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Cathay Pacific plans A350 product and network deployment, premium economy adjustment

The planned Feb-2016 delivery of Cathay Pacific’s first A350 XWB will allow it to fulfill the strategic objectives of having the latest premium product, long-haul growth and fleet efficiency. Cathay’s first new aircraft type in nearly a decade and first new aircraft family in two decades will arrive with a refreshed business class product that will be retrofitted across the long-haul fleet, reflecting how important it is during a more competitive environment  for Cathay to have the latest premium product, even with relatively minor adjustments.

Another response to competition, and fulfilling demand, is long-haul growth that ensures superior network scale. A350-900s will open European destinations while -1000s will do so in North America. The aircraft also bring efficiency, which Cathay is missing as it continues to operate A340s and 747s. The A350s will arrive with an enhanced premium economy seat while the cabin will be scaled back on A330s in Australia, the Middle East and India, evidencing a false-start for a product that has otherwise found success on long-haul and ultra-long-haul flights to Europe and North America.

Cathay’s A350 deliveries start in 2016 with -900 variant

Cathay Pacific expects to receive its first A350-900 in Feb-2016, taking about one aircraft a month. Cathay has firm orders for 22 A350-900s as well as 26 A350-1000s, due to arrive from 2018. Cathay's A350 order is due for delivery by the end of 2020.

Cathay Pacific aircraft delivery plan: 23-May-2014

By the time Cathay receives its first A350, it will have been almost a decade since it introduced a new aircraft type, the 777-300ER in 2007. The -300ER in many ways was already familiar as Cathay was a long-time 777-200/-300 operator. The A350 will be Cathay’s first new aircraft family in nearly two decades, after introducing its first 777 in 1996. Unlike most other major Asian airlines, Cathay skipped the two new aircraft programmes (A380 and 787) since the 777. 

Besides the challenges of managing a new aircraft family, Cathay – and Airbus – have to overcome memories of Cathay’s previous new Airbus introduction, the A340-600, which had various technical challenges. The A340-600 was planned as a short measure to have non-stop flights from Hong Kong to the eastern part of North America. Cathay’s three A340-600s were leased and arrived in 2002 and withdrawn in 2008. 

A350-900 has multiple roles: A340-300 replacement, new European destinations

Unlike the dual configurations Cathay has on its long-haul A330s and 777s, Cathay plans to have its A350-900s in one single long-haul configuration, Cathay GM Product Toby Smith tells CAPA at an Airbus A350 event. The A350-900s will be in a three-class configuration of business class, premium economy and economy.

The A350-900s will serve a similar role to Cathay’s A340-300s, which have been used to reach thinner markets and serve off-peak frequencies to destinations also served by 777-300ERs. Like other Cathay long-haul aircraft, the A350 can be expected to be used on ad hoc regional service that maximises utilisation while delivering a long-haul product on regional services for connecting passengers. 

The A340s also have a three-class business/premium economy/economy configuration, so the A350-900 provides familiarity while also allowing capacity growth over the A340. In recent times A340s have been used on Cathay’s long-haul network to provide the only service of the day to points like Auckland, Johannesburg and thinner European markets such as Amsterdam and Moscow. The A350 becomes a natural replacement for these markets.

Cathay Pacific Fleet Summary hulls: as at 3-Aug-2014

The A340 was also used to provide additional service to large markets that needed more than a daily offering, such as Paris where Cathay would use a four-class 777-300ER (with first class) and A340-300. More recently however Cathay has been withdrawing the A340 from long-haul flights, particularly Europe. The A340 lacks fuel efficiency while still having Cathay’s older and unpopular business class seat. Cathay did not retrofit its new business class seat on the A340 (or 747s) as their imminent retirement did not justify the retrofit cost.

Meanwhile a ramp-up in 777-300ER deliveries has allowed Cathay to withdraw A340s and 747s from long-haul routes. In the case of the A340, replacing it with a 777-300ER brings greater efficiency but in some instances more capacity than Cathay would ideally like to have. The A350-900, smaller than the 777-300ER, will allow Cathay to right-size long-haul markets with fuel-efficient aircraft rather than relying on the larger 777-300ER.

Cathay at the end of 2013 had 11 A340-300s (down from a peak of 15), meaning the 22 A350-900s cover A340 replacement, route shift from 777-300ERs to A350s and ultimately new long-haul growth. Secondary European markets are most likely for the A350-900, Mr Smith says.

