Cathay Pacific CEO Q&A

Transcript

Peter Harbison:We don't need to talk about Cathay Pacific because everybody knows it pretty well, and especially in Australia, we see a lot of you. But I would like to talk a bit about the Australian market too. Let's, let's start with where you like to start, I think, with your transformation program.

Rupert Hogg:Yeah.

Peter Harbison:you've been really carrying since you became CEO. One of the things that I find really interesting about your transformation programme is that, whereas in almost every other case where an airline is reshaping itself and trying to basically compete with low-cost carriers in one form or another, that seems to be more or less what it's about, the focus is really on cost, reducing cost. In your case, it seems to be the other end of the ledger, the other side of the ledger, in terms of enhancing revenue, going after premium traffic. Is that an accurate assessment of where you're at?

Rupert Hogg:No, not really, but I can give you a more accurate assessment. So we started this transformation program a little over a year ago, and the driver behind the program And the need for change, if you like, was the extent of the growth in competition in the areas that we compete. And although the markets are growing very fast, that was manifesting itself in huge amounts of new capacity growing faster than the markets. So in eventuality, that meant that particularly on the passenger side, we had 2 years of negative—

Peter Harbison:—growth.

Rupert Hogg:revenue growth. And actually subsequent to that, you've seen the results for last year, 3 years in a row. So the revenue component, very, very important for that reason. But we also took the opportunity to look at the way we were structured, look at the way we made decisions, make sure that we were really clear about what the correct accountabilities were and who was accountable for what. And acknowledging not just that the market was changing in terms of competition, but customer needs were changing. So we reorganized ourselves. We took the opportunity to slim down in Hong Kong. We're reorganizing ourselves in the regions as we speak as well. And that's—

Peter Harbison:Sorry, what do you mean slimming down in Hong Kong? What did that entail?

Rupert Hogg:In Hong Kong, we did literally slim the organization. So we shrank in head office by 600 people in the management levels predominantly.

Peter Harbison:Out of what sort of management?

Rupert Hogg:Out of the— it wasn't all management because we run a big hub airport from Hong Kong as well, but from a base of about 3,300.

Peter Harbison:Yeah, okay, that's a pretty big cull.

Rupert Hogg:So that's, that's the first point I'd make. Now clearly, Going forward, every airline— this is a very thin margin business, as we all know— every airline has to have a competitive cost base. And so we have 3 sort of big components, because notwithstanding all that, we also intend to grow and we see big opportunity, and we'll talk about that. So the first big component, if you like, of our transformation program is about new sources of revenue. new markets and how we generate revenue and the different portfolios by which we might do that. The second is really understanding our customer. We've always had a very strong service-orientated culture in Cathay Pacific, but it's about really understanding our customer, getting that from deep insight, which has a big data implication in it, in itself, and then investing intelligently as we go forward. And the third is all around productivity and value management. And that's about how do we run this business. So we've done the first bit around reorganization.

Peter Harbison:Mm-hmm.

Rupert Hogg:Not only did we reorganize ourselves, as I talked about, but we spent quite a lot of time building what I call a data infrastructure, if you like, in order to be able to get real insight, not just on the customers, but on our operations and what makes our operations tick. And we're now into the second phase of the transformation, and that is looking at the way we run our business from end to end, the processes or the work streams, if you like, and also seeing where we can apply some of these new technologies that can make such a difference to productivity.

Peter Harbison:Okay, but I mean, you still do have a very high cost base, don't you, relative to your peers? And you don't have the group structure where you can segment the market to a lower-cost carrier.

Rupert Hogg:Yes, I think if you On the issue of low-cost carriers, I made the point at IATA, and it's worthy of debate, I think, that it's somewhat of a binary false choice these days, I think, to talk about premium carriers and low-cost carriers, and people do use the terminology of hybridization and the two coming together. So the first point I would make is that we compete against 100 airlines in Hong Kong. There are 100 airlines flying into Hong Kong. Everyone here has seen that the nexus of aviation is moving towards Asia, and indeed, of the 20 biggest city pair, international city pair combinations, 6 of them touch Hong Kong. A lot of them are in Asia, and on some of those routes, in fact, I think on the average of those 6, there have been sort of 5 and 7, and one of them has got 11 players. So there's a lot of competition. And we have to be able to compete, and we do, with every proposition, every model that's flying against us. That's the sort of first point. The second point, if you take the low-cost carrier model in its purest form, a sort of Ryanair form, I think there are some things in Asia that are slightly different, if you like, Peter. There are huge amounts of traffic, but they're Very concentrated on these big city pairs. There aren't a lot of secondary destinations. There are very few carriers that are operating on any uncontested city pairs, which is a different phenomenon to Europe again. The sector lengths are much longer.

