Multi-Prong Model Key To Cathay Success, CEO Says
Cathay Pacific relies on a tested model to defend its market position
It is somewhat surprising that Cathay Pacific CEO Ivan Chu claims to not lose any sleep over the competitive challenges facing his airline. After all, it operates in a region where the established mainline giants are under increasing pressure from several quarters. But Chu is adamant Cathay’s business model is strong enough to thrive despite the new threats that are hammering many of its rivals.
Among these factors are the rapid growth of Asian low-cost carriers (LCC), the emergence of long-haul LCCs, Middle Eastern airlines capturing connecting flows in key markets, the rising international ambitions of the mainland Chinese carriers and the continuing expansion of competing Asian connecting hubs.
This daunting list contributes to the financial struggles afflicting many of the Asian legacy carriers. Some, like Malaysia Airlines, have required a government bailout, while others such as Garuda Indonesia and Thai Airways have launched restructuring efforts. Even Singapore Airlines—which has weathered the financial challenges better than most—is embarking on new strategic approaches
Cathay, however, is sticking with the business model that has served it successfully for decades. It relies on a full-service product, high frequency on trunk routes, international connections via its Hong Kong hub, a growing home market and a large cargo operation. These facets are supported by the airline’s fleet strategy and extensive aircraft order book.
Chu says Cathay’s model is “very competitive” against the LCCs in particular. Its strength is based on multiple strands that the LCCs cannot match, such as brand power, premium yields and the scale of its international network and cargo services.
Such advantages allow Cathay to price aggressively in some of its economy offerings. For example, three years ago the carrier launched its “Fanfare” product, steeply discounted tickets that go on sale in Hong Kong every Tuesday. Cathay sells about 2,000 tickets a week through this channel, which is similar in size to a small LCC operation, notes Chu. “We do want to connect with the price-sensitive sector” as well as premium traffic, he says.
Chu cites the success of Cathay in the Hong Kong-Singapore market as a good example of its competitiveness versus other models. This route is served by many airlines, including LCCs, yet Cathay has managed to maintain its market share and yield.
The airline’s approach is in marked contrast to many other Asian full-service carriers, which have been establishing their own LCC subsidiaries. Singapore Airlines has been actively growing its portfolio of LCCs and is directing much of the group’s growth to these carriers.
While many overseas LCCs fly into Hong Kong, Cathay has not faced serious competition from budget carriers based there. This may change in the future, with Qantas and China Eastern Airlines attempting to set up a Jetstar Hong Kong joint venture, along with local investors.
Recent financial results help vindicate Cathay’s strategy. The carrier boosted its net profit to HK$3.15 billion ($406 million) in 2014, despite the fact that it received little help from lower fuel costs due to unfavorable hedges.
Passenger demand remains robust. The carrier set new records during the recent Chinese New Year travel period, with daily passenger numbers exceeding 110,000 on two days. It is also achieving a load factor of 84% this year, says Chu.
The scale of Cathay’s operation means maintaining its premium brand strength is particularly challenging, with the need to ensure consistency across more than 10,000 cabin crew and about 8,600 ground staff.
“But the fact that it is hard gives us a strong competitive advantage, because we know most people can’t do it,” says Chu. While it is relatively easy to write a check and acquire the hardware, it takes many years to establish a premium brand reputation.
Cathay’s well-established brand helps it meet the challenge of rapidly expanding mainland Chinese airlines, which are in some cases trying to emulate Cathay’s success as a long-haul connecting carrier. The Hong Kong-based carrier has an entrenched product that is popular with corporate customers, and Chu believes that the other Chinese airlines will find it difficult to break into the mainstream of business traffic in the near future.
The vast potential of the China market also reduces the competitive threat. “The pie is growing so fast” that all players have the scope to increase traffic, Chu says.
The mainland Chinese carrier with the greatest international presence is Air China, which has close links to Cathay. They have significant cross-shareholdings, cooperate on some routes, and jointly own Air China Cargo. The cargo joint venture gives Cathay important exposure to the Yangtze River Delta manufacturing region, says Chu.
Rapid growth in outbound international Chinese travel will be one of the airline industry’s biggest opportunities over the next 10 years, Chu predicts. He says Cathay is “uniquely positioned to capture this traffic,” thanks to its subsidiary Dragonair, which operates flights to 22 points on the mainland.