After a wave of expansion in North America, Cathay is growing in Europe, bringing its passenger European network from seven points to nine as it launches a Manchester service in Dec-2014 and Zurich in May-2015. Long-haul growth has lagged as Cathay accelerated retirement of 747s, requiring new aircraft to replace older ones rather than open new services.

See related report: Cathay Pacific launches Manchester, continuing long-haul re-balance and clawing back at Emirates

Cathay is relatively small in Europe – Singapore Airlines serves 14 points and Air China 16, for example – and long-haul growth will further shift the focus away from under-performing short-haul traffic. This will also strengthen Cathay’s European network as it amasses scale that will make its overall position more favourable as competition from Chinese and Gulf airlines increases, both in Hong Kong and around the region.

While Cathay cannot match Emirates’ 34 European destinations, a larger network (and a growing partnership with Qatar Airways) makes for a more attractive position.

See related report: Cathay Pacific and Singapore Airlines cautiously welcome new hubs as Qatar & Turkish enter the fray

The question for Europe – as it has been in North America – is what share of growth will be driven by genuine opportunity as opposed to wanting to pre-empt other carriers (Gulf, mainland Chinese or Hong Kong Airlines). Amassing a size and early position, even if larger than presently ideal, makes it difficult for competitors to gain traction later on. This is a typical example of Cathay being willing (and having limited shares on the public register) to bear short-term pain to achieve a potential long-term objective.

Hong Kong Airlines has 15 A350 XWBs (all -900s) on order with intents to use them for long-haul flights. Its A350s are due for delivery from 2018, two years after Cathay receives its first A350.

Hong Kong Airlines Fleet Summary hulls: as at 3-Aug-2014

Cathay’s A350-900 business class will be retrofitted on A330s and 777s

Cathay plans to introduce on the A350 an upgraded version (exact details are still not public) of its existing Cirrus business class seat, which launched in Mar-2011. A new aircraft naturally allows an airline to make product changes, but the importance of having a leading product is reflected in Cathay planning to retrofit the changes of the A350 business class seat onto its A330 and 777 long-haul aircraft.

Many other carriers would not see the value of retrofitting minor changes; Mr Smith describes the seat as an “evolution” rather than “revolution”, understandable given how quickly business class seats have improved with little step changes available in the current produce life cycle. But Cathay’s decision reinforces its outlook as a premium carrier that seeks continuously to offer a leading product. Falling behind is an invitation for a competitor to advance, and there are many budding contenders.

Much of Cathay’s success in the past has arguably been due to the shortcomings of other airlines but North Asia is becoming more competitive. China Eastern for example on its forthcoming 777-300ERs will have a similar version of Cathay’s business class seat, narrowing the gap between the two. EVA Air already has the Cirrus seat and fellow Taiwanese carrier China Airlines will also have it, but their short-term competitive stance is limited as they are unable to carry connecting traffic out of mainland China.

See related report: China Eastern Airlines seeks to revitalise its position with 777 long-haul growth and new brand

Cathay’s decision also reflects its philosophy of a consistent premium product offering creating loyalty and a solid reputation. It is a cost to bear for a reward that cannot be quantified but Cathay feels is right. On a minor level this approach is in contrast to Singapore Airlines’ Jul-2013 unveiling of its own refreshed business class on 777-300ERs, which it originally did not plan to retrofit onto other 777-300ERs but now does plan to do so (but not across its entire long-haul fleet). But SIA, like Cathay, has some of the best premium products.

By the time the A350 arrives and other Cathay aircraft start to see the updated product, Cathay’s business seat will be about five years old and on some aircraft will have been in use for a significantly shorter period of time. In comparison SIA is updating its business class seats after a longer in-service period. Cathay is potentially advantaged by having sister MRO companies in Hong Kong (HAECO) and Xiamen (TAECO) that can offer lower-cost retrofits than other airlines could potentially achieve. 

The comparison in consistency is even more stark to other airlines in Asia, the Gulf and beyond, that may have a different product and resulting experience depending on the aircraft. Mixtures of configurations can frustrate passengers as they deal with the difference or go to lengths to avoid certain aircraft. This ultimately can create uncertainty over an airline’s reputation, a potential outcome that Cathay does not believe can exist in the contest to be one of the best airlines and attract a premium for being so. 