Peter Harbison:I suspect that'll come though. I mean, we are— it's still pretty early days in this region, isn't it? And there are international routes, which does constrain your network capability.

Rupert Hogg:It's early days in some respects, but Singapore's got 40% low-cost carrier penetration, and it may just be that there aren't a number of secondary airports in the first place that we see in Europe and other places, and the sector lengths are longer. The other point I would make is that a lot of the capacity on those regional sectors is wide-bodied. So in Europe and other markets, and I'm generalizing to make a point, it's often single aircraft model competing against single aircraft model, and they're both single aisle.

Peter Harbison:Yeah.

Rupert Hogg:So it's not quite the same comparator. Final point, if you take that model, rapid growth, try and fail fast with new destinations, there's been a sort of signature of that model and how it's developed, and I suspect that's less possible But, as I said at IATA, we watch that model with interest. We're in no means arrogant or complacent with respect to it, but if we did want to grow and try and fail fast, our airport's pretty full at the moment.

Peter Harbison:All right, I'll let you off the hook on costs for now.

Rupert Hogg:What do you think?

Peter Harbison:Well, you're certainly right on that last point, and that's given you a great advantage in terms of your strategy. You haven't really had to compete with low-cost carriers. Because there ain't space for them. But let's move on from that. I mean, I know what you're saying. At the other end, the other side of the ledger though, I mean, you are, and this is a very positive feature, you are very capable of attracting premium traffic. You've got a great end-to-end, a great point-to-point market with the Hong Kong financial market and so forth.

Rupert Hogg:Yeah.

Peter Harbison:Elsewhere in the world, we're seeing, supposedly anyway, the erosion of of premium traffic. Do you believe, and are you— well, first of all, are you seeing, and do you believe in the future that the premium market will continue to hold up in the markets that you serve anyway?

Rupert Hogg:I do, actually. If I can step back and talk about the markets that we serve, because I think this is an important point. I mean, Hong Kong is a very large international hub. It's the largest one in Asia, it's the 3rd largest in the world. And if you look at the Hong Kong economy, and I talked about it before, you know, finance has always been a really important component, and we wouldn't be flying 5 times a day to New York or 6 times a day to London if we didn't have a lot of corporate travel giving us that yield mix, and that really hasn't changed and hasn't abated. Now, we're also joining tech hubs to Hong Kong, because not just Hong Kong itself, but if you go over into the Greater Bay Area, these 9 cities, that is moving rapidly up the value chain. There's a big focus on technology and where that's going. And so there's lots of travel coming backwards and forwards, and that's part of the logic behind being online to Tel Aviv and part of the logic behind being on—

Peter Harbison:Singapore.

Rupert Hogg:line to Dublin. When I come back to premium and corporate travel, there's an awful lot of economic activity going on, and an awful lot of people that want to travel in the front end, and in business class and premium economy in particular. So that we see as a growing market, and we don't really see any indications as to why people would stop doing that. You have to be price competitive, and you have to differentiate yourself in a way that makes you carrier of choice, and hopefully people will pay a bit of a premium to their other alternatives. But no, I think that demand is going to remain.

Peter Harbison:Let's— yeah, I must say I'm inclined to agree, particularly in your market, your markets. Talk a bit about premium economy, and that really is a fascinating aspect of where we're at at the moment. It's Filling the gap between economy, very, very cheap economy, and sort of 5 times the price in business class. What percentage of your fleet is equipped with premium economy seating at the moment?

Rupert Hogg:Well, basically all of our long-haul.

Peter Harbison:Really?

Rupert Hogg:Yeah. That was quick. All of our long-haul. Yeah. Well, we— I can't remember when we started, but yeah, anyway, that's the net result.

Peter Harbison:Is it a standard product across the aircraft?

Rupert Hogg:Yes. Well, actually, the A350s come with a new premium economy seat, but the same features in terms of pitch, etc.

Peter Harbison:Right. How much, how many of your, sort of what percentage of your fleet actually has first class now?

Rupert Hogg:Well, we have 190-something aircraft, and 26 have first class.

Peter Harbison:Yeah. And compared with, say, 5 years ago, how would that have been?

Rupert Hogg:I couldn't tell you, I couldn't tell you the absolute numbers, but first class, I mean, the market's becoming quite clear for us. where the demand for first class is. So those East Coast and some of the West Coast destinations in North America, London, Frankfurt, Paris, these are the sort of markets, Milan, where we can see a continuous first class demand. We used to have it on all of our 747s, from memory, our long-haul 747s, and we used to serve Australia and other places. But as business class, has improved so markedly really, the demand for first class has become more specialised and more focused.

Peter Harbison:I mean, having seen these cycles over the last 40 or 50 years, I mean, what is business class? What is first class? Business class today is 20 times better than first class was 20 years ago. It's a joke, isn't it really? So, I mean, to some extent that discussion is academic because business class is first class now in a lot of ways. You don't get quite the same treatment. And so you just have an elite travelling first class, really. Sure, sure.

