NoAndThen
25th Aug 2009, 07:39
Air China presence in Cathay to show contrast in corporate cultures
Charlotte So
Aug 22, 2009
|
When Cathay Pacific Airways (SEHK: 0293) executives joined the board of state-owned Air China (SEHK: 0753, announcements, news) after the carrier took a stake in the mainland airline in 2006, they were in for a rude awakening.
Instead of discussing fuel costs, cargo loads or routes, the mainland directors had a much more pedestrian concern - the type of shoes they were wearing.
"The board meeting was conducted in a very informal way and some of the directors were comparing their shoes and exchanging information about the brands," said a transport analyst, who was told about the exchange by a senior Cathay executive.
The incident underscores the huge cultural gap between Cathay - a British colonial icon considered as one of the best-run airlines in the world - and the bureaucratic Air China. While Cathay directors actually have a say in the running of the carrier, directors at mainland airlines are often no more than a rubber stamp for their masters in Beijing.
With Air China this week announcing it would lift its stake in Cathay to almost 30 per cent as part of an eventual plan to take control of the Hong Kong carrier, those differences are about to be writ large. Two more Air China directors are expected to join the Cathay board, bringing the representation to four.
Cathay and Air China come from two radically different corporate worlds. One of the most noticeable differences is the remuneration for top people. Air China chairman Kong Dong has pocketed HK$327,000 from sitting on Cathay's board since May last year - 1.7 times his annual salary at the mainland carrier, according to the company reports.
Zhang Lan, a senior vice-president at Air China, received a HK$529,000 director's fee from Cathay last year. Details of her salary at Air China are not available.
By contrast, Christopher Pratt and Philip Chen Nan-lok, the Cathay executives sitting on Air China's board, received no fee from the mainland carrier. At Cathay, Mr Pratt earned HK$3.46 million as chairman last year while chief executive Tony Tyler received HK$15 million.
Poor compensation at state-owned enterprises is not the only problem for mainland directors. Boards at state-run companies really only have one function - to say yes to the decisions passed down from the ultimate owner in Beijing.
Andrew Tse, who founded Hong Kong Express Airways in 2004, had first-hand experience of this top-down management style after HNA Group, the fourth-largest mainland aviation group, became the carrier's single largest shareholder in 2006.
Hong Kong Express, which is losing millions of dollars a month, applied for a licence to operate a new air-cargo business last month over the objections of Mr Tse, who was concerned the carrier lacked the resources to start freight operations.
"There is no discussion at all ... Whoever is the majority shareholder makes the call," said Mr Tse, who still owns 14.7 per cent of the airline.
In Hong Kong, directors are elected by shareholders at annual general meetings and the management of the company is then appointed by the board. The appointment of senior executives at state-owned enterprises is solely controlled by Beijing.
That may explain the unease being felt at Cathay about the prospects of an Air China takeover. Middle management were more willing to initiate new policy or challenge their bosses if they found decisions were not in the best interests of the company, said one Cathay manager who declined to be named. Such a system would be anathema to a state-run airline.
The cultural differences extend to day-to-day matters. A former executive at Hong Kong Express recalls senior managers communicating with their colleagues by passing around fax paper with notes in red ink. The executive still cannot figure out why the mainland managers did not use the office intranet.
The corporate peculiarities got even stranger earlier this year when cabin crew at Hong Kong Express and sister carrier Hong Kong Airlines were asked to memorise and recite a company creed on command. Staff who failed to recite correctly faced punishment.
While Cathay remains in the hands of Swire Pacific (SEHK: 0019), staff can rest assured they will not be forced to recite a creed anytime soon. But whether Swire remains in control over the long term remains to be seen.
Air China is keen to get its hands on Cathay to boost its international presence and take advantage of the Hong Kong carrier's experience in training and services.
John Slosar, the Putonghua-speaking chief operating officer of Cathay, has reassured staff and investors that the strategy and management would not change despite Air China's increased presence.
At the moment, Air China would probably have to dig pretty deep to further increase its stake in Cathay.
"It remains the firm intention of Swire to remain the single largest shareholder in the airline, as indeed we have been for the past 60 years," Mr Pratt, the chairman of both Swire and Cathay, said last week. "Swire is wholeheartedly committed to the long-term development of the aviation industry in Hong Kong and on the mainland."
