Cathay Pacific Trading Well in Poor Times

There are a number of factors which have contributed to Cathay’s wellbeing. Location is certainly a key advantage in the airline’s success. Lying as it does astride the trade routes of the modern era, Hong Kong is a natural hub for air traffic. The city is one of the top three transit points in Asia, vying for through traffic together with Singapore and Bangkok.

Last year Cathay Pacific carried a third of the 4. 8m passengers which passed through Kai Tak last year. When government approval to overfly China is gained, and the new airport at Chek Lap Kok is opened to provide more time slots, Hong Kong will increase its through traffic to Europe substantially.

With approval having been finally secured in protracted bilateral discussions between Australia and Hong Kong, Cathay Pacific now has rights to carry passengers direct to Europe via Hong Kong from Sydney, Melbourne, Adelaide and Perth. Previously, restrictions did not allow through traffic to Europe originating in Australia, which subsequently limited operations to local business and tourist traffic.

Hong Kong’s geographic location has allowed it to develop into one of the world’s leading commercial and tourism centres. Of the six million visitors arriving in Hong Kong in 1991, 25% were business travellers and some 59% were tourists. This visitation figure is at present increasing by just under 2%. Despite the 1997 handover to the PRC, investment worth billions of dollars is still taking place in anticipation of Hong Kong maintaining its importance as a commercial hub. The centre is also home to a population with a massive disposable income.

From one of the most favourable trading locations in the world, the Swire Group management of Cathay Pacific has developed an effective management style which has produced one of world’s most successful and innovative airlines. With a comparatively small management team, the carrier has the ability to respond swiftly and decisively to market requirements. By eliminating the bureaucracy of multi level management structures common in most large airlines, the executive has shown that it can remain reactive and in contact with the real issues of their markets. From this has come a world class product, which is in the fortuitous position of long being one of the most respected tourist and business carriers. Over the last decade Cathay has received no less than 27 separate

From a small beleaguered carrier in 1985, Dragonair has been born again under new management and an active campaign to establish the airline as a major player in the local regional market. Julian Green reports.

Inside the Dragon’s Lair

Hong Kong Dragon Airlines was established in April 1985 as a Hong Kong based carrier intended to serve mainland China.

Its founder, KP. Chao, received an air operator’s certificate in July of that year and it was during that month that Dragonair operated its first service to Kota Kinabalu in Malaysia. Four months later in November 1985, a stake in the airline was acquired by the founder of World Wide Shipping, Sir Yue-Kong-Pao, who instigated a regular charter service to Xiamen in the southern China province of Fujian.

Since 1986 Dragonair has been given permission by the HK government to fly to 52 destinations on mainland China. After authorisation from the Civil Aviation Administration of China (CAAC), it exercised the right to serve 11 ports, with regular charter services to another five ports operated by the wholly owned subsidiary, Dragonair Holidays.

Dragonair was operating an increasing network in what was traditionally Cathay Pacific’s territory. Cathay was losing trade on key routes such as Beijing and Shanghai, which necessitated it taking measures to protect itself from this smaller but aggressive threat. At this same time, despite an increase in activity, Dragonair was losing money, and its shareholders demanded action to assure their investment.

By January 1990 a deal was struck whereby both Cathay Pacific and Dragonair investors were satisfied. Cathay purchased a 35% holding in the smaller carrier, and CITIC, the China International Trust & Investment Corporation (itself holding a substantial equity in Cathay), purchased a 38% share. The Chao family, together with some of the original minor shareholders, maintained a 22% holding.

As part of the agreement, Cathay was to provide management to Dragonair for a period of 15 years. Mr Simon Heale was directly appointed to the position of chief operating officer, and he now works in co-operation with the Executive Committee formed to supervise the airline’s operations.

As well as eliminating direct competition on some its routes, the move had one very important effect for Cathay: with the pending Hong Kong handover in 1997 to the PRC, it was now in the position to have not only its own international and regional network, but also an extensive domestic network which it could feed and manipulate.

Beijing and Shanghai were subsequently transferred to Dragonair, whilst the rights to the other destinations positioned it as a niche carrier to China. Currently twelve primary cities in China are served. While Dragonair will remain the sole Hong Kong based airline serving China. International destinations served include Dhaka, Kagoshima and Hiroshima in Japan, Kathmandu and Phuket. These routes represent viable opportunities for a smaller carrier such as Dragonair, but are too thin for Cathay. The size of Dragonair also means that it is more flexible and manoeuvrable than a larger airline, and to a certain extent can adapt more easily to its market.

The fact that Hong Kong is a key destination for the six regional CAAC operators has provided some leverage in seeking approval for Dragonair’s rights to serve Chinese cities. It is in part due to this that requests have been given “reasonable consideration in fair discussions” with the Chinese government. Of the 52 destinations it is licenced to operate to by the Air Transport Licencing Authority, Dragonair now flies to all those cities for which Chinese approval has been granted.

In addition to its growing mainland network, the management will consider expansion into viable Japanese and Indo-Chinese ports. With new destinations constantly opening in the growing south eastAsian market, Indonesia, Cambodia and Laos are options which may be explored in the future.

