Class act?

Cathay Pacific CEO Tony Tyler reckons his airline's culture of class divides it from its Gulf rivals. But can class pay the bills?
Class act?
By Damian Reilly
Sun 14 Feb 2010 04:00 AM

Straight-talking Cathay Pacific CEO Tony Tyler reckons his airline's culture of class divides it from its Gulf rivals by at least a generation, "if they're lucky." But can class pay the bills?

Cathay pacific lost $2.75m a day in 2008. the results for 2009, to be announced in March, are not expected to be printed in red ink any less livid. CEO Tony Tyler says the problem in 2008 was a simple one: the airline was caught with its "pants down" when the fuel price rocketed and then flopped. 2009, he says, was an entirely different horror-show.

"The problem with 2008 was the fuel price: most of the year it was very, very high which impacted profits, then it did its sudden collapse which caught most airlines, including us, with their pants down on the hedging costs. In round numbers we had a loss of $1bn in 2008. Most of which was on fuel.

"In 2009 the problem was one of collapsing revenues, particularly premium and cargo revenues. And actually the fuel price did double through the year but off a relatively low base... 2009 was a very difficult year for us although in the last quarter things picked up a lot."

As the world's economy did a very good impression of the death throes of capitalism last year, businesses and consumers alike became careful with cash. For the airline industry, Cathay very much included, this made it extremely hard to fill the front section of planes where seats are often three-to-five times the price of the ones at the back. And it is on filling the expensive seats and the cargo holds on which the whole legacy airline business model is predicated.

"What happened in 2009 was premium traffic, well, collapse is a strong word, but it certainly did weaken significantly, and so did cargo revenues...  We can always fill our economy seats - we have a great network. We connect mainland China to the world... We can always fill planes. The challenge for us in these times is to fill them with premium traffic for our business to make sense," Tyler says. So will 2009 be worse than 2008? Tyler seems to believe it will be, and by some margin.

"Strictly speaking I am not supposed to comment on our financial performance but you only have to look at our traffic figures to draw the obvious conclusion about its comparison with 2008," he says.  Later he will add grimly that "we haven't recovered yet."

Cathay Pacific, whose major shareholders are the Swire Group and Air China, is viewed by many as the grand old airline of the Far East, although Singapore Airways, certainly, and Thai Airways, might have something to say about that. Founded in 1946, last year the airline flew to 115 destinations in 36 countries and has exactly one hundred passenger planes, with 23 more on order. It has 24 cargo planes, with ten on order.

A hint of cautious optimism creeps into Tyler's voice on the subject of 2010. Sure, things are looking better, he says, but he is taking nothing for granted.

"The signs are good so far, the recovery in premium and cargo which we saw in the last quarter of 2009 has carried through into 2010. Not as strongly, Q1 is never as strong as Q4, but certainly momentum has carried through so providing the world economy doesn't take another lurch, 2010 should be an improvement on last year. I am not making any predictions; it depends on the world economy," he says.

And has he pulled his trousers up on the hedging? Certainly, the oil price has taken on some semblance of stability since it hit $147 a barrel in July, 2008. Recently it has tracked gradually upwards on an incline far less likely to induce nosebleeds.

"It seems to be trading in a bit of a range at the moment, from $65 to $85 a barrel. I think as long as it stays in that range, the industry can survive. We actually have a pretty solid hedging book; we are in pretty good shape for this year. I will say that we are fairly comfortable at the moment, that we are reasonably well protected against an increase in the fuel price above current levels," he says.

It is in this spirit of optimism that he announces 2010 will be the year of returning to frequencies of 2008 on routes that had to be trimmed back last year. He also says Cathay is looking to increase frequencies on flights to new destinations, such as making the Jeddah flight daily, and starting flights to Milan and Moscow.

"Moscow is on our radar screen. We are very interested in Moscow. We haven't announced that yet, but it is something we are very interested in," he says.How much more easy life must have been for the airlines transporting passengers between the Far East and the West before, relatively recently, the Gulf states hit on the bright idea of launching their own shiny, intercontinental carriers. First came Gulf Air, and after that Emirates, Qatar Airways and Etihad. The Gulf carriers, aggressively marketed and garnering awards left, right and centre, have given the whole industry the hurry up.

