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Dow Jones & Company Inc Jul 1, 1999| [Headnote] |
| Cathay Pacific struggles with labour disputes, high costs and image problems |
Cathay Pacific Airways and Singapore Airlines have been Asia's top carriers for many years. Both carry passengers across a network of international routes rather than mainly serving their small home bases. Both have among the most modern fleets of aircraft in the world. And both have been spectacularly successful financially.
Today, they are in very different shape. Despite Asia's economic woes, the SIA group declared a profit of S$1.03 billion ($603 million) for the year to March 31, down 0.1% from the previous year. Cathay Pacific's operating profit was wiped out when it wrote down the value of 13 older aircraft, leading to its first loss in 35 years-a deficit of HK$542 million ($69.5 million) in 1998. Now Cathay has hurt both its image and its bottom line in a bruising two-week battle with its pilots. How did two comparable companies wind up a study in contrasts?
A recent reason is the depreciation of the Singapore dollar and the strength of the Hong Kong dollar, according to Ian Wild, airline analyst for SG Securities Asia in Hong Kong. But a bigger reason may be that "SIA is radically better managed than Cathay in every sense of the word, everything from financing to quality of service," says Wild.
For all their apparent similarities, the two airlines have fundamental differences. SIA traces its history to government-owned MalaysiaSingapore Airlines, formed in 1966 and split in 1972 between Malaysia and Singapore. SIA took the bulk of the international routes and became the flag carrier of Singapore Inc.
Cathay, meanwhile, was founded in 1946 by two expatriate entrepreneurs in Hong Kong. The airline was bought in stages by the British Swire Group and was never a major beneficiary when Britain, whose flag carrier is British Airways, negotiated air-service agreements.
Management-labour relations differed. In 1980, when SIA pilots complained about being overworked, then-Prime Minister Lee Kuan Yew threatened to shut down the airline and start again with new crews. The pilots backed down, and staff have not seriously challenged management since. Cathay, however, has had a series of public disputes with staff.
It also has never found an marketing icon to match SIA's Singapore Girl. Cathay's confused image has ranged from "The Big British Airline in the Far East" in the 1970s to "The Heart of Asia" now. SIA topped a list of 10 mostrecognized Asian brands (excluding Japan) ranked by Interbrand, an international branding consultancy. Cathay came 10th.
As Michael Westlake and S. Jayasankaran report in the following stories, unless Cathay can get back on its feet quickly, it's SIA that will be the role model for the region.
How does an airline apologize for massively inconveniencing its customers? In the case of Hong Kong-based Cathay Pacific Airways, it offers any Hong Kong resident who uses its services 8,888 frequent-flyer miles ("eight" symbolizing prosperity to Cantonese). By June 19, the day the offer was announced in full-page newspaper advertisements, Cathay's services had returned to normal after its pilots ended a 13-day "sick-out." Its check-in counters were no longer besieged by irate passengers demanding information about flights delayed, cancelled or switched to chartered carriers.
But as Lehman Brothers analyst Philip Tulk points out, Cathay is no better off than it was before the latest labour dispute: losing speed in a highly competitive business. "In the past, they've been slow on the draw when it comes to staying ahead of the pack on service," Tulk says. "Cathay Pacific is a reactor to market changes rather than a leader or an innovator when it comes to service," unlike British Airways or Singapore Airlines.
| [Photograph] |
| Problem-beset Cathay has, in many cases only itself to blame. |
Cathay is now even more preoccupied with reacting to a depressed market-last year it lost money for the first time in 35 years. How did one of Asia's highest fliers, which made a record HK$3.81 billion ($488.5 million) profit in 1996, arrive in such worse shape two years later?
The regional recession played a large part-as it did with most Asian airlines. Their profits nosedived as foreign debt became more burdensome and far fewer people travelled. At the nadir, in March and April 1998, passenger loads (passengers carried relative to capacity available) for Asia's carriers were down 6% over the previous year. Several recorded losses for 1998: Malaysia Airlines suffered its worstever result-a loss of 700 million ringgit ($184.2 million) for the year to March 31. Philippine Airlines, loaded with $2.3 billion in debt, struggled for its very survival.
For Cathay, the fact that the Hong Kong dollar remained strong as other currencies depreciated since mid-1997 has made worse its already-high costs. Belated efforts to hold down costs damaged the airline's reputation as standards of service slid noticeably-some passengers have complained that they were no longer given a choice of meals in economy class or offered alcohol refills, for example. Despite this, Cathay's fares on many routes remained higher than those of other carriers because it wanted to maintain its image as a premium service targeting business travellers. Meanwhile tourist arrivals in Hong Kong, especially from its major market, Japan, fell off after the territory returned to Chinese sovereignty in July 1997.
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In addition, the small size of the old Kai Tak airport-which closed in July 1998-had hindered Hong Kong's development as an air-transport hub and curtailed Cathay's growth plans. While the new Chek Lap Kok airport will enable Cathay to expand, landing fees are at least double those at Kai Tak.
