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,ti!i *ar.3e Riding the bumps

Cathay Pacific Airways CEO

"Tltat is the big question tltat is on the minds of allairline managements around tlte world - what ist/te new normal?""Hold on tight!" That's CathayPacific CEO Tony Tyler'sadvice on how to manage anairline in today's economicallychallenging times.

Chief of the Hong Kong based full serv-ice iong haul airline since 2007,Tyler hasalready seen the best of times and the worstof times in barely r\,vo years."I had the pleasure ofannouncing thehalfyear results for the first haJf of 2007,and then the fuIl year results which weannounced in March 2008, which were thebest we ve ever l.rad, a HK$7bn (A$1bn)profit,"Tyler related to Australian Aaiationon a July visit to Australia. "But of course bythen we already knerv that 2008 was shapingup to be a very difficult veirr, and indeed itdid prove so for a whole range of reasons."

Cathay's operating loss for 2008 was$HK7.9bn (A$1.2bn), in large prrt due torising fuel costs and hedging loses.'And 2009 is in many ways even morediffi cult," Tyler contin ued.

Just how dilficult 2009 is proving rvrshighlighted by the airline's results for thefirst halfofthe year, released 10 days afterTyler's intervi ew with'4'4. Those fi gures(which include the numbers from fullyowned Dragonair subsidiary) showed thatpassenger and cargo revenues collapsedbv 27 per cent compared to the first halfof2008. Fuel hedging gains meant the.rirline in fact posted a headline profit ofHKS812n (A$12am) for the half, but the

underlying result for Cathay (and Drago-nair) was an operating loss of HK$765m(A$118m).The halfyear result is less bad than for

the 2008 full year as Cathay, like almost allits contemporaries, has moved to resize itsoperations for the new environment."I've been around the industry a longtime and I've seen ups and downs - this iscertainly the worst down that I've seen."

The Oxford educated Briton is certainlyno stranger to airline industry crises, havingworked at Cathay Pacific since the late1970s in a variety of commercial and man-agement positions, including heading HR,general manager Europe, and director ofservice delivery responsible for inflight andground service. From I996 Tyler was direc-tor of corporate development overseeingcorporate and strategic issues and planning,was appointed chief operating officer in2005, and then succeeded Philip Chen asCEO in 2007."But ifyouve been around as long as Ihave you cant help but know the businessquite well, you just know what you have todo. It's not rocket science, you've got to tryand defer capital expenditure, you've got totry and preserve cash, do other things tomake sure you've got liquidity and rreirn-rvhile reduce costs, snip operntions thzrt lrecosting you money."It may not be rocket science, br-rt rl,rk-ing cuts and rebnlirncing operrtions tbr ;rrnuch reduced level of tr,rthc demrmd is '.u-renormous chrrllenge ttrr ;rirli r-re s u-orldrvide.Horv do vou make ch;lnqes u'ithout hzrrm-

ing the business, and to what extent doesthe airline's underlying business modelneed to be changed?"In our case, critical to our success andour strategy is our nefwork, and weve beenvery careful not to damage the nerwork.The nerwork has helped us fill planes whereother airlines have lost 10 points ofloadfactor, we haven't," said Tyler."We can fill flights, it is not a problemfilling planes, the main problem we've gotis the front end ofthe plane has thinnedout so much. You would have seen therecent IAIA figures where they said therehas been something like a 20 per centreduction in traffic in the premium classes- that's about it, and the yield (has fallen)even more. So the revenue is down evenmore because the yield is down, and thathas had a huge impact on our overall yield."

Just by how much was detailed in thehalf yearly results, with Cathay Pacific/Dragonair passenger yield falling almost 20per cent when passenger numbers 'only'fel1four per cent."The other probiem we've got is cargo,"Tyler contir.rued. "The cargo market hasbeer-r l-rit ever-r h:rrder than the passengerm.rrket. "

Thirt hit has seen Cathayt cargo arm cutno ferr.er than six 747 freighters from itsfleet, retiring five and transferring anotherto subsidiary Air Hong Kong. Overall,Cathay and subsidiary freight capacity(including belly hold space) has been cut by11 per cent, with loads down 14 per cent inthe first half of the year.

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"But r.ou do what you have to do."So thr, Cathay has limited cost reduction

to trimming, rathcr than slashing, its routesrnd capacity, with plans to'parlionly halfrr dozen or so aircraft, and an unpaid leavescheme rather than job losses.

