Creating value

Cathay Pacific chief executive John Slosar

When you consider the success of Cathay Pacific, it is easy to see why Qantas is looking to establish a new Asian based premium airline of its own.

“We’re good at service, we’re good at understanding what people want, and giving them the products they want.”

This content is available exclusively to Australian Aviation members.

Login

Become a Member

To continue reading the rest of this article, please login.

Username or Email

Password Forgot password?

Keep me signed in on this device.

If you check this box before you log in, you won’t have to log back into the website next time you return, even if you close your browser and come back later.

If you check the box above before you log in, you won’t have to log back into the website next time you return, even if you close your browser and come back later.

---

or

---

Login with a Passkey

To unlock all Australian Aviation magazine content and again unlimited access to our daily news and features, become a member today!
A monthly membership is only $5.99 or save with our annual plans.

PRINT

$49.95 for 1 year Become a Member

See benefits

• Australian Aviation quarterly print & digital magazines
• Access to In Focus reports every month on our website

MOST POPULAR

PRINT + DIGITAL

$99.95 for 1 year Become a Member

$179.95 for 2 years Become a Member

See benefits

• Unlimited access to all Australian Aviation digital content
• Access to the Australian Aviation app
• Australian Aviation quarterly print & digital magazines
• Access to In Focus reports every month on our website
• Access to our Behind the Lens photo galleries and other exclusive content
• Daily news updates via our email bulletin

DIGITAL

$5.99 Monthly Become a Member

$59.95 Annual Become a Member

See benefits

• Unlimited access to all Australian Aviation digital content
• Access to the Australian Aviation app
• Australian Aviation quarterly print & digital magazines
• Access to In Focus reports every month on our website
• Access to our Behind the Lens photo galleries and other exclusive content
• Daily news updates via our email bulletin

View more offers and details

In 2010 the Hong Kong based airline was one of the world’s most profitable, earning around A$1. 77 billion, which makes recent Qantas profit results look anaemic, especially as Qantas’s revenue base is around a third bigger than Cathay’s. To be fair, Cathay described 2010 as “exceptionally strong”, and 2011 is not faring near as well (with first half profit down nearly 60 per cent) as a wobbly global economy and high fuel prices take their toll. But Cathay’s success highlights the opportunities of Asia, particularly when an airline gets its business model right.

“It’s an interesting and competitive business,” Cathay Pacific chief executive John Slosar tells Australian Aviation. “Everybody is looking for space in the market where they can deliver something that’s unique and valuable and make a business out of.

Over time in aviation, that’s been a difficult thing to do. ” In Asia that is seeing traditional players consider non-traditional expansion paths, from Qantas with its ‘Red Q’ premium airline to Singapore Airlines’ low cost long haul offshoot Scoot.

“Whether it’s Qantas coming up with that [Red Q], whether it’s Singapore Airlines thinking about low cost long haul [Scoot], whether it’s low cost overall in different product packages, the industry is amazingly dynamic,” Slosar observes.

So in an industry with more losers than winners, Cathay’s success, and it’s adherence to the same fundamental business model, stands out. And it’s a model Slosar envisages little change from, at least for now.

“We never say never, and we try to keep an eye on developments, and there are developments,” says Slosar, who took over from Tony Tyler as boss of CX earlier this year.

“We’re content with how we’ve got to where we are, but by no means is that any guarantee of where you get to in the future. So, we are open minded and always trying to challenge ourselves on what should we be doing differently in future to meet with that. ” Amidst that change it is not surprising that Slosar would say that “what we really are focused on is delivering value to customers”. But it is his background as the boss of Cathay parent Swire’s beverage business, which holds the Coca-Cola franchise in Hong Kong and much of China, before becoming Cathay’s chief operating officer in mid 2007, that gives a different perspective on the airline business, and how Cathay delivers that customer value in making an airline seat more than just a basic commodity and a means of getting a passenger from point A to point B.

“I don’t believe in commoditisation in any business, and there are always unique little differences that can make a difference.

But what it is we’re trying to do is to understand what consumers really value and push those buttons, and play to that area. Because I think we’re pretty good at it. We’re good at service, we’re good at understanding what people want, and giving them the products they want. ” Says Slosar, “you’ve got to be doing things where people say, ‘God, that was a great flight. . . put me on Cathay [again]’.

That’s what we want to achieve. ” So what does the Cathay boss think makes that ‘great flight’? “Luckily it’s a combination of factors. If it was only one thing, then everyone could do it and it would be simple! “But I think it’s about having the right schedule and network. You go to the places that people want to go, when they want to go there. Which is one of the reasons why in Australia we’ve deliberately sought to have almost round the clock coverage to Sydney, and improving [service] in Melbourne. So, whether you need to be in Hong Kong for dinner, or can’t leave until after dinner from Melbourne, we’ve got a flight that [suits].

“It’s certainly about having a great onboard product with a seat that is comfortable, functional, and allows you to do what you want to do, along with a great service that’s attentive to your requirements – consistent, in that it’s not up and down, it’s dependable in the sense that you’re always going to get the same sort of thing.

