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Cathay Pacific: Celebrate Our Differences

Responding to the diversity of customer requirements is the key to success, says John Slosar, Chief Executive of Cathay Pacific Airways.

February 2013 issue cover

How is 2013 shaping up for Cathay Pacific?

The world economy needs to get back on its feet before we see a real return to prosperity.

2010 was a fabulous year for us marked by moderate fuel prices, strong cargo demand, good premium traffic, and high load factors in economy class. But since then the global economy has been weak, cargo has faltered, and fuel prices have increased.

It makes 2013 hard to judge. The crystal ball has clouded up because the market has been so volatile.

China has been a source of strength in the difficult environment we’ve faced in the last couple of years but even their export markets have been hit by the weakness in Europe and the United States. We have increased flights into China through Dragonair, however, and this includes new destinations.

The fact that growth in China has slowed isn’t a concern. It was a mathematical certainty. You can’t keep growing at an extraordinary rate. It had to slow down a bit at some point and they will still achieve 7% to 8% growth in 2013, which isn’t bad. It will be domestic growth not export-led growth so we won’t get so much cargo but we’ll do well with passenger traffic.

There has been a lot of debate about Hong Kong’s third runway. How important is infrastructure development to Cathay Pacific’s growth?

Hong Kong is effectively an island city. It acts as a regional headquarters for many businesses, almost all of which deal on a global basis. Whichever way you look at it, connectivity is crucial to this city. The two runway configuration will reach saturation point some time this decade depending on the growth rate. And so if we are to keep global connectivity then we need additional infrastructure at the airport. A third runway will be essential.

The Airport Authority fully understands this and so does the government. Perhaps most importantly, a survey has  revealed that even the residents of Hong Kong understands the need for new infrastructure.

London Heathrow has the same challenges but the authorities there have reached a different decision.

The difference is that people here understand that connectivity is part of the lifeblood of the city. The airport has enough capacity for now but further down the line we need a new runway to provide Hong Kong residents with the connectivity they require.

Can Air Traffic Management move in parallel with developments at the airport?

A huge amount of work is being done to improve airspace capacity. And IATA and ICAO have been playing an important role. The Air Traffic Management Bureaus in Mainland China and Hong Kong are both totally committed to expanding airspace to keep traffic flowing in the region. And I’m confident they will succeed.

How will you tackle the competition of low cost airlines in the region? Will you follow other major airlines and form your own low cost subsidiary?

To be honest, I’m less interested in the business model of an airline and more interested in innovation in the market place. After all, the business model is just a reaction to what is happening in the market.

And what’s happening in the market is itself a reaction to how the customer is changing. If you focus on customers and why their requirements are changing then you have a good chance of winning their business if you respond to those requirements.

It is important to understand that customers shop for different reasons. They value the travel bundle in different ways and you have to respect that.

So we have no plan to create our own low cost subsidiary. Rather, we will concentrate on responding to our customers’ requirements with the tools we have available at the airline.

What about consolidation? Is that a correct response to customer requirements?

The opportunity for consolidation pops up from time to time and airlines may or may not be in a position to take advantage.

This is what happened with Dragonair. Consolidation isn’t a driver of our strategy but the chance to consolidate was there and we were quick to take advantage. It has certainly helped our customers to have Dragonair’s Chinese network available.

Consolidation is rare in Asia-Pacific though. There are many state airlines in the region and it is much harder to merge in these circumstances.

What role do alliances play in the modern market?

No airline offers a global product and so there is great value in an alliance, especially for a business traveler.

Of course, even an alliance cannot cover every possible market opportunity. And this is why we have a codeshare with Air New Zealand to Auckland, for example. It is a deal that makes sense to both airlines. Qantas is working with Emirates on the kangaroo routes.

The oneworld alliance permits these deals. We don’t need to ask for permission. The alliance is very flexible and allows airlines to pursue the deals that make business sense. That is crucial. Aviation is very dynamic. Fast forward a few years and new customer requirements and issues will crop up. Alliances are another tool that allows airlines to respond.

Are there implications for oneworld in the Qantas deal with Emirates?

The development of the Middle East carriers in a relatively short time carries implications for all alliances and bilaterals. They are acquiring global aviation assets and undoubtedly they are a major part of aviation.

Now that the “clock has stopped” on the European Union Emissions Trading Scheme, what needs to happen next?

It is no secret that most of the aviation community were not supportive of Europe’s proposed unilateral scheme because, among its many flaws, it moved the world towards a patchwork of uncoordinated, potentially overlapping regulation that would ultimately lead to inefficiency and produce much more harm than good.

Getting 190 governments to agree on something is challenging. Then again, they do agree on a lot of things. ICAO has a good track record in the safety and technical aspects of the industry, for example.

The argument is clear. Aviation is a global business and needs a global solution. We can’t go about this in a piecemeal fashion. The mere fact that we are discussing a global solution for market-based measures is a great sign of progress. I have confidence in the process.

What does carbon-neutral growth post-2020 really mean for the airlines?

The industry’s goal of a 1.5% improvement in fuel efficiency per year and then carbon-neutral growth from 2020 might seem like a tall order. But I know many of my colleagues in the industry are doing things to meet these goals.

At Cathay Pacific, we are targeting 2% per year and we think we will make it.

We have nearly 90 new, very efficient aircraft on order through 2020, which represents a commitment approaching $25.78 billion (HKD200 billion). Coupled with an accelerated retirement of older aircraft from the fleet, it means we are able to set—with strong confidence—this more aggressive target for ourselves.

Maybe even more impressive is that this goal does not reflect any impact that could be achieved through the introduction of sustainably-sourced aviation fuels. Add in the benefits from this and our annual reduction would surely exceed 2%.

Government and industry can and should sit down together and think through ways to tackle carbon emissions. And the path to sustainably-sourced aviation fuel is a great place to start.
We also need to be aware that everything we do has an environmental impact. So Cathay Pacific has also embarked on a number of other environmental initiatives.

We are recycling old crew uniforms into blankets, for example. And we have opened a new $760 million (HKD5.9 billion) cargo terminal in Hong Kong. It was built with a number of state-of-the-art sustainability-driven features including a material handling system functioning on regenerative power. We are also expecting a 30% electricity saving compared with more traditional air conditioning units due to a chilled ceiling cooling system.

New passenger rights legislation in the Philippines is the latest example of the proliferation of legislation in this area. Does it concern you?

It is a concern because the new rules that have been appearing in a number of countries are uncoordinated. There are different standards in different places and we have to communicate all of these differences to our crew.

All airlines have to satisfy their customers and we never want to be in a situation where our customers need to resort to legal redress. Like any airline, we want our customers to keep coming back. Why would a customer keep buying tickets on an airline that doesn’t fulfil their requirements?

And there are issues which are beyond an airline’s control. We can’t take responsibility for things that are outside our control. It is very dangerous when you introduce an unmanageable risk into a business equation.

I’m not saying there isn’t a role for regulation but it needs to be light-handed and it needs to be coordinated.

How important will New Distribution Capability (NDC) be to serving your customers?

NDC is a great example of thought leadership. The ability to have a conversation with each of our 30 million passengers about their travel needs has been greatly facilitated by new technology. But this has created different approaches and an NDC standard would help take that linkage with the passenger to the next level.

Is e-freight the long-term solution the air cargo sector requires?

There is no secret to this. E-freight is a project that has huge value creation attached to it. The Cathay team evaluated the e-freight project and had no hesitation in saying that “this is the way to go.” They got stuck in and made it happen. So far we have great feedback on e-freight.

www.cathaypacific.com

 

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