"We ve also done unpaid leave. Almost100 per cent ofour stalTsigncd up fbr someunpaid leave. We've staggered it so thatthe lower paid are given a lot lcss than thehigher paid, and that I think was seen by all,rs being fair, and as a result we'vc bccn ableto get almost all the stallonboard."An unpaid leave schcmc rather than joblosse- and effective communicrlion rp-p'orch with sralTrl,":rlpc.rr. t.r be peyingdividcnds beyond direct linancial savings."I spend a lot ofmy time talking to Ca-th.ry people, talking to the media who communicate what's going on,"Tyler expJained.'And you know that you're getting throughwhcr r (diam"nd level) Mrrco Polo (lre-quent flycr) member told mc at (a recelt)lunch,'your crcw are fantastic, and yor.rknow what, thcy rcally get it'. They askedhim at the end of thc flight'how was theflight, howwas the service?', and he said'it was great', and the crewmember said tohim,'well it is important that you Aie happywith the service because we know thc company is in a difficult position and we wantto make sure )rou comc btck dgain."When that happcns nanagement isgetting throush to pcoplc, they get it. Andthat's not thc lirst time I ve heard that."

Compared to other airlines, Cathay'sc.lpilcifj/ and fleet reductions have dlso beenrclatively small."Our hub strategy is very important, sonhcn I speak about reducing our schedule Ircfer to snipping, it's not cutting, not m^k-ing wholcsalc cuts to damage the ability tocilrn the revenue, it's getting thc frcqucncy..r.d i.rpaciry right in diffcrcnr mlrker'."It's casy to mess up your business by.'iving, 'right, we can't aford to do that, so',r'c rvill cut all those flights'because halfthe. .t..engcr\ on thosc lliShrs were connecting',r ith other llights, and when you do that'.,ru find a rvhole lot ofother flights become:r:rrrginal. So we've beer very careli.rl about.rL)\\'we've snipped. As a result wc'vc'-.rb.rbly made fewer capacity cuts. We've::Juced our capacity by about eight per,: nt rrnd other people havc cut morc, but'icn we've looked at cutting more wc've.::J rvcic going to cut into flesh and not: :. s,ed do the death ofa thousand cuts.' , thlt's been very importirnt."

Tr 1er stresses too that maintaining- :Jr.rv Paci6ct high scr\.icc strndards- :rr.rins critical to thc xirlinc, despite toughrorric times.tln the service side ... wc don't wiurt to- : .rn\-other reason for pcopie to srop llv: :r irnd start flying someonc else. So we.::t cut the food budget. Yes in c.ono-

FLEET LEADER Cathay currently 0perates 11further 20. (Cathay Pacific)

777 300ERs !,vith 19 0n order, and h0lds purchase rights 0n a

my class Hong l(onglTaipei we'r,e startedse ing sandwiches instead ofhot meals asthey're cheaper, but that money is going toget directed to where we need it. So we arcnot cutting budgets there, wc're not takingi.rbin crcw olT fliglrrs. wc rc srill invcsring inlong haul cabin refurbishmcnts, wcie stillinvesting in good inflight entertainmentbecause \,vc want to make sure pcople keepfrying us. And ... . utt ing rhc pcrnut. frnmthe service is not going to save mc cnoughmoncy to counter the loss ofall my pre-mium tramc, so it is not going to soh,e theproblem, and itjust might make it worse."

Plans to parkjust halfa dozen or sorircrirft, out of a fleet over 120 widebodic,, :rL', reflcr ir rhe qnipping l('r shshingapproach. A de'rl to sell five ofthe rlinctolder 777-200s lell through crrlier in theverr as the prospcctivc buler \v.ls unirble toraise the finrnce, so no\v the rrirline pllts toprrk four ,A340-300s and nvo 7J7--100s.Tl ler :rls., .:rid rhri C.rh.r) P.r..6, i.in talks with Airbus and Bocing to dcferaircraft dcliveries.

"We'r'e got some great 747-8 Freightcrscoming, with thc 6rst dcliveries plannedfor thc end ofnext year But with slr ofour own freighters out ofopcration it's

something we dont necd at the moment.o *e re r,rlking to Boeing rborrr dcl.ryingthose, and wc're t.rlking to Airbus aboutdelaying some A330s again a greataircraft, we will nced them, but we dontrcally need thcm quite as early as we'recontracted to take them."Another fect change is reconfiguringthe seating arrangements in thc airline's 12777-300s used for regional Asian routes."We're going to rcduce the number ofbusiness class seats in our 777-300s inthe region, where we ve had too many fora long time, and we're going to put moreeconomy class seats in, so thxt will help theeconomics ofthose."But Cathay has no plans to changcthe seating configurations on its newer777 300ERs which are used for long haulflillhts such :rs to New York, despite theslump ir, premiurn trlflic..OLrr long hrul 777 300ERs hrve 56business clrss selt: ,rnd seven 6rst .less, rrnd'o' rh( m.1rkc . \\ ( \'c : 'r rll(r. ,,r' lr:l_ .about right."Along'idc rhe A3l0 rrr ir\ j2 in .er r i. rand eight on order), thc 777-30OER isfast becoming a corc part ofthe CathavPacific fleet. "Wc'rc telling Boeing and