Rupert Hogg:But there is still a market for first class, as many of the carriers that I know.

Peter Harbison:Yeah. But fairly selectively by route?

Rupert Hogg:Yes, I think so.

Peter Harbison:Is that the London route mostly for you?

Rupert Hogg:No, as I say, the points I mentioned all have first class. I mean, we have 5 flights a day to New York. at least 3 of them have got first class on a daily basis. London, I think, is 3 or 4 out of the 5 have first class. So there is demand. The demand is partly corporate, partly private individuals. There's a lot of wealth being generated in some of the markets that we serve, and people want to travel in that sort of exclusivity and not be disturbed. And of course, there is always an upgrade or a reward for frequent flyers element to first class.

Peter Harbison:Yeah. So, I mean, talking about the corporate travel market, a lot of premium economy is targeted at that, presumably. Correct?

Rupert Hogg:We, and it may be different for other airlines, we haven't seen trading down to premium economy in our markets. We see a lot of SMEs, small-sized businesses, using premium economy. And differentiating that way. We see a lot of what you might call the silver-haired market, people who want to travel in a bit more comfort, but don't want to pay for flatbed business class. And the other thing we see, we do quite a lot of long-haul to long-haul connections. So the elapsed time in combination is very long, and so people are prepared to trade up for that reason as well. So it's been a very good, very good product for us.

Peter Harbison:It's interesting you say for the corporates trading down from business class. I think a lot of corporates Yeah. And these road warriors are having to travel in economy class anything under 8 hours these days.

Rupert Hogg:Yeah, no, I was referring to just looking at people that travel in business class. You introduce premium economy, do you see them trading down or do you see other people trading up? And it's the latter.

Peter Harbison:It's a really difficult product issue, isn't it, to get that right? I mean, I think I think Qantas have got it right with their premium economy, so you don't get the trading down. I think Singapore probably have got their premium economy too good that it is more attractive to trade down. What are the ingredients that go into it from your point of view? You seem to have it pretty much right.

Rupert Hogg:Yeah, I think we have got it right. We made a conscious decision when we launched this product to really make it different in a physical sense, in terms of pitch, and the product, and the service that you get relative to economy, and particularly super economies, which at that time, I think it may have changed in the American market, was essentially a few seats up the front of the aircraft with a bit of extra pitch. We looked at Qantas, we learned a lot from Qantas, very good premium economy product, and we said we want to be in the top quadrant of premium economy in terms of how it's perceived and what the product features are. And that's what we did, and it's worked for us. The other interesting thing about premium economy is that we do best in markets where it's a very well-known product. So others have marketed the concept, done it well, and we found that actually a much easier market to penetrate.

Peter Harbison:Okay. The general tendency is to think of Cathay as a Chinese transfer carrier, and obviously, because the Chinese carriers themselves are becoming much more effective, therefore that's hurting Cathay. You yourself mentioned before in the other panel about your services to Southeast Asia. You're almost the carrier of choice between Southeast Asia and North America, aren't you, these days? Well, I mean, Singapore is coming in with its non-stops, but—

Rupert Hogg:I sort of make this point, and it's, it's true, and it's— we're lucky Hong Kong is really well situated geographically. So with current technology aircraft, we can do non-stop to both coasts of North America, we can do all of Europe non-stop, and of course, if you think of a funnel, we can funnel people down to Southwest Pacific and Southeast Asia. We've always wanted to keep a balanced network, so we try and grow roughly equally all of those markets. And we have the opportunity presented by China. Sometimes if you talk about China and the sheer scale of China, you also ignore the economic development that's going on elsewhere in North and Southeast Asia. And we're well suited to service those markets as well. But just talking about China, I mean, I've mentioned this before, you know, 150 million international travel sectors this year is the prediction. So that's a very, very high number. Last year, 135 million. Talking to your tourist board yesterday, 1.3 billion. That's a lot of people. million people came down yesterday and it is— last year, sorry. And it's probably worth noting in the context of what Willie was saying about China that China is not just one homogeneous market as we all know. If you look at millennials, people born in the '80s and '90s in China, there are 400 million millennials by that criteria. And they make up 60% of the overseas market. And the market's changing really very fast, particularly in the big urban centers of Beijing, Shanghai, Tier 1, Tier 2 cities. And the nature of travel is changing fast as well. So, move very rapidly from group travel to individual travel, people looking for experiences and things like that. So I think the opportunity is both big in volume and big in scale. I was also interested to hear that actually of inbound Chinese visitors to Australia, 80% now are individual travellers.

Peter Harbison:Mm-hm.