"It is hard to say [what the impact of Gulf carriers on Cathay Pacific has been] because of course we have been growing too, not in quite the same way. It is always hard to say how we would have grown if they hadn't been taking a share of the traffic."

That said, he believes the product offered by his airline is considerably better than anything offered by his Gulf rivals, and therefore professes to be confident for the future. "The fact is that between the major origins and destinations that we [and they] serve, we still offer a greatly superior product in terms of schedule and frequency, not to mention the onboard product. So we are certainly not an airline who feels our very livelihood is being threatened by the Gulf carriers," he says.

There are sometimes rumours in the aviation industry that airlines from oil rich Gulf countries receive their fuel at a considerable discount to market prices, and as a result the playing field on which the battle for passengers is waged is not a fair one. Does Tyler think Gulf carriers pay market rates for fuel? His reply isn't convincing.

"They always say they do. So I suppose I have to take their word for it... That is what they say. Some carriers tanker fuel out of places that we tanker fuel into, but perhaps they just have a different way of looking at it than we do."

And why is he so confident that Cathay's soft product - by which he means all the add-ons beyond tangible planes and seats and check-in desks such as service and smiles - is so much better than anything offered by any of the Gulf carriers?

His answer sounds like old money smacking down a squadron of arriviste nouveaux riches. It's about class, he says, in so many words, and class takes time to acquire. Class and culture.

"I do believe that while it is possible to copy airlines' hard product, the quality of the human service that our cabin crew give is unrivalled by any airline in the world. And it is the same with our service on the ground, it is unmatched by any airline in the world. And that is not something you can easily copy. It is something that is built up over years of development and management and training. It is culture building if you like, and the particular flavour of the Cathay Pacific service is something that is unique, and I believe it is better," he purrs.

Class of course, is a dangerous word to throw about when it comes to claiming superiority. Old money, new money - most people understand it is the same thing. And history is littered with the bloated carcasses of companies who didn't adapt quickly enough to the challenge presented by younger, more dynamic rivals. How, for example, can Tyler imply he takes the threat of Gulf carriers lightly when monthly they win awards for the excellence of their service?

"Oh yes, they win lots of awards, but in 2009 Cathay Pacific was the airline of the year from [independent aviation watchdog] Skytrax. In the last seven or eight years we have won that twice.

"It is pretty easy to win the awards from magazines, which are very largely driven by advertising budgets. We are never going to win an award which is based on an advertising budget because we don't have a very big advertising budget.  We spread our brand more by way of our product.

"On the hard product side, we are only nine (seats) abreast on our 777s. Gulf carriers tend to go ten abreast. It makes a huge difference in economy class. But really, it is the soft product that other airlines will take a generation to develop, if they're lucky."

Grand and peaceful

Cathay Pacific was founded in Hong Kong on September 24, 1946 by American Roy Farrell and Australian Sydney de Kantzow. Both men were ex-air force pilots who had flown the Hump, a route over the Himalayan mountains. Each man put up HK$1 to register the airline. Although initially based in Shanghai, the two men moved to Hong Kong where they formally began Cathay Pacific.

They named it Cathay, the ancient name given to China, derived from "Khitan", and Pacific because Farrell speculated that they would one day fly across the Pacific. The Chinese name for the company comes from a Chinese idiom meaning "Grand and Peaceful State".

According to legend, the airline was conceived by Farrell and some foreign correspondents at the bar of the Manila Hotel. On Cathay Pacific's maiden voyage, Farrell and de Kantzow flew from Hong Kong to Manila, and later on to Shanghai. They had a single Douglas DC-3, nicknamed Betsy.

The airline initially flew routes between Hong Kong, Sydney, Manila, Singapore, Shanghai, and Canton, while scheduled service was limited to Bangkok, Manila, and Singapore only.

In 1948 Butterfield & Swire (now known as Swire Group) bought 45 percent of Cathay Pacific, with Australian National Airways taking 35 percent and Farrell and de Kantzow taking ten percent each. The new company began operations on July 1, 1948 and was registered as Cathay Pacific Ltd on October 18, 1948. Swire later acquired 52 percent of Cathay Pacific and today the airline is still 40 percent owned by the Swire Group through Swire Pacific Limited.

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