Although some factors are beyond its control, for other problems Cathay has only itself to blame. Its high wage costs have long loomed as a problem, but management's clumsy efforts to cut costs have hurt relations with staff. "The problem should have been addressed earlier in a more constructive fashion," says Ian Wild, airline analyst at SG Securities Asia. "It's been a major long-term issue for a long time."
The airline fired 1,000 ground staff during 1998 to pare its wage bill; cabin-staff benefits were whittled down in December. "We've downsized about 25% of our ground staff-half through attrition, half through redundancy and retirements" says Tony Tyler, Cathay's director of corporate development.
The pilots were given until early June to accept cuts in salary and benefits-or be fired. Angry at what they saw as management's arrogant way of demanding compliance, growing numbers of pilots called in sick as the deadline approached. On June 10, after government mediation, the pilots agreed to a settlement that the company said would save it HK$1.4 billion over the coming decade-an annual saving of a mere 0.53% of its operating costs for 1998. The direct cost of the sickout is estimated at between HK$455 million and HK$1.1 billion.
Still, analysts say the airline is finally coming to grips with problems rooted in its colonial legacy, which included paying fat salaries to attract foreign pilots. "Cathay's pilots are clearly overpaid by industry standards. Finally it's taking the bull by the horns," says Timothy Ross, airline analyst at Warburg Dillon Read in Hong Kong.
Cathay's other moves to control costs have been easier, such as relocating operations to cheaper cities. "We've moved everything we can out of Hong Kong," says Tyler. Revenue accounting is done in Guangzhou. The computer centre is in Sydney and reservations are handled in Bombay. About 350 of the airline's 1,350 pilots have moved to bases overseas where they don't receive housing and other allowances.
Cathay has also rationalized its fleet, dumping all but one of its 13 older 747 aircraft because they were too expensive to operate. All of them were written down to residual value in the books, bringing HK$837 million in exceptional provisions to Cathay's 1998 accounts. With other exceptional charges, this turned a HK$397 million operating profit into a declared loss of HK$542 million. Most of these aircraft have since been leased or sold to other carriers. Tulk expects Cathay will be back in the black this year, estimating profits of HK$597 million.
One thing Cathay can't do is hike its fares much. "Asia is still beset by too much capacity, so the ability to raise fares is limited," says ING Barings analyst Neil Payne. Cathay's major market has always been Asia northeast of Hong Kong. Huge growth in the 1970s came from Japanese travellers who provided 25% of Cathay's total revenue; the figure fell to 8% last year. Taiwan is now a key source of customers, as are Hong Kong and southern China, but the big numbers these days are Chinese passengers from the rest of the mainland-and they go for discounted tickets and cheaper tours.
Cathay tries hard to wring benefits from the China market even though it doesn't fly there. It owns 19% of Hong Kongbased Dragonair, which flies to 17 cities on the mainland and feeds Chinese traffic to and from Cathay flights beyond Hong Kong. Cathay isn't allowed to share routes with Dragonair under Hong Kong's longstanding "one route, one airline" policy. But Cathay is trying to better integrate its schedules with Dragonair-as well as with Air China and Guangzhou-based China Southern.
Cathay's spacious new base at Chek Lap Kok airport offers an excellent venue from which to expand services, but with demand still down, the timing is not ripe.
So the airline's expansion plans are limited in the short to medium term:
Improving services to the booming U.S. market. It has started a nonstop service to San Francisco. Combined with its services to Los Angeles, Vancouver, Toronto and New York, Cathay now has access to 85% of the North American market, Tyler says. It plans more nonstop flights from the east coast of North America to Asia as aircraft range grows with technology. (Currently, flights from New York to Hong Kong have to stop to refuel in Anchorage.)
Serving new destinations. It plans more flights on routes to the Middle East and India as well as unspecified new destinations.
Participating in the "oneworld" alliance which it hopes will enlarge its route network and increase business. The alliance's five members-British Airways, Qantas, American Airlines, Canadian Airlines and Cathay-will feed each other's routes.
In the first quarter of this year Cathay's passenger and cargo volume rose-by less than 10%-on 1998's first three months though discounting kept returns low. Figures for passenger loads from the 19member Association of Asia-Pacific Airlines show signs that the long dive may have stopped and at least some of the region's carriers may have turned the corner (see chart).
Goldman Sachs analyst Jean-Louis Marisot wrote in a recent report from Singapore that travel demand was starting to pick up in Taiwan, South Korea and Japan. Moreover, some non-Asian carriers have scaled down services, leaving Asia's airlines to benefit from the upside of any recovery.
For Cathay, is there likely to be a return to the high-profit good old days of '96? And if so, when? Says Tyler: "It won't be this year . . . it won't be next year, either. Perhaps in three years."
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