THINNING 0UT Fewer passengers are experiencing CathaV Pacitic's new business class, which'features lieflat sleeoer seats set if a arrangement. Pacific)

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CARG0 PAIN Cathay Pacific has parked five 0f its 747-400BCFs (pictured)and hansferred a sixth t0 its AirHong Kong subsidiary. (Seth Ja!'/orski)

GE we think they're going to need to'ginger'that aeroplane up if they want tokeep it competitive, and I think they knowthat. We've got 19 on 6rm order (with 11already in service) and I can see us eveotu-a1ly probably getting more, especially ifthe economics of rhrr airframe rnd engineare improved."In contrast, the 4'340 and passenger747 400 fleets are starting to be cut, withthe newly announced retirements to leave11 and 21 in the feet, respectively."Clearly iffuel prices stay high then our747s are going to look less like a good ideaearlier, and we may want to phase themout quicker."

Interestingly though, it seems that unlikemajor competitors such as Qntas and Sinqrpore Ai11ine.. Carhay woni be replacing7.17s with .4380s."We've done a lot of analysis of theA380, and I dont want to upset anybody,but with our fleet and with our network wesee better ways ofmoving people aroundthan the current version ofthe 'A380,"Tr ler srid. "l've no doubr rhe A 380 i. goingto be very successful aircraft and a verystrong competitor with good economics.\\re believc there are aircraft at the momentn ith better economics for our particularnetwotk."Tller said the airline is not looking tol.rrqer aircraft at the moment as fiequencyir critical to its business model.'I s ouldnt rule out rhe 747-8 Intercontirtnral :rs rvell, that might do the job for us,-:: .rt the moment we dorit want a bigger.::::,plane, u,e're quite happy to go with: ::.:::erl :rnd not capacity. And with the--- -i.,,lER.l-e\'e got three flights a day to\.. '. 1 :r rhc -\380 cant do New York.- -: :':..cngers like frequency, and_ _ - :l-: .r:r' ir .utcessfhl airline econom- : -..:..:...ell ,rnother 100 or so: _ _ :. : -:::-: ::::]e oidtrr: -{t the mO-' _ :: ::::..:mr:e 100 passengers

_ _ - . : . .. :: :i.rn the oncs

you are carrying, ifyou've got a sensiblerevenue management system. So by de6ni-tion you're carying another 100 low yieldpassengers.Ifon the other hand you've aflight at a different time ofthe day youiein a different market, connecting differentplaces, you have people who may want toput a full day's work in before they fly, orthey want to go in the morning and not theevening it's a different game, and thenyou've got a chancc ofgetting passeogersthat are high yie1d."That's the game we play, the frequencygame, and the 777 is a real winner, acrossthe Pacific it's a real winner."Longer term, it looks like Boeing andAirbus will have an interesting battle onthcir hands. depending on how well Boeingcan'ginger'up the 777, and ifthc A.350tpotential is realised."The A.350 looks a very interestingaircraft indecd.Ifit does what it says onthe box, I think we'd be very interested inthat aircraft."On the other hand,Tyler described the787 as a little small. "The 787 is a very goodaircraft, but a bit small for us, and perhapsnot quiet the range we want. The 787 10, ifir happens, might be a "tronger competitor,but then you're starting to get into -4350territory. Itt the less obvious one for us,although I'm sure eventually it will be avery good aircraft."

But for now, Tyler said he is "very happywith what we've got at the moment".That's not surprising, given any discus

sion of new aircraft types is premature untilCathay can successfully weather the currentchallenging environment, and presumesthat there is no more fundamental redraw-ing ofthe airline map, due to the growthoflow cost competitors in Asia such asAirAsia and Tiger, and the as yet unan-swered question ofwhether premium tramcin time bounces back to traditional levels.

"That is the big question that is on theminds ofall airline managements around

the world - what is the new normal?"Tr1e:mused. 'At thc moment, we re in rece5-sion. at the momenr we're \eeing negatilefigures.That will not last forever, eventurrll.we.tart seeing posirive rr:rlic and po'i-tive revenue growth. So the que'tion i.,when the world turns to positive economi.growth how strong is premium trafficgoing to be. On our network the averagepremium yield ratio is something like fiveto one in terms offront-end/back end - isthat going to be achievable (whcn grou'threturns)l That is the big question.To behonest nobody knows that."

