Maintaining course

It’s hard to argue with that plan when the airline is returning thumping profits.

For the financial year ending December 31 the airline group nearly tripled its profit to HK$14bn (A$1. 7bn) from HK$4. 69 billion in 2009 on a 33. 7 per cent jump in revenue to HK$89. 5bn (A$10. 8bn).

All the related numbers were bullish.

Cathay and its subsidiary Dragonair carried a combined 26. 7 million passengers in 2010, up 9. 1 per cent over 2009, while capacity rose 9. 9 per cent to 24. 46 billion.

Load factor was 83. 4 per cent, up 2. 9 points, while passenger yield jumped 20 per cent.

Those numbers translated into great bonuses for the staff, with all eligible staff receiving a 2010 profit share of five weeks’ salary, plus either HK$6000 (A$727) or half of the employee’s monthly salary, whichever is lower.

Under this formula, more than 60 per cent of staff will in effect get a profit share of more than six weeks of salary.

Cargo was also a great contributor to the result, with the group’s full year cargo revenue increasing 50. 1 per cent to HK$25. 9bn (A$3. 1bn). Freight carried by Cathay and Dragonair increased 18. 1 per cent to 1. 8 million tonnes, while cargo capacity rose 15. 2 per cent.

However, as always, the airline is cautious on the result, with Slosar reminding Australian Aviation that fuel remains the largest single expense, representing 35. 6 per cent of total operating costs. “We paid 28 per cent higher on average for fuel in 2010 compared to 2009. ” Slosar also reflected that the result is indicative of the volatile nature of the airline business.

“We cannot afford to be complacent. ” Cathay’s results would be very quickly adversely affected by a return of the peak oil prices of 2008 and the resulting recessionary economic conditions, says Slosar. And while that downturn saw many airlines turn their backs on first class for cheaper strategies, Slosar says that is not for Cathay.

“I don’t see Cathay going in the low cost direction at the moment,” he said.

Slosar said the airline’s network and brand were very powerful assets in the battle with LCCs.

“We understand low cost airlines well and in economy class we’ve got to have sharp fares to get you to purchase Cathay Pacific tickets,” he explained.

Until now, Cathay has competed effectively against short haul LCCs, such as AirAsia, by discounting the back end of its Boeing 777-300s.

However, Slosar hinted strongly that the airline is moving toward adding a premium economy product as an additional point of difference.

“Yes, [premium economy] started off as a niche product and makes great sense for the ultra long haul routes,” he said.

“But it is moving to be more commonplace and thus we will be taking steps to compete in the market and in true Cathay style we will deliver something special – not just an economy seat and call it premium. ” Australian Aviation understands that the airline is well advanced on concepts and to expect an announcement this year.

Business Class

Late last year the airline unveiled a HK$1bn (A$120m) overhaul of its cabin that includes new business class seating on its long haul aircraft from March this year, and a return to conventional reclining seats in economy.

The major change in the lie-flat seat/bed is the rearrangement of the alignment to face the windows on the sides and to face inwards in the centre of the aircraft, reversing the current herringbone layout.

The new seats will be rolled out on all of CX’s new long haul Airbus A330-300 and Boeing 777-300ER deliveries, and progressively retrofitted on existing aircraft.

By February 2013, all 30 of its 777‑300ERs and 20 long haul A330-300s are expected to have the new product.

The new seats are radically different to the current design and offer far more space and a more pleasing outlook.

The business class seat features up to 28cm of travel, and passengers in the centre two seats can move them forward to converse with travelling companions or rearwards for total privacy. A simple precision toggle allows passengers to adjust the seat position to a seemingless endless number of options.

In its lie-flat position it is over 2m long, and a bed extension increases its width by 16. 5cm to give extra room for hips, while the arrangement of the side storage compartment offers extra knee space for sleeping on your side.

There is also more personal storage space, and the side cabinet houses not only your headset and a vanity mirror, but has room for small items such as glasses and gadgets – and the cabinet door doubles as an additional privacy divider.

The entertainment control panel now includes a multi-port connector that lets you connect your own electronic devices, including iPods and iPhones, and stream audio and video content to your personal TV display. The TV is a 38cm unit with audio and video on demand. StudioCX has a rotating library of 100 movies, 500 TV shows, 888 music CDs, 22 radio channels, and 70 games.

Network and fleet

Matching the premium product is network, says Slosar.

