Cathay Pacific CEO John Slosar, in CX World Magazine Nov-2012, stated (Nov-2012) on the cost side, the biggest issue for the carrier is fuel, which is the carrier's single largest cost. He commented, "We planned for fuel to be expensive this year, but it has been even more expensive than we anticipated. The actual cost of fuel into plane...has exceeded budget by about 6%." He continued: "6% may not seem like much but, looking at all our flights together on an annual basis, if we had done nothing, this higher fuel price would have meant our total fuel bill this year would have exceeded the high budget we had planned by HK$2.5 billion! The increase in the price of fuel since 2010 has had a big impact on the operating cost of our routes." Using a specific example, Mr Slosar said: "On a 747-400 flight to London, fuel today represents 62.5% of the total cost of the flight. In 2010, when fuel was substantially lower, it represented only 47.9%. That is a big jump! Let me try to put that into perspective. Taken over a year, on that one flight pair alone, the fuel bill will have increased by HK$110 million – again, on just this one flight pair". He said the carrier has limited options to directly address the fuel situation. While the carrier hedges fuel, "hedging is not a miracle solution, particularly when fuel prices have been stubbornly high for so long". He also noted it is difficult to raise fares in the current weak economic environment. On fuel surcharges, he commented: "We are allowed to collect fuel surcharges, but these require regulatory approval and help us recover only about 50% of the extra fuel cost we pay. So this also helps, but cannot fill the gap." Mr Slosar said the carrier has been the most aggressive in taking steps to reduce fuel consumption with the retiring of Boeing 747s from its fleet and replacing them with 777-300ERs being key to this. He noted, "The 777s are overall more than 20% more fuel efficient than the 747-400s. As we move into 2013 and take delivery of more 777-300ERs, we’ll see an even bigger benefit but the full benefit will not be realized until 2014." Mr Slosar said fuel costs are not the only cost issue facing the carrier, adding, "There is significant cost pressure all around us. We are seeing increases in airport charges, overflight charges, catering charges, landing and parking charges, handling charges and passenger costs to name a few". [more - original PR]
Cathay Pacific notes significant increases in cost-base, fuel costs in 2012 exceeding budget by 6%
You may also be interested in the following articles...
Clouds loom over Cross-Strait airline market as Taiwan faces political change. Hong Kong may benefit
The ruling, and pro-Beijing, KMT party is expected to lose the Jan-2016 elections in Taiwan. Under the KMT's leadership Beijing and Taipei have forged closer ties, including the launch of charter and then scheduled Cross-Strait flights between mainland China and Taiwan, which had been prohibited for decades. There has been growth, with increase in overall frequency as well as destinations available to be served in the still tightly-regulated market.
An outstanding gripe from the Taiwanese side was that, for complex reasons, their airlines were not permitted to carry transfer traffic from mainland China to Taiwan and beyond to other markets – such as Australia and North America, two popular long haul markets from mainland China and for which Taiwan is well positioned to be a hub. Earlier in 2015 when relations were warmer, Taiwanese carriers were expected to receive transfer traffic rights by the end of the year. But as the Taiwanese political situation has turned unfavourable to Beijing, an Oct-2015 meeting did not grant transfer traffic rights. The bigger risk is that cooling relations would slow Cross-Strait liberalisation – or at an extreme, recede. One outcome could be that visitor growth would instead funnel through the Hong Kong hub.
Cathay Pacific 1H2015: 'Our commitment is unwavering.' But the market is not returning loyalty
Cathay Pacific remains attached to its premium business model, which in 1H2015 showed some improvements from a low base while profits from subsidiaries and associates – namely an unhedged Air China – greatly helped the bottom line. "We must be doing something right," chairman John Slosar said.
But the going is getting tough. A 12% decrease in fuel net of hedging losses was largely passed on to consumers with a 9% decrease in yields, although there is some impact from foreign exchange. Premium long haul demand remains soft. Cathay's recipe for relying on efficiency improvements could be reaching a ceiling: aircraft utilisation may be tempered to address growing congestion while load factor is at 86%. A350s, and later, 777Xs bring improvements but other gains will be precious. Cathay must rely on incremental improvements to remain ahead of competitors that have better geography and bigger local markets. Restructuring of China's bloated state-owned airlines was once a fantasy but is now coming into focus, a concern for Cathay.