Cathay Pacific CEO Update – The Transformation Of The Business, Its Four Pillar Strategy, Data, New Aircraft And Building A Balanced Network

Transcript

Rupert HoggWe announced last year in January that we were going to have to transform the business. And a couple of backdrops to that really. One was obviously the financial results, but the financial results themselves were a manifestation principally of more competition. So although the markets are growing very fast in our area, there's lots of demand, capacity has been growing more than that. So over a three-year period, we've had negative revenue growth. So clearly that's a situation that can't continue. And then of course we've had some issues with fuel hedging. It's had a big P&L impact for the last three years. But the bigger issue really is competition and declining revenue.

Well, I would say we're nearly halfway through the [00:00:51], and of course, there's not one silver bullet. There's a whole range of things that we need to do. We have, I think, 700 initiatives at the moment in different stages of development and execution. But last year was principally about reorganizing ourselves, [inaudible 00:01:07] ourselves down, clear accountabilities on the one hand. That's the organization. And on the other hand, we did a lot of work to make data more accessible to us, if you like. So I call it the data infrastructure. We're not starting to ask the right questions and have data available to us so that we can get better answers, make more informed decisions going forward. So that's the sort of nuts and bolts, if you like, of the transformation. There's many, many aspects to it.

And there are four pillars to our strategy. One is by putting the customer at the center of everything we do, but doing that based on really good insight, a better understanding of our customers than ever before. The next is about operational excellence, getting great utilization out of our assets. The third is all-around productivity, really productivity and value management, we call it. Number four is about high-performance teams. So those are the four big streams. And to date, we're making some progress against each of those fronts. I'm not going to give any predictions as to how that's going to manifest itself in numbers, but I'm pleased generally with progress. It's a long way to go. We're not finished yet.

In the second half of the transformation process, we're going to concentrate much more on how we actually do the work that we do, in other words, change the way we work, and technology and digital and big data's got a big part to play in that as well.

Yeah, I should talk a little bit about our growth strategy, because it's significant and profound. So in the last two years, notwithstanding the backdrop that I was talking to you about, we've taken 22 new aircraft, A350-900s. Fantastic addition to our long-haul fleet. And if you go forward until the third runway, which is a seminal moment for us, in Hong Kong 2025 comes into operation, we've got another 78. So it's roughly a new aircraft a month for the next four years. So that gives us a huge ability to grow and to grow long haul. And the types of aircraft we've got allow us to open new points that we haven't before. So this year, we're opening five long-haul ports. In the last 10 years, I think we've done 10. So you can see the rate of growth. Three in Europe: Dublin, Copenhagen, and Brussels. Washington D.C., we start in September of this year. Very important destination for us. And to your point about seasonal destinations, last southern hemisphere summer, we introduced a service to Christchurch for three months. Very successful. And we're doing the same this year to Cape Town. So a lot going on in terms of long-haul growth.

And in the region, we're opening four new destinations. Two in China, Nanning and Jinan. Done those already. And in the second half of the year, we'll put services into Medan and Davao.

As I said before, you can see the growth in the major markets that we serve, so consider where we are, Hong Kong. It's the further south you can come in Asia and serve both coasts of the U.S. nonstop, so that's a really unique position to be in. It's a massive gateway, not just to China, but to the greater bay area, which is much talked about now. And of course, it's the largest international hub in Asia and the third largest in the world. Our growth objectives are really to service that major Chinese market but also the markets in north and southeast Asia and link them to the rest of the world. I think next year, in fact, this year, they're predicting 137 million Chinese trips overseas internationally. So you can see the size of the market. And it's all about building a balance network and joining points particularly to Hong Kong that have never been joined before, and so increase the power of that hub.

There are various reasons why we have a modern fleet. Obviously, to grow that network. Our long-haul fleet, which is nearly 100 aircraft, average age of our long-haul fleet now is 5.6 years, so that's a very young, super efficient platform, if you like, from which to build a great hub product inside the aircraft. We've introduced new business-class seats in our A350s, new premium economy in our A350s, and actually new economy seats as well. So we'll keep doing that every time we have a new model coming along, so that we're offering the very best platform. But then it's the service style that's the differential too really, and I think that's always been a great strength of Cathay Pacific. And data will allow us to get better customer information and therefore to do that in a more effective way in the future than even we have in the past.

Well, we have changed our hedging strategy. But the key point to remember with respect to us is that we will always hedge as a risk mitigation strategy in terms of volatility and rising fuel prices. So our current strategy is that we will hedge no more than a tenor of two years and no more than 50% exposure. But that does, of course, give us some protection against very rapid rises in the price of fuel.

I think the low-cost model is part of a bigger conversation, whether it's still a binary choice of full-service carriers versus low-cost or not, or whether it's actually a bit more of a nuanced range of carrier models I think is up for debate. There's no doubt that there is a [inaudible 00:06:47] the market, and that drives volume with low prices. And in that sense, I think it's an interesting model and not one that we would ever necessarily say no to. The model, as it's being developed ... I'm talking about low-cost carriers, not ultra long-haul low-cost carriers at the moment ... has required very rapid growth. Our home-based airport is full at the moment, or largely full, and so it's not a perfect place to develop a model from scratch. But we watch with great interest other carriers look at different structures, if you like, to accommodate this kind of new business model. And it's not that new, actually. And we'll never say never to anything.

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