“Dragonair will not expand for the sake of expansion; it must be manageable”, Mr Heale says. “Every route served by the airline must be profitable, if it is not it will be dropped from the network. ” Such management style has turned Dragonair from a fledgling also-ran into a profitable and successful business which in 1990 grew 90%, and in 1991 grew 35%. These figures represent excellent growth rates by industry standards, and they are a result based on sustainable growth with periods of consolidation.

Understanding the market has been important in achieving such successes. The aim of the airline is to “Provide reliable and good quality service for the markets served. ” The majority of services to mainland China do not generally require, nor do they demand, first class service. “What the routes require is a good economy class service with a choice of meals, drinks, newspapers, and on time service”, says Mr Heale. The only routes on which first class services are provided are the Hong Kong/Beijing and Hong Kong/ Shanghai sectors, these being the high business traffic routes. The 11011 used on these routes is configured with 30 seats in the forward cabin, and 270 in economy.

Bookings on the airline have be made easier since the takeover by Cathay Pacific who now acts as GSA This provides Dragonair with over 70 offices worldwide, and in April 1990 a participation agreement was signed with Abacus, which enhanced Dragonair’s access among its traditional markets in the region.

As Dragonair moves ahead, it has established a strategic plan to upgrade its fleet. The current inventory of five 737-200s and a single 11011 on wet lease from Cathay will be replaced from January 1993 with five new Airbus A320s on lease from ILFC. By October 1993 all the 737s will have been replaced by A320s. The Airbus order is also in keeping with Cathay’s recent A330 order. It is likely that with the arrival of the A330s that Dragonair will return the 11011 and take up the new type as its widebody choice, giving it an all Airbus fleet. The acquisition of new aircraft also represents a manageable growth pattern for the airline. The 737s uplift 126 pax, and A320 156 pax, and the A321, which is optioned, can carry 30% more. again.

Dragonair is a growing and successful airline operating in a booming south east Asian market. If Cathay Pacific’s prosperity is any indication, the new management team will leave its trademark on this feisty carrier. Sensibly, Cathay didn’t let the Dragon die, and helped give it fire again allowing both airlines to become a dominant force in

the region’s flourishing air transport market. awards for service and operations, including two from Air Transport World. Constant reviewing and redevelopment of its various passenger service products enables fine tuning to ever changing market demands.

Such is the case with the recent renaissance of first class travel. Roland Cobbold, Marketing Director for the airline says, “Our research and customer feedback have shown that First Class passengers want more flexible service, tailored to their individual needs”. This latest review of its premium product has seen Cathay Pacific completely refurbish the first class cabin interiors of all aircraft, provide revised inflight service which allows more flexibility in meal times and choice of cuisine, and new check in procedures. Another of the more obvious changes regular passengers will notice are the further improved Japanese designed Koito seats which include individual entertainment systems, and electronically adjustable leg rests and seat backs. An unsurpassed pitch of 62 inches is now offered on all long haul aircraft.

Part of the $US10. 5m upgrade has been spent on the construction of the new First Class lounge at Kai Tak: now the largest in Asia. Guests at the lounge may avail themselves to a full range of business facilities, and a bar and buffet service which would shadow even the most aristocratic establishment. The lounge is 2000 square feet of business practicality and pure luxury, and is another feature that consolidates Cathay as one of the leading business carriers.

At the forefront of market innovation was the decision to trial long haul non smoking flights to Australia and Canada. Since April 1 this year, these services have met with overwhelming approval by passengers, and has led to the airline’s commitment to introduce non smoking flights throughout its network. The average 74% load factors have remained unchanged since the new services were introduced, and they will undoubtedly attract new passengers who prefer Clean Air flights. Check in procedures have also become smoother as a result of the new policy, with the allocation of smoking and non smoking seats no longer necessary.

Additionally, Cathay is a growing force in the area of air cargo. In 1991 the airline carried 314,150 tonnes of cargo at an average load factor of 62%. This represents a turnover of $HK3448m, or almost 17% of the total revenue for the year. latest figures show that freight carriage is already up 10% on last year with 29,388t being uplifted in March alone. Three 747F aircraft currently operate the scheduled cargo network, with a fourth (VR-HIH) having been withdrawn from passenger service and is presently being prepared for freight duties. Two 747-400Fs will join the fleet in 1994 and 1995, with a further two on option.

The -400 series freighters were ordered as part of a major fleet replacement programme. Announced in April this year, Cathay Pacific has on order both Airbus and Boeing equipment at a value of US$2. 8 billion. Ten A330s are intended as replacements for the ageing L1011s and are due for delivery in January 1995 and February 1996. Eleven 777s will replace the 747-200 and -300 series aircraft over the 1996 to 1998 period. By this time the 747s, which were delivered from 1980, will have amassed between them some 1. 2 million hours of reliable service.

If Cathay Pacific had not been able to create a profit in its worldwide operations, it would not have been able to survive such a massive re-equipment programme. Its product is cru- cial in maintaining profit levels. This product is not only the high standard of service offered, but is also the reliability and efficiency achieved in operating a modern fleet, supported by a sound and realistic management style.

What goes around, inevitably comes around.

I wish to thank the staff of Cathay Pacific, Dragonair, and Wendy Hughes for their assistance in the preparation of this feature, and Holiday Inn Golden Mile, Hong Kong.