Political and economic uncertainty is set to keep a lid on corporate traffic until the middle of next year but the long-term prospects for Cathay Pacific remain bright, according to the Hong Kong carrier’s chief executive.
Corporates have been travelling less in key markets such as the UK and the US and Cathay boss Ivan Chu believes the industry doldrums are set to continue in the short term.
“At the moment we are seeing some structural and cyclical trends which are impacting on the economy – both economics and politics – and it will be impacting on the airline industry no doubt,’’ he told AIrlineRatings in Cathay Pacific’s sprawling Hong Kong headquarters. “So cyclically and structurally, I think the next 12 months will be quite tough, it will be quite difficult.’’
The Hong Kong-based carrier this week reported an 82 per cent drop in half-year profits as it faced tough competition from expanding mainland Chinese and Gulf carriers, grappled with the slowdown in China and faced uncertainty in other markets.
The airline's net profit in the first half of the year dropped to $HK353 million ($US45.5m) as revenue fell 9.2 percent to $HK45.68 billion.
Other factors affecting the results included fuel hedging losses and weak currencies in some markets.
Chu noted that a number of airline groups —IAG, Lufthansa, Air France/KLM and some major American carriers flying the trans-Atlantic — were reducing capacity but he still sees the current direction of the industry as healthy .
“Cathay is also reducing our growth from the original four to about 3.2 percent, which is low,’’ he said. “Normally in the last five years we grew about five per cent, we grow at market, but this year we are also scaling down our growth which is a good thing, I believe, so everybody can consolidate a little.
“We will work through our cost base, we’re basically going to be looking at our budget and we’ll be looking at our expansion plan.’’
The Cathay boss sees a number of international factors contributing to the weakness, including a reduction in corporate travel linked to political uncertainty accompanying the Brexit vote and the US presidential election.
Elections for the Hong Kong legislature in early September and a March poll to elect the region’s chief executive in March had affected local corporate and government travel, he said. Added to this is the impact on travel of recent acts of terrorism. “When there’s uncertainty, generally corporates travel less.’’
While Chu does not expect a recovery this year, he does see blue sky emerging by the middle of next year. “By the middle of the year, when everything is clearer – clearer for Hong Kong with a new chief executive, clearer in China in terms of new leadership, clearer in America in terms of new president and everything else —I believe things will get on to a normal track,’’ he said.
Founded in Hong Kong in 1946, the Cathay Pacific Group has grown to offer cargo and passenger services to 179 destinations in 43 countries and territories and last year recorded a turnover of HK102.3 billion.
By the end of last year, the group operated 201 aircraft, 146 of them flown by Cathay Pacific and 42 by subsidiary Dragonair to 53 destinations in mainland China and elsewhere.
It also has a 20.13 per cent stake in Chinese flag carrier Air China and is the majority shareholder in cargo operator Air Hong Kong.
Almost 26,000 of its 33,600 employees are based in Hong Kong, which is a major hub in the world’s fastest growing air travel region and transit point for major markets such as India, China, Europe and the US.
So there’s little surprise that Chu remains a “China bull’’ who sees Cathay as ideally placed to take advantage of the big growth opportunities in the region. He has no doubt Asia is the best place to have an airline “whether it’s passenger or cargo services’’ and is confident Cathay can take on all competitors.
He notes the Asia-Pacific was where the biggest number of new aircraft were heading and believes the signs continued to look good with a young and growing population, increasing GDP per capita and a rising number of people able to travel by air.
“Last year, Hong Kong did very well with 68 million people coming through our terminal, which is only third to Dubai and Heathrow and we grew actually faster than Heathrow,’’ he said.
“If we look at the medium term, no doubt there is so much potential passenger and cargo (traffic) and I think … we are quite in the right place at the right time with the right fleet and the right land assets, ready to pick up and meet the market growth as and when it happens.’’
Growth plans at Cathay include new routes to Europe and what Chu calls a “quiet expansion” in Australia where Boeing 777s are replacing smaller Airbus A330s on some routes.