Cathay also claims it has a legally binding agreement that Air China has to get the written consent of Swire if it intends to increase its stake to more than 30 per cent.
But in the volatile world of aviation, one should never say never. Swire could change its mind if Cathay encounters another once-in-a-lifetime crisis like the current one it has just flown through. If that crisis was so big that it had to raise funds from its shareholders - Air China and Swire - all bets could be off.
Air China, a state flag carrier with unlimited access to low-cost funding, could easily dilute Swire's holdings if Cathay is in need of a huge amount of capital to pay down debt.
The carrier's net-debt-to-equity ratio increased to 81 per cent from 69 per cent in the first half of the year. Cash outflows of HK$1.2 billion were incurred in the first half because of a HK$2.9 billion cash settlement for fuel hedging losses. The situation is not alarming right now, but if there is any significant reversal in oil price movement, losses could start to mount.
"We have to face the reality that the airline industry is a tough one with very thin profit margins," said Mr Tse, an industry veteran. "The mergers and acquisitions involving airlines in the United States and Europe show that."
Without support from a state-backed carrier, Cathay could lose out under the "open skies" policy that seeks to liberalise routes around the world. Cathay is already losing the one-route, one-carrier privilege on many mainland routes, a protection that was passed down from Hong Kong's former British government.
Hong Kong Dragon Airlines, a subsidiary of Cathay, has a comprehensive network on the mainland but it is reportedly operating at a loss amid fierce competition from mainland carriers.
State-owned mainland carriers have deep enough pockets to increase their fleet and expand their network as part of Beijing's goal of stimulating the nation's economy.
"The room for a purely commercial airline to survive is getting narrower than ever," Mr Tse said.
The mainland is considered one of the aviation industry's growth engines and it would appear Cathay is on the doorstep of a hugely lucrative market. But the cosy position Cathay held in colonial days is truly over.
With cash-rich mainland airlines breathing down its neck and the city's airport seeking closer co-operation with airports in the Pearl River Delta, the road could be even more bumpy ahead for Cathay.
Cathay may be Hong Kong's most recognisable brand. But the world is changing and cultural differences not withstanding, Cathay's future lies more and more across the border.
Charlotte So
Aug 22, 2009
|
When Cathay Pacific Airways (SEHK: 0293) executives joined the board of state-owned Air China (SEHK: 0753, announcements, news) after the carrier took a stake in the mainland airline in 2006, they were in for a rude awakening.
Instead of discussing fuel costs, cargo loads or routes, the mainland directors had a much more pedestrian concern - the type of shoes they were wearing.
"The board meeting was conducted in a very informal way and some of the directors were comparing their shoes and exchanging information about the brands," said a transport analyst, who was told about the exchange by a senior Cathay executive.
The incident underscores the huge cultural gap between Cathay - a British colonial icon considered as one of the best-run airlines in the world - and the bureaucratic Air China. While Cathay directors actually have a say in the running of the carrier, directors at mainland airlines are often no more than a rubber stamp for their masters in Beijing.
With Air China this week announcing it would lift its stake in Cathay to almost 30 per cent as part of an eventual plan to take control of the Hong Kong carrier, those differences are about to be writ large. Two more Air China directors are expected to join the Cathay board, bringing the representation to four.
Cathay and Air China come from two radically different corporate worlds. One of the most noticeable differences is the remuneration for top people. Air China chairman Kong Dong has pocketed HK$327,000 from sitting on Cathay's board since May last year - 1.7 times his annual salary at the mainland carrier, according to the company reports.
Zhang Lan, a senior vice-president at Air China, received a HK$529,000 director's fee from Cathay last year. Details of her salary at Air China are not available.
By contrast, Christopher Pratt and Philip Chen Nan-lok, the Cathay executives sitting on Air China's board, received no fee from the mainland carrier. At Cathay, Mr Pratt earned HK$3.46 million as chairman last year while chief executive Tony Tyler received HK$15 million.
Poor compensation at state-owned enterprises is not the only problem for mainland directors. Boards at state-run companies really only have one function - to say yes to the decisions passed down from the ultimate owner in Beijing.
Andrew Tse, who founded Hong Kong Express Airways in 2004, had first-hand experience of this top-down management style after HNA Group, the fourth-largest mainland aviation group, became the carrier's single largest shareholder in 2006.
