At its Annual General Meeting recently, IATA (International Air Transport Association) predicted that the industry will recover faster than expected, with Asia-Pacific carriers powering the upturn. INSEAD Knowledge takes a closer look at the performance of one of these airlines: the flag carrier of Hong Kong, Cathay Pacific.
It's been a turbulent time for airlines, with the financial crisis hitting passenger demand, particularly in the premium sections at the front of aircraft, which in turn has had an impact on revenues and bottom lines. Cathay Pacific's CEO Tony Tyler however is cautiously optimistic about the future, at least in the near term.
We expect strong financial results for the first half of 2010 as the improved cargo and premium passenger revenues which became apparent in the last quarter of 2009 have continued into this year, and if present trends continue, for the second half also, Tyler told INSEAD Knowledge. That said, conditions can change very rapidly in the airline industry.
Our traffic figures for the first four months of the year indicated an almost four per cent growth in the number of passengers carried and 24 per cent growth in air freight, he adds.
Notwithstanding the depths of the global financial crisis last year, Cathay Pacific exceeded market expectations and turned in a group operating profit of HK$285 million (US$37 million) from its core airline business compared with a loss of HK$1,440 million ($185 million) in 2008.
The airline saw an improvement in the latter part of 2009 but remains cautious about the prospects for 2010 as it has not yet seen a sustained improvement in premium passenger demand which accounts for a high proportion of total revenues. There are also concerns that adverse changes seen in the pattern of passenger and freight demand could be structural rather than cyclical. In addition, the cost of fuel, which rose steadily to $90 earlier this year from $40 per barrel in the middle of 2009, remains stubbornly high and threatens to undermine profitability.
Reduced demands and competition
The airline took a number of measures last year to help address the steep downturn in business, including reducing capacity, operating costs and capital expenditure. It also introduced an unpaid leave scheme for staff, parked a number of aircraft, asked suppliers for concessions, and requested a deferral of new deliveries from aircraft manufacturers.
Despite a difficult year, Cathay sought to keep its network substantially intact, while maintaining the quality of its service.
So how does a premium airline like Cathay compete with budget airlines under these conditions? Aviation has always been and remains a very competitive industry. We will continue to provide great services at great fares by our great people, says Tyler.
Strategy for growth
Tyler says Cathay Pacific plans to increase passenger and freighter capacity moderately this year in accordance with market demand to pre-crisis level in 2008. Last year, we launched services to Guangzhou and Jeddah; and so far this year, we have launched new services to Milan and plan to fly to Haneda in Japan and Moscow later this year.
Some of the passenger capacity reduced during the economic downturn was restored for the 2009 winter schedule and more is being restored in 2010. We have already added flights to popular destinations including Seoul, Jeddah, Riyadh, Hanoi, Sapporo and a number of mainland (Chinese) cities, and will add flights to Taipei, Jakarta, and also for the summer peak, Paris, Singapore and Bali, Tyler says.
Cathay currently has firm orders for 31 aircraft, including 13 Boeing 777-300ER aircraft, eight A330-300s and 10 747-8 freighters. They will be deployed on existing routes and new routes to support Cathay Pacific's network growth.
As for cargo, weekly flights fell to 84 in 2009 from a peak in 2008 peak of 124, with most of the reductions on European, Asian and mainland Chinese routes. The weekly frequencies have been gradually returning to 90-100 flights per week, Tyler says.
In February this year, Cathay Pacific announced it had entered into agreements with Air China and others to establish a jointly-owned cargo airline. The joint venture will provide two of the most important cargo-generating regions in China with two highly competitive and efficient home-based carriers: Cathay Pacific in the Pearl River Delta and Air China Cargo in the Yangtze River Delta.
Volcanic ash continues to threaten European airspace. What has the impact been so far on Cathay Pacific?
During the five-day closure of European airspace, we cancelled 79 flights and delayed 14, affecting more than 20,000 passengers, says Tyler. While we cannot put a dollar value to the impact, combined loads for Cathay Pacific and its subsidiary Dragonair were down 3.6 per cent compared to April 2009.
When traffic on Cathay Pacific's key European routes were disrupted, the airline put the excess capacity to good use on routes to India, the Middle East and North America.
The declining euro threatens to erode earnings of foreign businesses but Tyler says that, so far, the weaker European currency has had no significant impact on the airline. As far as outlook is concerned, a low euro means less spending of euro-based travellers, but it makes Europe a cheaper place to visit for Asia/Australia-based travellers. We have recently launched services to Milan and will be adding flights to Paris for the summer peak.