Superior premium economy seat to be introduced on A350

The A350 will carry an entirely new premium economy. Cathay introduced premium economy in Mar-2012 but plans for the A350 premium economy seat to be more premium. The exact seat has not been disclosed but Mr Smith pointed to improvements like foot rests, which are not on every premium economy seat at present, and greater seat pitch.

Cathay was able to negotiate with Airbus to use a buyer-furnished premium economy seat on the A350 rather than one of Airbus’ catalogue seats. Cathay is using a catalogue seat for economy. (Airbus does not offer catalogue seats for premium classes.) 

One view is that an improved business class product creates room for Cathay to improve premium economy without risk of cannibalisation. Alternatively, some premium economy features on the A350 may reflect what Cathay missed on its first iteration and not what it feels it must hold back. Cathay has introduced premium economy by taking out economy, not business class, seats. 

Cathay is not inclined to retrofit the premium economy seat onto existing aircraft, Mr Smith says. This reflects the difference in Cathay’s premium products versus economy products (premium economy is grouped with economy while business and first are premium cabins) as well as the niche premium economy exits in. Only a handful of carriers in Asia offer premium economy, and the exact product varies from a regular economy seat with more legroom to a clearly defined product like Cathay’s.

Wider adoption of premium economy and moves towards more developed (and less basic) premium economy seats could see updates become more important. For now Cathay rests on comfortable territory in premium economy whereas in the business class segment competition is increasing and Cathay shares space at the top with more airlines than ever before.

A330 premium economy is to be scaled back

Separately to Cathay’s A350 plans, premium economy on the A330 will be adjusted. Cathay initially offered premium economy on all of its long-haul A330s but is retrofitting the fleet into two groups. The first will have one row of seven premium economy seats replaced with 16 economy seats.

One aircraft has already been retrofitted, with the rest to be completed in approximately a year, according to Mr Smith. 

Cathay Pacific long-haul A330-300 configurations: 2012-2015

 Aircraft Type

Business

Premium Economy

Economy

A330-300 (Present)

39

28

175

A330-300 – being rolled out

39

21

191

A330-300 – rolled out from 2015

39

0

TBA

These A330s will be dedicated to the Australian market where Mr Smith says Cathay is experiencing strong economy class demand. Cathay has previously found Australia to be at the edge of premium economy’s attraction window, with the cabin doing best on long-haul services. Singapore Airlines plans to introduce premium economy on A380s and 777-300ERs and not intra-regional aircraft. (Regional cities will have SIA premium economy service depending on A380 and 777 deployment.) Qantas offers premium economy on its A380s and 747-400s that fly to destinations over 12 hours away and has not found demand for Australia-Asia services.

Mr Smith also noted the Australian bilateral constraints on Cathay that limit further growth. “We only have four flights a day to Sydney,” he notes (competitors may consider this already high). Cathay has reached the maximum allocation of 70 weekly flights Hong Kong carriers can have from Australia to Brisbane, Melbourne, Sydney and Perth. Smaller airports like Adelaide and Cairns, which Cathay serves, are excluded from the restrictions. Australia and Hong Kong have been negotiating a new bilateral for over three years but without an agreeable outcome. 

Cathay currently (w/b 4-Aug-2014; OAG) operates more seats into Australia/NZ than it does into the entire European market, and 80% of the level of its US capacity, an indication of how important these routes are for it. Only Taiwan and Japan country markets exceed these levels for Cathay.

Australian carriers will never have as much demand for Hong Kong since Hong Kong is an end destination whereas for Cathay Hong Kong is its hub it can pool traffic from around the world and send onwards to Australia. Qantas is the only Australian carrier serving Hong Kong and in Aug-2014 has only 20 weekly flights. In comparison Cathay has 74 weekly flights, including those not limited by the bilateral. As Australia does not need additional traffic rights it has sought beyond rights - which Hong Kong has been reluctant to dispense.

With the application for Jetstar Hong Kong, partially owned by Australia’s Jetstar Group, currently stalled in light of staunch opposition by Cathay, there could be a fear (although not publicly voiced by Cathay) that an ultimately unsuccessful Jetstar Hong Kong application could allow Australia indirectly to retaliate against Hong Kong by not granting more traffic rights. As a large portion of Cathay’s traffic is transfer and not from Hong Kong, Australia could still potentially reap the tourism benefits Cathay (or Hong Kong Airlines) might bring by instead granting additional rights to Gulf or mainland Chinese airlines. 