“Frequency is so important – we want four or five flights a day so we cover the clock.

“It’s really important for our customers not to have to think about whether we have a flight or not when they want to travel. We don’t want them to have to think about the schedule.

“We have the perfect aircraft types in their category right now in the 777 and A330 to achieve this. They are the ultimate in efficiency. ” “You know there are many airlines that would gladly swap their existing aircraft for 777s or A330s,” Slosar added.

But while frequency rules, Slosar concedes that the airline will look at super jumbos in the next two years.

“Sometime in the next two years we will have a good look at the large aircraft, the 747-8I and A380. ” One route that would be ideal for a larger aircraft is the Hong Kong-London Heathrow service, where two of the airline’s four daily flights from HKG leave within 30 minutes of each other.

The 747-8I would appear to be a frontrunner, given the airline has ordered the freighter variant and would possibly only need a small fleet. Last year, outgoing Cathay CEO Tony Tyler expressed concerns to Australian Aviation that the A380 in its present form did not suit the airline because of its cargo carrying capacity – in a Cathay configuration and operation – on west bound routes from the US. However, Airbus is working on further improvements in the payload and range on later builds.

Certainly Airbus was the big winner when Cathay committed to the A350 last August with an order for 30 A350-900s for delivery from 2016 through 2019 to replace the airline’s fleet of A330s and A340s on European routes. At the time of the order, Tyler told media that it was a milestone deal for Cathay.

“The purchase of these new generation aircraft is an important step in our plan to grow our fleet to ensure that we stay at the forefront of the industry. The A350 fits perfectly into our operation. Its passenger capacity, flight range and operating economics are just right to become the backbone of our mid sized long haul widebodied fleet,” Tyler said.

Cathay also committed to six more 777‑300ERs, which brought the airline’s commitment to the type to 36, comprising 18 aircraft in service and 12 scheduled for delivery from 2011 to early 2013. The six additional aircraft will be delivered in 2013 and 2014.

More orders flowed this year, when in March Cathay announced it would acquire 15 more A330-300s powered by Rolls- Royce Trent 700 engines, 10 additional GE90 powered 777-300ERs, and a pair of Trent XWB powered A350-900s from ILFC. All of the aircraft will be delivered before the end of 2015, and the new commitments brought the airline’s order book to 91.

On the question of the delivery of the A350, Slosar says he remains confident that the aircraft will be delivered on time. He wanted to distance himself from an AFP report, which quoted him as saying the A350 “has technical improvements to make and it will certainly be delayed. ” The A350 has slipped from mid 2013 to late that year.

Slosar said his comments had been taken out of context and that Airbus was “working hard” to minimise delays.

In the same article AFP said that Louis Gallois, CEO of Airbus parent EADS, confirmed that the A350 calendar “remains challenging.

“Critical milestones have been reached on the A350, with difficulties to be overcome in the coming years to manage this risky program,” he told the group’s annual general meeting in Amsterdam, AFP reported.

However, as Australian Aviation closed for press it had become evident that Rolls-Royce was set to announce a larger engine for the A350 to boost performance, which would certainly delay delivery if Cathay were to opt for the larger engine. While the engine is being targeted for the A350-1000, some operators could opt to boost the -900 as well.

More runways

But more aircraft means more runways as Hong Kong International Airport moves towards capacity.

Slosar is totally focused on the big twin of network and frequency, thus driving the need for a third runway at HKIA.

“Looming capacity constraints must be addressed,” said Slosar.

But while HKIA was built many kilometres from downtown Hong Kong so it could be expanded easily to meet demand, Slosar recognises the environmental concerns and supports a review.

Both Cathay and subsidiary Dragonair hold the view that a third runway at HKIA is essential to maintain the city’s reputation as one of the world’s key aviation hubs.

The Hong Kong Airport Authority, which believes the airport will hit a saturation point in 10 years, is looking at two options.

The first is an upgrade of existing facilities, but the airlines, among others, believe this would be a token response that would fail to solve the coming capacity problem.

The second is building a third parallel runway at a cost of HK$86. 2bn (A$10. 4bn), with almost half the cost attributed to land reclamation.

The additional runway would enable the airport to handle nearly 100 million passengers, 8. 9 million tons of cargo and 602,000 flight movements annually by 2030.

Slosar told Australian Aviation that the first option is not a practical solution.

