FLUG REVUE March 2004: Cathay bounces back after SARS

CATHAY BOUNCES BACK

By Sebastian Steinke

In an interview with FLUG REVUE in Hong Kong, Robert Cutler, Director Service Delivery at Cathay Pacific Airways Limited, looking back on the last few years, described his Asian home market as a continuous sequence of dramatic upsurges and downturns. “Since 1997, the only thing we have been able to rely on is uncertainty. First of all there was a decline in visitor numbers following the return of the former British Crown Colony to China, then our entire fleet of Airbuses was grounded for ten days for technical reasons. In 1997, the first Asian crisis broke out. In 1998 we moved to the new airport, but we had major teething problems with the computers. Then in 1999, Asia was hit by its second economic crisis.”

Boeing 777, Hong Kong

At this point he becomes more optimistic. “On the other hand, 2000 was our most profitable financial year ever, but then came 11 September. In 2002, the market recovered again and we enjoyed our second most profitable financial year.” Then, in the midst of a period of strong growth in Asia, the plummeting of demand caused by the SARS scare suddenly plunged the airline into the most threatening crisis in its entire history. As Cutler points out, “We may be used to crises, but we never thought things could get so bad.”

At the lowest point on 13 May 2003, the total complement of passengers travelling in Cathay's green, white and grey jets was only 5,310, compared with the 29,000 that the airline had carried on the same day a year earlier. 75 flights were cancelled and over half the fleet (54%) was forced to sit idle on the ground. The situation was a disaster from the financial point of view as well. On that day alone, CX, as the airline is known in the industry, lost three million collars, according to Cutler.

The only consolation at that time was the cargo business, which held up. A remarkable thirty percent of Cathay's turnover comes from this area, which fortunately was virtually unaffected by SARS and actually grew by 4.3 percent in the first six months of 2003. “Sometimes there would only be ten passengers on board,” says Cutler, “but the belly would be full to the brim with cargo.” On the other hand, the lack of underfloor capacity on the passenger flights that were cancelled from time to time was also a negative factor. So in the short term Cathay brought back into service a 747-200 cargo plane which had been parked since 2001 and as a result was able to limit the downturn in freight revenue during the crisis to six percent.

How does an airline which is doing very well respond when suddenly one-third of its total revenue collapses? Robert Cutler explains. “We did exactly the same thing as we did after 11 September. Our management team came up with the guiding principle that we should not cut any jobs, as the market would recover again. Besides, redundancies are bad for morale in a company. Instead, we cut salaries or else we asked our staff to voluntarily take a three- to four-week unpaid holiday.” Once the financial situation improved, Cathay paid back the lost salary at the end of the year in the form of a bonus.

The company also managed to save some money by persuading the shareholders, spoilt from regular high dividend payments, to accept a 50% cut in the expected dividend at the end of the year 2002, after the first profit warning in the company's history. The airline also negotiated reductions in charges or deferment of payments with a number of business partners, including its home airport in Hong Kong. Additional savings came from thinning out the passenger flight schedule by 45 percent and taking 22 aircraft out of service.

Meanwhile the situation on the consumer front, so critical to Cathay, calmed down. After the initial, global information and communications chaos caused by the epidemic, the World Health Organisation (WHO) lifted its SARS travel warning for Hong Kong on 28 May. There were no further new cases. At the beginning of June the US Center for Disease Control followed suit by weakening its previous urgent travel warning to a general caution.

Even so, to this day the authorities require every passenger arriving in Hong Kong, even transit passengers, to complete a questionnaire stating where they have stayed in the last ten days prior to their journey and whether they have a suspicious temperature or cough. In addition, all travellers are examined closely by a thermal imaging camera which gives off an alarm if their temperature is above a threshold value. The same procedure is repeated on departure.

The great uncertainty that occurred during the outbreak of SARS had been caused by the attempts, protracted over many weeks, to hush up the first cases in southern China, as a result of which it was harder to take countermeasures. The government of Hong Kong therefore formally agreed on accelerated reporting channels with the nearest provinces on mainland China and Peking. It is hoped that no epidemic of comparable proportions will ever occur again. Despite all the precautions, however, Hong Kong remained very much on its guard and even predicted the revisitation of SARS that actually occurred this winter, but which fortunately was limited to a small number of cases.

When in the early summer of 2003 the collapse in demand had recovered, the airline succeeded in filling its much leaner route network once more by the end of September. Here the company was helped by the high standard of onboard comfort that it offers. This includes onboard e-mail (system provided by Tenzing), reclining seats and a choice of high-quality Chinese cuisine. Decades of high quality service have established a quality image, especially amongst business travellers accustomed to the best. Full fare-paying passengers are courted in Hong Kong with two unusually luxurious and spacious lounges (“The Wing” and “The Pier”).

“We are back to normal again,” says Robert Cutler. “Business travel is now making up for the SARS period. Revenue from the particularly high-yield Business and First Class is still strong. On the other hand Economy Class revenues are significantly down, and these crisis cycles, which are occurring at ever shorter intervals, always end in another decline.” To coax the travellers back as quickly as possible, the airline has been working with a number of special offers. As a result, utilisation has recovered more quickly than revenue.