“And, ultimately, attention to detail, creating the feeling and the environment that, gosh, somebody’s thought long and hard about this. This all works and it makes sense for me. ”It is a long way from differentiating Coke from Pepsi, but some of the principles are the same.

“You always need to give people a new reason to buy your product. The fact that you sold them a Coke yesterday . . . doesn’t mean they’re under any obligation to buy one today. You need to think about how am I giving people reasons to come back and keep buying, whether it’s a Coke or whether it’s a Cathay Pacific ticket? The idea being, let’s always be thinking about giving people reasons to come back, with improvement in all sorts of areas, kind of continuously – [so] there’s always a reason to try Cathay again. ” If growth in passenger numbers is a measure of Cathay “giving them the products they want”, despite the turbulence of 2011, for the first half passenger numbers were up 1. 7 per cent on a stellar 2010 – passenger numbers in calendar year 2010 were up 9. 1 per cent on 2009 (those figures include 100 per cent owned subsidiary Dragonair’s traffic too).

“So much of travel for us, especially in the premium end where we try to focus, it’s not one-off. . . it’s repeat travel. So we’re into giving a reason to come back next time, and the more we do that, I think the more successful we’ll be. ” Two recent product initiatives highlight Cathay’s premium focus, with a new long haul business class being rolled out on A330s and 777-300ERs, and premium economy to be introduced for the first time to the Cathay fleet from the second quarter of next year.

“Over time, it’s turned out that, guess what, there’s a reasonable segment of passengers who are not going to pay full business fares, because they’re pretty expensive . . . but they would be prepared to pay more than economy class fares if you’ll give them more,” Slosar says of the rationale behind premium economy.

“And standing back and looking at aviation overall, the fact that consumers, again, identify value and say, ‘this is valuable for me’, as a business provider, that’s a great thing. People who see value in different offerings, that’s great for the marketplace.

You know, the most boring businesses are businesses where nobody sees any value at all, and customers only want [the product] as cheap as possible. So from Cathay’s point of view, it’s a great development and we’re really keen to get into it, and anything that we do, we will do well, and focus hard on doing a good job for our passengers. ” Cathay’s premium economy will be a little more “classic” in style than compared to Air New Zealand’s innovative premium economy arrangement, while as for the new business class, “We really sweated that hard.

We wanted it to be great and thus far the feedback’s been really great, so we’re happy about that. ” The new business class does away with the sometimes unpopular high walled, herringbone layout of the existing business class. Instead, the seats are set at four abreast in both the A330 and 777, with outboard seats angled towards the windows, and the inboard seat pairs angled towards each other.

The design also allows for a wide work area, thanks to a ‘cocktail table’ which adjoins the tray table, while a fold out flap when the seat is converted to the lie-flat bed gives passengers some extra width.

Interestingly, the first route the new business class was deployed on (with newly delivered A330s) was to Sydney in March, an illustration of how important Cathay sees the Australian market.

The airline’s position in Australia is well illustrated by official government figures.

For the 2010 calendar year, just over two million passengers travelled between Australia and Hong Kong. Of those, according to BITRE data, 1,413,712 flew on Cathay Pacific, compared to just 548,227 on Qantas (and 106,498 on Virgin Atlantic, the only other carrier to fly direct between Australia and Hong Kong). Given that Cathay (and Dragonair) carried 26. 8 million passengers in total in 2010, the 1. 4 million Cathay carried to and from Australia represents an important part of the company’s business, even before taking into consideration how many of those passengers were connecting through Hong Kong on their way from or to other points in Asia or Europe on Cathay’s extensive network.

Interesting to note too that for 2010 Cathay Pacific had a 5. 3 per cent marketshare of all international passengers into and out of Australia (Qantas just 19 per cent), up from 3. 5 per cent in 2000 (when Qantas had 34 per cent).

Cathay’s share of Australia-Hong Kong traffic is probably not surprising when you consider it flies to Cairns, Brisbane, Sydney, Melbourne, Adelaide and Perth, including no fewer than four times daily flights to/from Sydney and three times daily to/ from Melbourne. (Sydney-Hong Kong is the third busiest Australian international city pairing, behind Sydney-Auckland and Sydney-Singapore).

So flying “to the places that people want to go, when they want to go there” is clearly an important factor in Cathay’s strength in the Australian market, with its ability to take passengers beyond Hong Kong.

Qantas, meanwhile, is hampered by a lack of beyond rights from Hong Kong, apart from flights on to London, which it has been unable to make profitable, and are being axed from next year. Still, Qantas’s recent announcement that it will operate the A380 four times a week on the Sydney- Hong Kong route from January shows that Hong Kong remains an important market to it, but just one in which it will always have a competitive disadvantage.

But if a legacy carrier like Qantas finds it hard to compete with Cathay Pacific, what about the smaller, more nimble low cost carriers like AirAsia, Tiger, and Qantas’s own Jetstar, which is rumoured to be looking at a Hong Kong based operation? “We compete with Jetstar and Tiger on Singapore, AirAsia on Kuala Lumpur and Penang, with AirAsia Thailand on Thailand today. . . Arguably, some of the Chinese carriers are low cost. So, it’s something we do every day. It’s nothing that we don’t already deal with, and I think we do it pretty well, actually,” Slosar notes of the LCC challenge.