Rupert Hogg:So you can see the structure's changing very fast. So that's clearly a big opportunity, and it's a big opportunity for us. We have a carrier, Cathay Dragon and Cathay Pacific, and between us we fly to 23 points in China. 400 services a week, and so we're well placed to service that market. The other thing I would say about Hong Kong is that the Greater Bay Area and the development of the Greater Bay Area, the 9 cities in the southern Pearl River Delta part of Guangdong, is a huge opportunity too. So 70 million people in aggregate, GDP beyond the that of the Bay Area of San Francisco. And so you can see Hong Kong and Hong Kong Airport rapidly developing to help service that demand as well. So Hong Kong Airport is becoming a multimodal airport quite quickly. There are ferries going to Macau and ferries going up the Pearl River Delta. We can put airline code on those. We have upstream check-in. We have a— check our ferry here, you check in. And 2.6 million people are going through that airport on ferries seamlessly at the moment. And we've got the bridge to Macau opening up the western area, and of course the high-speed rail. So there is a real opportunity, I think, to offer our services to more people living there as well. So we're lucky where we sit.

Peter Harbison:You, you certainly are. You always have been. Comparison of yields on China to US compared with Southeast Asia to US, which is better?

Rupert Hogg:China to US versus Southeast Asia. Well, actually, our pricing is fairly dynamic, as you can imagine, Peter. So you have the prices in the market, and then inventory management will determine what you take. But again, you really can't generalize about business in China.

Peter Harbison:If you were allocating capacity, which is your first choice, though? Is it on to China or Southeast Asia?

Rupert Hogg:Well, it's all done in an automated way on an optimized OBE. But in all seriousness, I mean, we've grown our services to the US really quite fast. We grow the regional networks in balance, and our sales are growing in both areas, but China clearly is growing a bit more.

Peter Harbison:Couple of quickies, because we're well over time. Sorry, this was too short, but just a quick one. Australia-Hong Kong. Traffic rights you're sharing now with Air Hong Kong. Do you see any likelihood of lifting the cap on capacity?

Rupert Hogg:Well, that's sort of government to government. I'll tell you what we're doing.

Peter Harbison:You have a bit of, bit of say in it though.

Rupert Hogg:But you're, you know, I mean, some of the airports are full. We know Sydney is full. Yeah. And so the strategy that we're adopting in order to, you know, bring more people to Australia and service the Australian market is really to up-gauge So now in Sydney we're 3 777 flights a day, whereas only a few years ago, or 2 years ago I would guess, we would have been 3 or 4, uh, 330s. So one's got 250 seats, the other's got 340 seats. So you can see we can up-gauge capacity. Uh, we've grown, as you know, Adelaide and services to Perth. We're 19 a week to Perth now. So yeah, we'll continue to, to grow Australia in that manner.

Peter Harbison:You see any lifting of the cap?

Rupert Hogg:How important is it to you? On the Australian side, I think they're still not using their allocation, actually, of services.

Peter Harbison:And then, last question, and again, you shouldn't be asking this thing quickly, but it— because it's much more complex, but you remember at OneWorld, very close relations with BA, not so close with Qantas. and others, and you're also part ownership by Air China Star Carrier. We talk about promiscuity. Which one's your wife and which one's your mistress?

Rupert Hogg:Yeah, it's a good question. First of all, on Oneworld, actually we do have good relationships with Qantas. I've known Alan now for a bit of time and get on well, and I think it is important for people to get on well. And the CEOs at Oneworld all get on very well. Second point, on Oneworld, we completely acknowledge that what we created 20 years ago was a really valuable customer proposition, and it was for your most frequent and valuable customers to know that when they went beyond the extremes of your network, they could go on to another network, access to lounge, earn and burn, etc., etc. That's a proposition that I think we all agree we wouldn't want to lose, right? Then we accept that the markets that we serve have completely changed. I mean, look at the China market we're talking about now versus 20 years ago. So if the markets change and new carriers come in, then there will need to be new types of alliances, and Qantas Emirates is a very good example of that. Air China has 30% in Cathay Pacific. We have 20% of Air China, or a little less at the moment. We've known each other for a long time. It's a, it's a productive relationship. They are long-term shareholders with a long-term view. They understand aviation. We do a lot, you know, we talk a lot together and share views. And of course, the China market and the way people buy and the way they're attracted to travel is completely different. And we all know about the WeChat and the phenomena and the cashless society. And Air China can help us a lot, just telling us how that works. And so we learn a lot from them. Very close. It's a good relationship.

Peter Harbison:So you can coexist quite, quite easily, is the point?

Rupert Hogg:Yes.

Peter Harbison:Across the 2 platforms.

Rupert Hogg:And I think, I think all the alliances show some evidence of that.

Peter Harbison:Yeah, yeah, increasingly. Rupert, thanks very much. We really appreciate you joining us and having a chat. Thank you. Thank you.

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