident we can compete with China’s airlines and also the world’s carriers,” Chu said. |
“It’s a huge number. To deliver on that scale over a long period of time is very hard. It can only be done if you are totally focused on passenger service. Our customer must be our focus. A lot people say this but they don’t do it.”
Chu said the airline has been paying a lot of attention recently to this service delivery ethos. “ As the CE I would not know if the cabin crew is looking after a particular passenger, but if we have a very good service culture, it is part of the DNA of cabin crew to do this. Our difference, at Cathay, is that in the last 60 plus years, we have not just convinced our customers that we do this, we have convinced ourselves.”
Apart from giving depth to the service culture philosophy, Chu does not see the airline making big changes. “We will be strengthening our business model as a premium full service network carrier. We have created a lot of premium seats. We have a lot of choice in our seats – first, business, premium economy and economy. All our new B777s, including the B7779Xs and the A350s, will have new seats. In terms of full service carriers, don’t forget we are one of the biggest airlines in the world.”
| About Cathay Pacific Cathay Pacific Airways operates a fleet 146 aircraft, with an average age of 8.5 years and employs 22,000 worldwide. It is a founding member of the oneworld alliance whose members service 1,000 airports in 150 countries. Dragonair, 100% owned by Cathay Pacific is an affiliate member of oneworld. The carrier has firm orders for 85 airplanes, including 22 A350-900s, 26 A350-1000s, 21 B777-9Xs and 10 B777-300ERs. The airline, established in 1946, operates to 88 passenger destinations in 46 countries with their own aircraft, and is the 19th largest airline in the world by operating revenue and the 14th largest passenger airline globally. At press time, it is the seventh largest cargo carrier worldwide in freight tonne kilometres. Its subsidiaries include regional carrier, Dragonair, Cathay Pacific Services Ltd, Cathay Pacific Catering Services (HK) Ltd, Cathay Holidays Ltd, Asia Miles Ltd, AHK Air Hong Kong (60%), Air China Ltd (20.13%) and 100% of Vogue Laundry Services Ltd. |
And first class is safe – if only on some routes. Chu said despite the recent trend of eliminating the first class cabin, Cathay won’t be going down that track. “We are a premium full service carrier so first class is important to us. The first class cabin is smaller than it was, but there is always demand for a first class seat. But we agree that not every route will have demand for first class so we will continue to offer it where there is a market for it, for example, London and New York,” he said.
Air freight figures very prominently in Cathay’s forward planning. “Do not underestimate the cargo business,” said Chu, who now has the most efficient air cargo in the world to service the airline’s air cargo business.
“When I look at the air freight market in the last two or three years, yes, there has been a slowdown in demand, but the need for air freight is still there. I am definitely confident we will start growing.
 |
“If I go to any supermarket in a major city like New York, London or CitySuper in Hong Kong, I see all these products – fresh seafood, live seafood, cherries from America, cheeses from Australia, summer fruits from different countries. The world is becoming more affluent. So Asia, [with its expanding middle class], becomes our potential market and trade will go back to the normal curve.”
Chu said the slowing of air cargo business since 2012 has brought some rationalization to the industry. Several airlines worldwide have closed their air freight divisions, air freight companies are closing and many airlines, including Cathay, are retiring old, fuel-hungry freighters. The world’s economy is growing so air freight will be growing, but the airline industry will have to accept the new norm, which is slow growth, but nevertheless still growth,” he said.
“This trade is moving increasingly from west to east, the reverse of the former air cargo business model. Nowadays, during the festive seasons of Christmas, Chinese New Year and Easter we are sending a big amount of high quality produce from Europe to Asia. In the last ten years, air freight from Asia was about setting up a production centre in Asia and sending it to the rest of the world. Now Asia is importing products for its middle class.”
It is obvious that Chu is very proud to be part of Cathay and thrives on the challenges of the top job. He has come a long way since those booming eighties days and a management traineeship at an airline based at Kai Tak and headquartered in a dowdy building in Hong Kong’s CBD. His story is the Cathay story.