Hong Kong’s growing ground transport links to the mainland are effectively expanding Cathay’s home market. Instead of regarding just Hong Kong as its catchment base, Chu notes that Cathay can draw traffic from Guangdong province—a market of more than 100 million people. Already, thousands of cars, ferries and buses cross the border into Hong Kong every day, and new rail and road projects will make Hong Kong even more accessible.
This will balance Cathay’s reliance on connecting traffic to some extent. But Chu stresses that transit traffic via the Hong Kong hub will always be a core part of the airline’s business and currently comprises about half its customers.
Hong Kong’s hub status is highlighted by the fact that more than 63 million passengers came through the airport last year —making it the 10th busiest in the world—even though Hong Kong itself only has a population of around 7 million. Half of that passenger total flew on either Cathay or Dragonair.
A planned third runway is vital for the continued growth of the Hong Kong hub, Cathay executives say, particularly as other Asian hubs are vying for a larger share of connecting traffic.
Cathay’s network strategy is notable for its focus on building multiple daily frequencies on trunk routes, rather than spreading its flights more thinly over a larger number of destinations. Frequency is valued by business travelers, Chu says, and this approach also aids connectivity. For example, Cathay’s four daily flights to Sydney are timed to connect to five daily flights to London, making it one of the larger players on the Kangaroo route.
Transpacific flights to North America have always been a major strength for Cathay. It has more than 100 flights a week to seven points in the U.S. and Canada, including four flights a day to Los Angeles and five to New York City metropolitan area airports.
Chu notes that Cathay’s goal is to connect Asia to North America via its hub, and it has built out its North American service over the past five years. He cites the San Francisco route as one example, which has increased to twice daily and will soon grow to 17 times a week. If that goes well, it will increase to three times daily.
The next network goal for Cathay is boosting its European operation by adding more destinations and frequencies. It started flights to Manchester in December, to Zurich in March and will introduce a Dusseldorf route in September.
While the European economy and currency remain relatively weak, Cathay’s load factors and yields in this market have been quite high. Strong outbound travel to Europe has helped make it “a pretty profitable operation,” says Chu.
Cathay’s network strategy is supported by its fleet plans. The carrier has 22 Airbus A350-900s on order, with the first delivery expected in February. It also has 26 of the larger A350-1000s in its order backlog and has agreed to buy 21 Boeing 777-9Xs for delivery from 2021.
The -900s will be well-suited to routes between European cities and Asia, Chu says. These aircraft could either open new routes in this market, take over some 777-300ER services or add frequency to existing 777 flights. While Europe will be the primary focus for the -900s, the range and size of the -1000s will be a better fit for the transpacific routes, he says.
Cathay decided at the end of 2013 to order the 777-9Xs instead of taking additional A350-1000s. The airline already operates a fleet of about 50 777-300ERs and is very pleased with their performance. The fact that the -9Xs will be a further improvement over the -300ERs makes them a compelling choice, Chu notes.
The 777-9Xs will have more capacity than the -1000s, which will broaden Cathay’s size options on a given route. The carrier also likes the idea of having two aircraft families—777s and A350s—in its long-haul fleet.
In general, the new widebody orders can be used for either expansion or aircraft replacement, Chu says. If Cathay decides it does not want to add capacity, it can return some leased -300ERs as the newer types enter the fleet. This option, combined with its range of aircraft sizes, gives the airline considerable flexibility in its fleet plan and allows it to be nimble in its response to the industry environment, he says.
The A350s will begin arriving just as Cathay completes deliveries of existing fleet types. It is due to receive the last four 777-300ERs from its current order by the end of this year, as well as its final two Airbus A330s. The carrier is among the world’s largest operators of both types.
Despite its substantial widebody order book, Cathay is also considering what additional fleet moves it should make. Narrowbody replacement is one of the carrier’s next priorities, Chu says. This would cover the A320s and A321s operated by its subsidiary Dragonair. Although it is “not urgent,” it is “important that we look at” the replacement of these aircraft, he says.
At the other end of the scale, Cathay is also watching to see what sort of offering Airbus will come up with for an updated A380. If a new engine option yields greater efficiency, “we’d be interested in looking at it,” says Chu. However, he stresses that Cathay is a big fan of the widebody twin-engine aircraft types, and the carrier would only consider a larger type if it offered better operating economics.
Multi-Prong Model Key To Cathay Success, CEO Says | Commercial Aviation content from Aviation Week