Hong Kong Express, which is losing millions of dollars a month, applied for a licence to operate a new air-cargo business last month over the objections of Mr Tse, who was concerned the carrier lacked the resources to start freight operations.
"There is no discussion at all ... Whoever is the majority shareholder makes the call," said Mr Tse, who still owns 14.7 per cent of the airline.
In Hong Kong, directors are elected by shareholders at annual general meetings and the management of the company is then appointed by the board. The appointment of senior executives at state-owned enterprises is solely controlled by Beijing.
That may explain the unease being felt at Cathay about the prospects of an Air China takeover. Middle management were more willing to initiate new policy or challenge their bosses if they found decisions were not in the best interests of the company, said one Cathay manager who declined to be named. Such a system would be anathema to a state-run airline.
The cultural differences extend to day-to-day matters. A former executive at Hong Kong Express recalls senior managers communicating with their colleagues by passing around fax paper with notes in red ink. The executive still cannot figure out why the mainland managers did not use the office intranet.
The corporate peculiarities got even stranger earlier this year when cabin crew at Hong Kong Express and sister carrier Hong Kong Airlines were asked to memorise and recite a company creed on command. Staff who failed to recite correctly faced punishment.
While Cathay remains in the hands of Swire Pacific (SEHK: 0019), staff can rest assured they will not be forced to recite a creed anytime soon. But whether Swire remains in control over the long term remains to be seen.
Air China is keen to get its hands on Cathay to boost its international presence and take advantage of the Hong Kong carrier's experience in training and services.
John Slosar, the Putonghua-speaking chief operating officer of Cathay, has reassured staff and investors that the strategy and management would not change despite Air China's increased presence.
At the moment, Air China would probably have to dig pretty deep to further increase its stake in Cathay.
"It remains the firm intention of Swire to remain the single largest shareholder in the airline, as indeed we have been for the past 60 years," Mr Pratt, the chairman of both Swire and Cathay, said last week. "Swire is wholeheartedly committed to the long-term development of the aviation industry in Hong Kong and on the mainland."
Cathay also claims it has a legally binding agreement that Air China has to get the written consent of Swire if it intends to increase its stake to more than 30 per cent.
But in the volatile world of aviation, one should never say never. Swire could change its mind if Cathay encounters another once-in-a-lifetime crisis like the current one it has just flown through. If that crisis was so big that it had to raise funds from its shareholders - Air China and Swire - all bets could be off.
Air China, a state flag carrier with unlimited access to low-cost funding, could easily dilute Swire's holdings if Cathay is in need of a huge amount of capital to pay down debt.
The carrier's net-debt-to-equity ratio increased to 81 per cent from 69 per cent in the first half of the year. Cash outflows of HK$1.2 billion were incurred in the first half because of a HK$2.9 billion cash settlement for fuel hedging losses. The situation is not alarming right now, but if there is any significant reversal in oil price movement, losses could start to mount.
"We have to face the reality that the airline industry is a tough one with very thin profit margins," said Mr Tse, an industry veteran. "The mergers and acquisitions involving airlines in the United States and Europe show that."
Without support from a state-backed carrier, Cathay could lose out under the "open skies" policy that seeks to liberalise routes around the world. Cathay is already losing the one-route, one-carrier privilege on many mainland routes, a protection that was passed down from Hong Kong's former British government.
Hong Kong Dragon Airlines, a subsidiary of Cathay, has a comprehensive network on the mainland but it is reportedly operating at a loss amid fierce competition from mainland carriers.
State-owned mainland carriers have deep enough pockets to increase their fleet and expand their network as part of Beijing's goal of stimulating the nation's economy.
"The room for a purely commercial airline to survive is getting narrower than ever," Mr Tse said.
The mainland is considered one of the aviation industry's growth engines and it would appear Cathay is on the doorstep of a hugely lucrative market. But the cosy position Cathay held in colonial days is truly over.
With cash-rich mainland airlines breathing down its neck and the city's airport seeking closer co-operation with airports in the Pearl River Delta, the road could be even more bumpy ahead for Cathay.
Cathay may be Hong Kong's most recognisable brand. But the world is changing and cultural differences not withstanding, Cathay's future lies more and more across the border.