For this reason, strict cost control continues to be a central theme at Cathay Pacific too. Here the airline, which pays its most senior, longest serving long-haul pilots up to two-and-a-half times the salaries of European scheduled airline captains, can no longer afford not to cut its personnel costs. Robert Cutler explains that the previous high salaries were the result of underlying conditions that were fundamentally different from those facing rivals like Singapore Airlines. “Hong Kong is an expensive place, and we don't have an air force of our own that trains new pilots for us free of charge. But with seven million people (compared with 3 million in Singapore) and a larger catchment area, our revenue potential is also greater”

To enable the company to move away from its dependence on highly paid foreigners to man its cockpits, Cathay began ab initio training of its own trainee pilots in Australia back in 1989, Cutler explains. Around 12 pilot cadets from Hong Kong join the scheme per quarter. In 2004 another 40 candidates or more will start the 60-week course. They will then have to work their way up a long and arduous career ladder which begins with two years of apprenticeship as Second Officer. The Second Officer starts out as no more than an extra hand on long-haul flights, before being allowed to land the aircraft himself.

The majority of cockpit positions at Cathay, which are the envy of pilots throughout the industry but very hierarchically structured, are still manned today by a large pool of experienced Australians. Besides, pilots of passenger aircraft have to live in Hong Kong, whereas in the cargo business pilots have the option of being based, for example, in Europe and North America as well. Right by the elegant Cathay corporate headquarters at the new Chek Lap Kok airport is a company-owned multi-storey hotel for the crew, who frequently sail in by intercontinental flight from all over the world to report for duty.

Despite the economy drive, Cutler does not want to make any changes in the high level of service in the cabin and on the ground. “Costs remain an issue, but we believe that we can maintain our service. Training plays a big role here. We have people who have been trained in Australia, Canada and China. Our staff have to interact with customers, while retaining their individuality.” In practice at Cathay, (whose catchword is “Service from the heart”) they are perhaps a bit less formal than at comparable Asian airlines. For example, if there is no one queuing at a First Class check-in counter, passengers from more humble booking classes who are waiting nearby could well be offered the opportunity to check in more quickly.

For cost reasons, however, Cathay is currently moving some of its staff to hourly contracts, away from the fixed monthly salaries that were previously the rule. In the cabin too, there are plans to increase the number of local staff. In February 2003, Cathay initiated the first round of recruiting with this objective in mind.

Robert Cutler is not convinced by the mad rush to establish low-cost airlines, which has now spread to Asia. Only recently Temasek Holding, owner of Cathay's arch rival Singapore Airlines, announced that it would be founding a no-frills brand called Tiger Airways in the second quarter of 2004. Its shareholders will include the Ryanair holding company. Ryanair CEO Michael O'Leary has even apparently been spotted not far from Hong Kong in Macao. AirAsia is currently setting up in Malaysia, while Richard Branson is said to have his own plans for an Asian no-frills airline. Other recent newcomers are Skymark from Japan and Air Do and Valuair from Singapore.

Commenting on these new developments, Robert Cutler says “Yes there are low-cost airlines. The network airlines have founded low-cost airlines as it is a matter of 10 percent of turnover. They have their eye on that extra revenue.” However, the industry expert points out that there are several reasons which argue against the bargain fare principle in Asia. First of all, because of the large number of widebody aircraft deployed in Asia there are always plenty of cheap seats over on scheduled flights. A more serious factor, however, is the political fragmentation of the Far East. Unlike the EU internal market, in Asia every new route for which an airline seeks rights has to be negotiated bilaterally. And, thirdly, another factor which the would-be low-cost airlines are up against is the geography of Asia. Long distances and the large number of hub airports mean that there are limits on the potential savings that no-frills companies can make compared with the classic scheduled airlines. “Where exactly is the second airport in Hong Kong that the low-cost carriers can use?”

Instead, Cathay Pacific is taking a different course with regard to expansion. With the vast Chinese mainland market on its doorstep, there seem no limits on theoretical growth. Already today fast ferry services transport mainland Chinese from five neighbouring cities on the delta of the Pearl River directly to the airport landing piers of Hong Kong. Some 40 million people live in that area.

On the evening of 2 December, a Cathay jet touched down in Beijing once more after a 13 year absence. Shanghai and Xiamen will shortly enjoy a three times weekly service, and other cities and frequencies could follow. To acquire these extremely promising traffic rights, Cathay had first of all to win the approval of the government in Hong Kong before bilateral negotiations with Peking could get under way, as required under the political slogan, “One country, two systems”, which will remain in force until the year 2047. Dragonair, a company in which Cathay has a 19 percent stake, has complained about the new competition from its big brother and the threat that this poses to it. But Cathay already has its sights set on further agreements. In return for traffic rights between Hong Kong and Australia for Virgin Atlantic, Oneworld member Cathay Pacific would like to fly from London Heathrow to New York. With the new A340-600 there is the prospect of a round-the-world flight back to Hong Kong, perhaps before the end of this year.

From page 22 of FLUG REVUE 3/2004

Last updated 12 February 2004

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