Cathay Pacific CEO lets fly at suppliers; business recovery "still seems like a distant dream"


Cathay Pacific CEO, Tony Tyler, talked of his disappointment and frustration at "everyone else" along the aviation value chain doing "very well at our expense". Some of Mr Tyler's strongest comments were directed at Airbus and Boeing.

Mr Tyler criticised airframe, engine, parts, component and interiors suppliers for overcharging airlines for their products and called for closer alignment between the interest of airlines and suppliers. Mr Tyler also criticised manufacturers, Boeing and Airbus, for their order delivery delays, and stated the carrier has experienced unpublicised delays from a variety of other suppliers, in speech to the Asian Aerospace Congress.

Mr Tyler also lamented that a real and sustained business upswing "still seems like a distant dream".

Here are some of the highlights.

On aircraft suppliers

A constant source of disappointment for airline owners and managers around the world is the poor profitability of our industry. Especially at the moment of course. This disappointment turns to frustration - and even stronger emotions than that - when we see that everyone else along the value chain is doing very well at our expense. At one end of the chain, passengers and shippers are enjoying fantastic fares and cheap rates. And at the other, suppliers of all kinds – hard products and services alike – are making good profits even in these dark recessionary days. It’s the airlines, stuck in the middle, who suffer chronic financial under-performance. We are all in this crisis together but you wouldn’t believe that from the way many of the suppliers to the airlines conduct business with us. I have two related complaints about the way airlines are treated by suppliers.

The first is very simple. Things cost too much.

That’s a very general statement, so let me qualify it. I’m not going to talk today about excessive costs from airport charges, air traffic control services and other monopoly providers. There’s plenty to say on that but I’ll save it for another day. More appropriate targets today are airframe, engine, parts, component and interiors suppliers.

I am always astonished when I hear how much what you sell us costs. Big things, small things, seats, engines, parts of all kinds – how can they be so expensive? I know there are certification costs. Things have to be certified, of course, and I know the regulatory authorities can be difficult to satisfy at times. But all the same, the prices of some of the items we have to pay for are far too rich.

The result is that a premium seat and its furniture costs more than a top-quality sports car! If our passengers only knew what some of our costs were, there would be no complaints about the costs of premium fares!

What airlines pay for the tools of our trade gets more and more expensive over time because of the insidious effects of so-called “price escalation” clauses...How can suppliers charge more and more for the same thing, while the forces of competition mean that airlines can only collect less and less from our customers, even as we give more and more in terms of service, space, comfort, facilities, and so on?...

It particularly irks me when I know a supplier has reduced its costs through continuous improvement, quality programmes, high volume production or coming down the experience curve, and still insists on an escalation clause instead of sharing some of the benefit. It’s absurd to expect an industry which is estimated to be going to lose around USD9 billion this year to keep paying higher costs for the same thing.

There has to be a closer alignment in future between the interests of airlines and suppliers. After all, we can’t grow our businesses if we can’t make money, and suppliers’ businesses depend entirely on us. If we don’t grow, suppliers don’t grow. The days when airlines could just pass on cost increases to passengers have long gone. It’s time they were gone in the supply market too.

I’d have more sympathy for suppliers if they provided the sort of on-time performance our customers expect from us. But they don’t even do that!

I’ll try to be even-handed: the world’s two leading aircraft manufacturers have had well-publicised problems with aircraft delays. Fortunately neither of these have affected Cathay Pacific!

But I can tell you that we have had all sorts of unpublicised problems with delays from suppliers of all kinds over the years. I know that other airlines have too. It’s time the supply market lifted its game, and we need more risk sharing and alignment of interests in this business between the buyers and sellers.

On the economic environment - "no end in sight"

Hand on heart, I can say this is one of the most challenging times we have ever faced – and I know we are not alone. This is a truly global downturn in the industry – unlike anything else we’ve seen in terms of its impact. I’ve been in the business for 30 years and seen many highs and lows, but the past year and a half is as bad as it’s ever been.

Since the financial crisis hit we have been suffering a toxic combination of a collapse in our front end and cargo revenues, extremely weak yields in our Economy cabins and still volatile fuel prices. And don’t forget the swine flu outbreak which stifled demand early in the summer and could well rear its ugly head again later in the year.

Oh, and did I mention direct flights to Taiwan? The fact is that both our passenger and cargo business have been hammered at the same time, and that makes this a downturn like no other - and the worst thing of all is there is still no end in sight.

We keep waiting for signs of the green shoots of recovery. We’re in Asia so I’ll use an appropriate analogy. When we look at the rice-paddy we see only one or two green shoots rising out of the watery mud. Certainly not enough to fill a rice bowl! The very best we can say is that things have stopped getting worse, but a real and sustained business upswing still seems like a distant dream.

On Yield/Premium demand weakness

The truth is that the premium cabins were only full because of people being able to enjoy upgrades and Asia Miles redemptions, while the back end was filled to the brim with people travelling on very cheap fares. Many of these will be passengers connecting over our great hub in Hong Kong. At least our great network has helped keep our flights full despite the weakness of the local market. This is an advantage not enjoyed by many of our rivals. It remains a real challenge to make any money – especially when the price of fuel, our biggest single cost, keeps edging up.

Another important question – being asked more frequently by more and more people – is whether business will ever be the same when the rebound finally arrives. What if the changes we have seen recently – lower premium demand, lower yields for passenger and cargo business – are not just cyclical? What if these changes are actually structural and airlines have to become acclimatised to a “new normal” where things need to be done differently than before. This is a question now being pondered with great seriousness by a lot of airlines around the world, including at Cathay Pacific where we have just set up a full-time team that will look at our business model in light of the economic changes we’ve been experiencing.

On Cathay's business model

One thing I do know is that Cathay Pacific will remain a premium carrier.

High-yield business traffic might not come back in the same way as before but there will still be a place for airlines that differentiate in terms of the level of service they provide. Low-cost carriers have upped the ante around the world and many have done a fantastic job of appealing to a specific segment of traveller. But our belief is that there will continue to be passengers who want something a bit special when they fly. This is especially true in Asia, where many people still expect some pampering and special attention on flights that, on average, are longer than those in Europe or the US.

So we have no doubt the full-service model will stay, but it may need to be tweaked and refined if indeed the business model for airlines such as ours does change. The scary thing is that visibility remains very low and we still have no clear idea what will emerge in the recovery from the financial and economic meltdown of the last yearOne thing we can be sure of is that airlines are going to have to face up to a whole array of challenges in the future – on the business side, in terms of regulatory issues, and in relation to specific issues of global concern such as the environment.

On the environment

Whatever economic challenges our industry faces, the environment and climate change have to remain a priority. Aviation must play a key role in the forthcoming climate change negotiations at Copenhagen and the industry must be treated fairly and in proportion to its 2% contribution to global man-made CO2 emissions.International aviation requires a global solution and the development of a global, sectoral approach is the best way to achieve lasting CO2 emission reductions.

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