Cathay's next CEO looks to North America to boost long-haul fortunes
veteran Ivan Chu will face some complex strategic challenges when he takes over as CEO, as the carrier grapples with new sources of competition and a weak cargo market that continues to hobble its financial performance.
The next few years will be critical for Hong Kong-based Cathay. It is increasingly coming under pressure from fast-growing rivals from the Middle East and mainland China, as well as the low-cost carriers that are spreading their networks across Asia—and even into Hong Kong.
Cathay is looking to combat these threats by strengthening its own network, adding services to its most profitable markets such as the U.S. The carrier is also making major fleet changes to help its long-haul operation become more cost-effective.
However, these steps will mean little unless Chu can drag Cathay's extensive cargo operation back into profitability. A sustained downturn in the freight market has hit Cathay and other big freight carriers hard—particularly since Cathay is making some major investments in this side of its business.
Chu, who is currently chief operating officer, will assume responsibility for all of these issues when he becomes CEO in March. He takes over from John Slosar, who has been CEO since 2011 and is moving up to become chairman of Cathay and a slate of other Swire Group companies.
Speaking to Aviation Week in Sydney just before his promotion was announced, Chu highlighted transpacific routes to the U.S. as a focal point for Cathay. The carrier has “seen good growth” in the U.S., and is “very bullish” about the market, Chu says. He citesestimates of 4.5% annual growth in transpacific traffic. Cathay is “well placed to take advantage of that [demand growth],” says Chu.
The airline plans to add both frequencies and new destinations in the U.S. market, Chu says. U.S. East and West Coast cities are under consideration. One such new point is Newark (N.J.) Liberty International Airport, which the airline will begin serving in March. Four daily flights to New York John F.are already offered.
Cathay is also ramping up its Los Angeles and San Francisco services again as it takes delivery of more-300ERs. These markets saw a dip in capacity thanks to the airline's decision to accelerate the retirement of some of its in 2012.
As well as the U.S. West Coast cities and New York, Cathay flies to Chicago and Canadian destinations Toronto and Vancouver.
Generally speaking, Cathay “sees a lot of potential going forward” in North America, says Chu. The scheduled arrival ofin 2016 will open up the possibility of more long, thin routes into secondary markets in North America and Europe, he says.
The airline's executives were also upbeat about the North American market during a recent analyst briefing. They say the recovery in business traffic has been strongest on Cathay's North American routes. Yields were up dramatically in this market, although year-on-year capacity was down 15% due to last year's cuts.
Cathay does not have antitrust immunity to cooperate closely with another airline on transpacific routes as rival carriers do, although it has a code-share relationship withthat Chu says is working well.
Other markets are also appealing. Australia is one of these, although Cathay has reached the cap of 70 flights a week allowed by the current air services agreement between Australia and Hong Kong. Cathay is hoping this limit can be raised during government negotiations, Chu says.
Closer to home, Chu describes the potential for growth in the mainland China market as “exponential.” Cathay already serves about 20 destinations there, mainly through its Dragonair subsidiary. He notes that even so-called second-tier cities in China have populations in the millions.
Elsewhere in Asia, low-cost carriers are posing an increasing challenge to the established legacy airlines as they push into new markets. A good example is the Australia-based Jetstar group, which is attempting to launch a joint-venture LCC in Hong Kong.
The Jetstar Hong Kong proposal was listed in the Hong Kong government gazette on Aug. 23, opening the public comment process. Cathay says it will make a submission, which will undoubtedly oppose the LCC's entry. Cathay claims the new carrier does not comply with laws requiring airlines to have Hong Kong as their principal place of business, and says the LCC will be controlled from overseas by Jetstar.
Ownership of the joint venture is split equally among Jetstar,and Hong Kong's Shun Tak Holdings. Jetstar executives say they are confident the new LCC will be approved and operating by year-end.
Chu downplays the effect Jetstar Hong Kong will have on Cathay if allowed to proceed. He notes that Hong Kong has always been a highly competitive market, which is currently served by more than 100 carriers—including 17 LCCs. None of these LCCs are based in Hong Kong, although local airline Hong Kong Express intends to transform itself into an LCC from October.
While many Asian full-service airlines have launched LCC subsidiaries, Cathay is still assessing the market. The carrier is “not jumping into the water yet” with its own LCC, Chu says.
The move bysubsidiary Jetstar into Hong Kong is also straining relations with fellow Oneworld Alliance partner Cathay. While Cathay has a relatively loose affiliation with many Oneworld members, it has close partnerships with some carriers—particularly ; the two carriers have significant ownership cross-holdings.
A greater immediate concern for Cathay is the poor financial performance of its freight operation. The global cargo market has experienced a long-term slide, which is particularly painful for airlines like Cathay that have dedicated freighter fleets.
Cargo demand has been weak since April 2011, according to Cathay. The airline's revenue and yield in this sector fell again in the six months through June 30, offsetting improvement in passenger demand. While there are not yet any signs that the cargo market is improving, Cathay executives are hopeful there will be a pickup late in the year as new electronics product shipments increase.
Despite the downturn, Cathay is making major investments on the cargo side. It is spending HK$5.9 billion ($760 million) on a new cargo terminal, which is opening in stages. The final stage is scheduled to be completed in the fourth quarter of this year.
The carrier is also modernizing its cargo fleet as it takes delivery of new. Three more of the type are due by the end of the year, giving it 13 -8Fs which will comprise about half of its 747 freighter fleet. Older 747-400BCF converted freighters are being phased out.
Chu says these investments are justified since cargo demand is certain to rebound, and Cathay will be well-positioned when it does. He notes that it is never easy to time long-term investment with market cycles.
The -8Fs will improve cost-effectiveness. Chu observes that the economic assumptions of the cargo business have changed, and freighters have to be modern and fuel-efficient. “High fuel prices have ended the days of old freighters making money,” he says.
Another challenge is the increasing level of congestion at Hong Kong International Airport. The airport is planning to add a third runway, but the project is tied up in the bureaucratic process. Chu stresses that Cathay's hub is “near capacity,” with some experts estimating that this point will be reached as soon as 2017. “The need for a new runway has never been more clear, [but] there are still some challenges to overcome,” Chu says.
As well as its freighter acquisitions, Cathay is also making major changes in its passenger fleet that will improve its competitiveness on long-haul routes and reduce the impact of high fuel prices. The airline is phasing out its 747-400s as new 777-300ERs arrive. It is due to receive six more -300ERs this year, with eight to come in 2014 and four in 2015, to give it a total of 50. The airline will cut its 747 fleet to 13 by year-end, and will phase out another six in 2014 and the remainder by 2017.
The 777-300ERs will be significantly more fuel efficient than the 747s they replace. Cathay Finance Director Martin Murray says the difference is so great that some routes that would be unprofitable with 747s would be profitable with the 777s.
The carrier is also slated to receive 10 more Airbus-300s by 2015. In the longer term, it expects to take delivery of 22 A350-900s in 2016 and 2017, and 26 A350-1000s between 2018-20.