“Hong Kong needs to move quickly to build the third runway so as not to cede its competitive advantage. ” Separately, Association of Asia Pacific Airlines director general Andrew Herdman commented in early June that Hong Kong’s economy is tied to the long term viability of HKIA as a major hub.

“If Hong Kong is going to maintainits competitive edge and take further advantage of new growth opportunities, work on constructing a third runway at HKIA really needs to start quite soon, given the long lead times involved,” Herdman commented. “It is clearly a strategic and critical issue for Hong Kong, and its future ambitions to continue expanding its role as a major aviation hub for both passengers and cargo. ”

Environment

While Hong Kong and the rest of Asia may recognise correctly that aviation is a key economic driver, Slosar is leery about what is happening in Europe, and particularly in the UK.

Slosar has deep misgivings that the patchwork of regional environmental schemes to tax carbon and aviation will cause major market distortions and a nightmare of paperwork.

Slosar warned that in the absence of a global scheme, there could be “a plethora of competing schemes with significant overlap. ” “There is no coordinated pathway approach,” he said.

Slosar said that the EU ETS will distort the aviation market and will be a huge burden, and if other ETS schemes develop in other parts of the world it will be onerous and regional schemes will be very difficult.

He also has a warning for the UK that its passenger departure tax may dissuade travellers from picking the UK as their travel destination.

At Cathay, consensus exists that the airline industry and its passengers and forwarders must pay, but it must be fair and equitable.

Slosar’s view is that there was a clear mandate from last year’s Cancun Climate Change summit that put the emphasis back on ICAO to come up with a solution which gives IATA legitimacy to help and contribute to the process.

Slosar emphasises Cathay’s commitment to the environment, but urges an “equitable global scheme. ”

Downunder focus

Slosar is quick to highlight both Cathay’s roots in Australia and its focus on the market, which is one of the airline’s top five.

“One of our two founder partners was an Australian, and the first service was from Sydney to Hong Kong with the DC-3 Betsy. ” Fast forward to 2010 and Cathay has 67 passenger and two cargo flights a week to Australia, with flights to Sydney, Melbourne, Brisbane, Adelaide, Perth and Cairns. These numbers, says Slosar, are nearly triple the 28 flights the airline had just a decade ago.

“We will be looking at overall capacity and we have the option of upgrading some flights to 777s if we want to increase capacity overall,” Slosar added.

And Cathay has ramped up services across the globe in the past year, adding two destinations to its passenger network in 2010. A four-times-weekly service to Milan commenced in March and a threetimes- weekly service to Moscow commenced in July, while a twice daily service to Haneda International Airport in Tokyo was launched in October.

The airline also added 22 destinations to its network through codeshare arrangements with airlines in Central and Latin America, the US, Canada and Japan.

This year Cathay added a four-timesweekly service to Abu Dhabi in June, triangulating the route with flights returning to Hong Kong via Jeddah. And in September Cathay will start a daily service to Chicago.

During 2010, the airline also restored virtually all flights cut during the GFC, plus increasing frequencies on some routes.

These included five flights per week to Toronto, three flights per week to Jeddah, three flights per week to Los Angeles, seven flights per week to Seoul, seven flights per week to Singapore, 21 flights per week to Taipei, additional services to Perth and Sydney, and four flights per week to Paris.

This year Milan will move to a daily flight, Paris will be double daily, seven more flights per week will be reinstated to Taipei, Jakarta will become a thrice daily service, and Surabaya will get one extra flight a week to make it a daily service.

Slosar adds an interesting perspective on Taipei. When cross straits flights became a reality in 2009, Cathay cut back flights between Taipei and Hong Kong, but has now restored all services as demand has rebounded.

Slosar agrees that the cross straits flights have boosted the profile of travel between Taiwan and China.

“Taiwanese also like Hong Kong as part of their travel plans,” he suggests. In 2010 visitors from Taiwan to Hong Kong increased by 7. 70 per cent to 2. 16 million.

In fact, the two countries are now negotiating a new air deal to increase the number of flights by all airlines by about 56 per week. Slosar said Cathay would now like another two daily flights, on top of its present 108 round trip flights between Hong Kong and Taipei.

Clearly Cathay has never been in better shape thanks to CEOs such as Tony Tyler, and after listening to Slosar’s strategies and views, many would argue the airline is still in very good hands.