Tyler, though, remains confident that bu.iness tavel will return to some degree at leasr."I dont believe premium trLel hassropped lorever Tfyou're a busincssrrrI i rHong Kong and you've got to fly somewhere for 10 hours and start work imme-diately, you need to go flat and get somesleep." Continued the Cathay boss, "Thereis going to be a market for flat beds, thequestion is how much will people par' lbrit, and how many are going to do it, lnd Idont know that yet."But ifthe curreot shift by businesstravellcrs from the front end of lhe Jirir.Ll:to economy does become the new norm .then full service airlines like Cathal' facethe competitive threat ofthe burgeonineAsian low cost airlines."Operating with our legacy cost strucmrein an expensivc place like Hong Kong ".

-.never going to match, as an overall airlineopcrarion, AirAsia! costs. However. i(inor to srywe can't competc with AirA.i.rusing our back-end capacity in targetedmarkets to make sure they don't have it alltheir own way. When you take the averagecost of a back-end seat of a Cathay Pacilic777 -300 operftLg in the region, when louthink that there are premium passengers- although not enough at the momentr-rnfortunately sitting up the front andyou've got cargo in the belly, and you've gotthe overall efficiencies ofa big network tobring down your overhead costs,we can sellvery cheap down the back and sti11 makethe whole package economically sensiblc.

"So even though on an overall basis ourcost per seat is going to be higher thantheirs ir doesni mean we can t competewith them in targeted segments, and that'swhat we have to do, clearly, because if wedon't, they'll hollow us out."

Clearly, then, the low cost cariers havethe potential to reshape the Asian airlinemarket, but Tyler is more sceptical aboutthat other much discussed issue with thepotential to transform the airline industryconsolidation through mergers and takeo-vers, eventuating."I'd love to see it, I think it would begreat, I just dont think it's going to hap-pen,"Tyler, who became chairman ofIAIAin June, said ofconsolidation. "The airline

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industrr is tirn.l.rnrrr.:l ., .l: -:.:r:.:r :::brc.ru'c irdur.r r. :..: ...othcr industrl'under the sun .loe: iri-i-::rofthe sovcrcigntv of tnllic rights. -\ndii\.ou diJrir hivc rh.rr you rv.uld ger b:qirirlines fornring with a whole lot ofnichcc.lrriers doing thcir thing. And then thcrcwould be some chancc thilt the industrywould rcturn its cost ofcapital. (But)personally I don't think it's going to heppenirny til're (soon)."

Tylcr is dso sceptical ofarrangcmcntssuch m the dual-listing structure devised forthe mooted Qntirs BA mcrger late last t,e ar."It looked to mc ficrTdishlv complicatedtnd dilllcult to run. ArT d to be honest alsoI looked .rt that idee and I couldn't rerllv.ce rr here rlrr .r n, rgic. rvc-c conring from.Cost synergics would bc very dillicult toqet rnuch out oll lnd then even the revenuesynergies,I pcrsonally couldnt see, giventhe fact thcv alrcrdy l.r.rd the JSA whichallows them to pool the bie arers ofoverllp(on the kangltoo routc), it w,1s hard to scelruu rlrct rtcr'c 'c.tl r gr,irrg tu gcr.r r.rrrhugc syncrgics. A:rd I gucss thct cimc tothc samc conclusion, lvhcn thcy lookcd rt itmore closchr"

That ccrtainh suggcsts aol kind of lbrmalrir -ul\ \virlr Qrnu. i. highlr L.rrlikcll..lc-f ircsonlc andysts picking Clthrl, Prcific, rs rvellas llal'.wsi:r Airlines, :ls potcntiirl prrtncrsi 'r'tlrc Au.trtli.'n ,rirlinc irr rlrc rvrrkc ofthc coll..rpsc ofthe BA dcal. So hm thcrccr-cr been any scrious discussions benvecnthe two airlincs, rvhich rre both lbundinsmcmbcrs ofthc oneworld allirncc?"No, rve htr,cn't,"T1'ler conirmcd. "Ovcrthc rears rve'r,e h.rd somc vcrl'high lcvclinlbrrnrl discussions ..rbout whet if, butrou prcttV quicklt'come up against somcr elv dillcult ob stacles. 'Ihc rc is thc grcirtri)\'crcignq'obsticlc lbr iL stirt, if ]ou cirnL^ clcomc that you'\,e thcn got go\rernencer:sucs end )