“The point here is, there are different parts of the marketplace, people have different value equations in what they’re looking for, and you have to find ways of meeting them. Certainly in the premium end, you want to have a great product that attracts them back. At the leisure end you may have to have unbelievably great prices and packages. You don’t necessarily have them on every seat on every flight, but you have to have enough there so that people feel, ‘hey, when I’m going somewhere I’ll check with Cathay to see what they’ve got [as] they’re never priced so far out of the market I don’t even bother to check’.

Because that would be bad for us.

“I think we’ve done a really good job on our marketing and on our revenue management side of saying, ‘hey, let’s remember, again, we have to give people a reason to go buy a ticket, whether it’s a first class ticket to New York, whether it’s a leisure trip down to Thailand for the weekend, and both, in terms of value and price, it has to work for the passengers’. So we’re not hung up about ‘are we a low cost airline?’ What we’re hung up about is, ‘where’s the value at the customer end?’, and making sure that it’s meeting their requirements and generating value for them. ” How Cathay’s Dragonair subsidiary – fully owned by Cathay since 2006 – fits into the evolving airline marketplace is currently under consideration.

“We’re not hung up about ‘are we a low cost airline?’ What we’re hung up about is, ‘where’s the value at the customer end?’ ”

“Dragonair’s unique position for us is serving China. And, you know, and that’s a fabulous thing to… for them to be doing.

The amount of traffic that crosses between Dragonair and Cathay now is several times what it was before we integrated with them. And, thank goodness, because China’s emerging and the ability to have China feed, or, of completing a longer journey into China, and to be able to do that pretty seamlessly over an excellent hub like Hong Kong, is of fabulous value for us. So, we certainly want to make sure, first and foremost, that Dragonair takesmaximum advantage of the China opportunity.

But I think there’ll be some other opportunities for them as well, and we’re kind of thinking about, where we might go on that. ” Another advantage of Dragonair is its fleet of 32 aircraft, which includes 17 A320s/A321 narrowbodys, which allows Cathay to develop smaller markets not able to sustain the smallest aircraft in its own fleet, the A330-300. As for Cathay itself, at June 30 it had 127 widebodies in its fleet, including 39 777s (-200s/-300s/-300ERs), 32 A330-300s, 14 A340-300s (three of which are stored and are being retured to their lessors) and 21 passenger 747-400s.

On the freight side Cathay has just taken delivery of its first 747-8F, joining about 20 747-400F/400ERFs/-400BCFs.

But it is the A330-300s and 777-300ERs that are becoming the core of the fleet, with 20 and 24 on order, respectively.

“At the moment, just about anybody in the world would love a big fleet of 777s and a big fleet of A330s,” notes Slosar, a onetime managing director of maintenance firm HAECO. They seem to be the aircraft of choice. Both are … fully optimised, with fully matured systems that are very reliable, with very reliable engines. ” Also on order are 32 A350-900s, which should offer “incremental” growth opportunities, “because with the next-gen economics, that should allow us to open up even more destinations efficiently and profitably than we can now with current generation airplanes. ” A380s and 747-8Is, though, are off the agenda for now. “We continue to have a look at them, and we may have a look at them in another year’s time. We’ve been pretty busy with other things. ” They also don’t fit as well into Cathay’s model of offering multiple frequencies to its key destinations. “We want multiple frequency, rather than one big flight, which means 300-seaters have been a better choice for us in the near term than a 500-seater. Down the line, we may well need some 400 or 500-seaters. But in the very short term, we’ve been doing fine with the 300-seaters. ” Piloting all those new aircraft may be a longer term challenge for Cathay Pacific.

“We don’t have the benefit of having an air force here in Hong Kong that spills out pilots at age, say, 38, having done 20 years or something of being a pilot. So everybody that we bring in here locally we’ve trained pretty much from scratch. So, we have a big training program and we try to keep that going continuously. ” Indeed Cathay’s cadet pilot scheme has now been opened to international, not just Hong Kong resident, applicants. The airline had some 69 cadets undergoing pilot training at Adelaide with Flight Training Australia as of mid year.

“Whether that will be enough, or whether we have to do a few other things, I think the market will tell us ultimately, based on how we go. But it’s a big area lacking in forward visibility. You can see one or two years in the future, but you’re buying airplanes for seven or eight or nine years in the future, and you just have to say, well, I’ll have to make sure I deal with it on that score.

“So far, so good, but it is a challenge. ” In the shorter term other challenges loom larger, particularly the uncertain global economic outlook.

“Conditions seem to be weakening, frankly, although it’s not just a recent phenomenon.

2010 was amazingly strong on all fronts really, and I think most people felt the following wind of that. This year has been more of a challenge, especially in the cargo market. Cargo’s been much weaker this year than it was last year and most recently is getting weaker still.

“On balance, the forecast from everybody is that Asia’s going to be better off than other places, and I have no idea of knowing whether they’re right or not, but obviously we hope they are. ”