In the absence of frequency growth, Cathay can grow revenue by changing configuration or aircraft type. Both are on the agenda, although so far the premium economy reduction will be the main driver. Cathay from Feb-2015 is planning for one of its four daily Sydney flights to be operated by a three-class 777-300ER that will seat 149 more than its new A330 configuration. (Prior to Feb-2015 the 777 service will be less than daily.)

Additional seats will allow Cathay to offset the decrease it experienced in the Australian market beginning in 2012 as it started to retrofit a new business class seat and later premium economy seats, which took up more room than the seats they replaced. Cathay's capacity in 2013 was 6% below 2011 levels even though frequency increased, according to BITRE (the frequency figures include limited cargo services).

Cathay Pacific annual seat capacity and frequency to/from Australia: 2009-2013

The second batch of A330-300s, to commence re-configuration in 2015, will have premium economy entirely removed and replaced with economy class seats. These aircraft will be used to the Middle East and India where Cathay has not achieved sufficient premium economy demand, according to Mr Smith.

Cathay used to serve the Middle East and India with regionally-configured aircraft but switched to those with a lie-flat business class seat. It appears, but is not confirmed, premium economy went along with the new business class seat.

For Cathay, the Middle East is an end market (not a transit market as it is for Gulf carriers) with low-end demand coming from migrant workers, mainly from the Philippines. Wealth in the region is such that those who can afford premium economy could also likely afford business class. Removal of premium economy from the Middle East will bring Cathay’s Doha flight into alignment with partner Qatar Airways, which does not offer premium economy.

See related report: Cathay Pacific consolidates Middle East network as competition grows in local and source markets

This is a costly exercise and not the first product miscalculation Cathay has made, although it is a smaller and less expensive one. Cathay’s previous business class seat was unpopular, earning the nickname “the coffin”, while economy seats that “reclined” by having a moving seat back in a fixed-shell seat were equally unpopular on long-haul flights. Cathay began installing new long-haul economy seats in Mar-2012.

A350-900 is to be a three-class product without first class. The -1000 definition awaits

Cathay is now working towards locking down an initial configuration of its A350-1000 for later in 2014. Mr Smith says Cathay is still evaluating a number of layouts and whether to introduce first class or not has not been decided. Mr Smith favours the A350-1000 fleet all having the same configuration.

The extra range of the A350-1000 will allow Cathay to open secondary North American cities. That could preclude a need for first class. The A350-1000 could also supplement 777-300ERs to destinations that see multiple services a day, potentially creating a 777-300ER/A350-1000 combination in North America to match a likely 777-300ER/A350-900 combination in Europe. Alternatively the A350-1000 may have grounds for first class. Cathay's current first class seat debuted in 2007 and was slightly updated in Jul-2013.

First class globally has been changing, with Gulf carriers setting new standards while others withdraw the product or keep it as an aspirational product (to paraphrase Lufthansa). Mr Smith says Cathay’s deployment of first class is holistic – corporate, strategy, financial – and that “it's not a marketing exercise for Cathay Pacific”, a dig at some of its competition.

See related report: Etihad Residence highlights the UAE airline ascension in first class travel, while others cut back

Outlook: Geography continues to be on Cathay’s side but competition is working against it

Cathay Pacific and Singapore Airlines are the region’s, and among the world’s, premium bastions. The two long ago diverged as competitors but their upholding of a premium-focused strategy makes reflection worthwhile.

Both are undertaking incremental long-haul upgrades while also boosting the product of their short-haul subsidiaries.

See related reports:

Yet their financial outcomes are markedly different. This is due to a number of reasons, including more vibrant competition in Southeast Asia while Cathay benefits from geography that makes non-stop North American services viable while limiting the advantage of Gulf carriers to Europe. But now the competition SIA experienced in Southeast Asia is being replicated in North Asia.

Cathay’s premium strategy is understandably market-based, but so too is SIA’s. The question is if Cathay has enough advantages over SIA that its approach in the long-term can stand up to competition and be sufficiently rewarded. Heavy reliance on a premium strategy comes at a cost that passengers (and their corporate travel managers) may be willing to overlook as they decide between a more costly excellent product and a cheaper very good one. Perfection risks becoming the enemy of the good.

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