PPRuNe Forums - The Real Reasons CX Loses Money

1) Fuel Hedges - Not just bad, but hugely disastrous. The CX fuel hedges for 2015-2018 (4 years and approximately $4B US lost) are not just upside down, but so far beyond normal industry practise that an independent investigation is warranted. The hedges are so many times larger than anything CX, or any airline, has ever done before that one must ask who is making money on the other end. These hedges have essentially eliminated a large portion of the cash off CX’s balance sheet. If the Swires wanted this cash for themselves, this would be an ingenious way of doing it, as long as it cannot be tracked back to them. Apparently, that will not be a problem as no mechanisms or institutions exist to investigate and demand corporate accountability in Hong Kong.

2) Modern Fleets - In light of HUGE fuel hedges, the ultra-modern fleets (A350, A330, B777, and B747-8F) are like doubling down. New and efficient aircraft cost more to own than older aircraft. While maintenance expenses are less, modern aircraft only pay airlines back when fuel costs more. When fuel prices are low, modern fleets are less advantageous, sometimes even a liability. Note how CX is allowing 777-300ERs on lease to be returned while acquiring old regional 777s from Emirates. Several European carriers are operating old 747-400s very profitably due to low fuel prices. Wise airlines have a judicious and measured mix of older and newer aircraft. CX seems to be learning this lesson the hard way.

3) Competition and Revenues - There is no question that CX faces increasing competition in Hong Kong. Of course and why wouldn’t they? The sharks smell blood in the water due to mismanagement at CX. CX’s competitors pay far less for fuel than does CX. Therefore, they can charge less for passenger tickets and cargo carriage and still make money. Hence, revenues will decrease as average ticket prices decline due to lower input costs (fuel). Duh!!! It’s called capitalism, but you will never hear this from CX. They only cite competition and the changed market for revenue decline. That’s NOT the whole story!

4) Labour - Lacking any other better ideas, CX predictably comes to its employees to bail them out. Pilots are the primary target, but no employees are immune. Ruthlessly, CX has sacked hundreds of low-wage, local employees as an opening salvo in an act that was largely symbolic and will have almost no impact on the bottom line. Ironically, the pilot market is on fire at the moment and many other employment options exist for qualified pilots. So, pilots are holding the line and saying get stuffed! What’s lost in the calculus are the customers. As front line employees feel attacked, they get defensive and stop providing good service to the customers. No surprise, it’s a perfectly natural reaction. CX has forgotten the old adage, or maybe they never learned it, “Take care of your employees, and they will take care of your customers.” It’s common sense really, but elusive at CX.

5) Marketshare - As service levels decline, customers naturally look elsewhere. Competitors are more than willing to court them with cheaper tickets and higher service levels on larger aircraft (A380s and B747s). Meanwhile, CX’s long haul aircraft get smaller (from 747s to 777s to A350s). CX is literally giving up on large portions of the market that just go elsewhere. CX’s stellar reputation is under massive attack, from themselves. How ironic! The very definition of a self inflicted wound as CX flounders with a compromised product and angry employees. It all boils down to poor leadership, past and present.

6) Leadership - All of the above stems from poor leadership. The directors of this Company have for decades attacked costs with soda straw vision. They have managed CX in vertical silos and pretended that those silos have no effect on one another. The failure to make investments in the Company (IT, etc) and the habit of recreating the wheel at every turn has cost this CX dearly. Arrogance prevents CX from adopting best practices from other airlines, always assuming they know better. The result is predictable, CX has been left behind in almost every facet of the operation. Now, there is a panicked effort to get caught up. Is the current team up to the tasks? I have my doubts.