The airline has been boosting its destinations in Europe, adding Dusseldorf last year, Madrid in June and starting Gatwick on September 2. Gatwick will be operated by the A350 and Dusseldorf will join it from September 16. The addition of Gatwick will see Cathay flying 96 services a week to Europe to 10 destinations and Chu wants to add more.
“Despite what has been happening in Europe, we will be sticking to our growth plan,’’ he said. “We believe in terms of whether they are Chinese going to Europe or whether they are Australians going to Europe, the one-stop via HK is still a very good option.’’
One important component of growth for the former British colony will be the construction of a third runway at Hong Kong International Airport on Chek Lap Kok and due to open in 2024.
Chu said this was equivalent to building a second airport when assets like the associated terminal, taxiways, underground people mover and baggage systems were included.
“When this is open, we call it the third runway system, will mean we have another airport next to the other one in terms of the handling capacity,’’ he said.
In the meantime, he is optimistic that that more advanced air traffic control technology, particularly a new system being launched at the end of this year, will provide some medium-term headroom needed to lift slot availability from the current 68 per hour.
“I believe there is room for doing a bit more with the new system and better coordination with air traffic control management in the Pearl River Delta,’’ he said “So it’s something I believe the government is working on.’’
Cathay is facing new challenges from mainland carriers expanding their international networks and from Gulf juggernauts moving into Asia. However, Chu is confident his top-tier carrier is up to the challenge and says its young fleet will be a major positive. The carrier is introducing new planes while at the same time upgrading its product with improved, state-of-the-art cabins and striking new lounges.
At the same time, it is retiring older planes such as the Boeing 747 and the A340. The last Cathay 747 flight to Tokyo in October is already booked out and by early next year the A340 will cease operating to Auckland and be replaced by an A350-900.
“This is quite historical for us in terms of retiring two fleets in a matter of six months,’’ Chu said. “Our fleet composition will be the most moderns 330s, The 777s — the 300ERs on the long haul — as well as beginning the introduction of the A350, which will come through very, very fast. “So we are very confident we have the most modern fleet with most modern cabin and world-beating service.’’
The September launch of the Airbus A350 flights to Europe comes after the airline has been bedding them down and training crew on shorter international routes such as Hong Kong-Bangkok.
It will have 12 A350s by the end of the year as it heads to a fleet of 48 by 2020, including 26 bigger A350-1000s. “The 1000 is really a stretch version in terms of seat capacity and in payload range so they will fly further, they will fly the east coast of the US,’’ Chu says.
The airline’s 53 Boeing 777-300ERs that form the backbone of its long-haul fleet, with about half of them leased Chu said the future was about flexibility and agility and noted Cathay had the ability to return aircraft to lessors if the market slows or use them for growth if the picture is good.
Even more exciting, he said, were the 21 B777-9X aircraft which will begin arriving in 2021. The advanced version of the 777 will have a new wings, technology, improved aerodynamics and new engines. “All of these are firm orders so you have, in list price terms, about $HK180 billion (on order), so about $35 billion Australian dollars in all,’’ he said.
Another positive, according to the Cathay boss, is the airline’s expanding collection of lounges. Its latest, The Pier in Hong Kong, is being used as a template for other lounges across the network and flagship lounge in London is opening soon.
A huge amount of planning has gone into the new lounge concept with the aim of eclipsing existing facilities and setting a new standard based around Cathay’s Life Well Travelled concept. Chu says the emphasis is on fresh and healthy offerings as well as on providing frequent travellers with an oasis in which they can relax. Having both new aircraft and ground facilities that meet the needs of frequent passengers was important to Cathay’s competitive position, he said.
“About half of our passengers are transiting through Hong Kong so we know as we serve those passengers we are competing against many carriers, including the Gulf carriers which are a major force.’’
Steve Creedy travelled to Hong Kong courtesy of Cathay Pacific.
