,ti!
i.3e
*ar
"Hold on tight!" That's Cathay
Pacific CEO Tony Tyler's
advice on how to manage an
airline in today's economically
challenging times.
Chief of the Hong Kong based full serv-
ice iong haul airline since 2007,Tyler has
already seen the best of times and the worst
of times in barely r\,vo years.
"I had the pleasure ofannouncing the
halfyear results for the first haJf of 2007,
and then the fuIl year results which we
announced in March 2008, which were the
best we ve ever l.rad, aHK$7bn (A$1bn)
profit,"Tyler related to Australian Aaiation
on a July visit to Australia. "But of course by
then we already knerv that 2008 was shaping
up to be a very difficult veirr, and indeed it
did prove so for a whole range of reasons."
Cathay's operating loss for 2008 was
$HK7.9bn (A$1.2bn), in large prrt due to
rising fuel costs and hedging loses.
'And 2009 is in many ways even more
diffi cult," Tyler contin ued.
Just how dilficult 2009 is proving rvrs
highlighted by the airline's results for the
first halfofthe year, released 10 days after
Tyler's intervi ew with'4'4. Those fi gures
(which include the numbers from fully
owned Dragonair subsidiary) showed that
passenger and cargo revenues collapsed
bv 27 per cent compared to the first half
of2008. Fuel hedging gains meant the
.rirline in fact posted a headline profit of
HKS812n (A$12am) for the half, but the
Riding the bumps
Cathay Pacific Airways
"Tltat is the big question tltat is on the minds of all
airline managements around tlte world
t/te new normal?"
underlying result for Cathay (and Drago-
nair) was an operating loss of HK$765m
(A$118m).
The halfyear result is less bad than for
the 2008 full year as Cathay, like almost all
its contemporaries, has moved to resize its
operations for the new environment.
"I've been around the industry a long
time and I've seen ups and downs - this is
certainly the worst down that I've seen."
The Oxford educated Briton is certainly
no stranger to airline industry crises, having
worked at Cathay Pacific since the late
1970s in a variety of commercial and man-
agement positions, including heading HR,
general manager Europe, and director of
service delivery responsible for inflight and
ground service. From I996 Tyler was direc-
tor of corporate development overseeing
corporate and strategic issues and planning,
was appointed chief operating officer in
2005, and then succeeded Philip Chen as
CEO in 2007.
"But ifyouve been around as long as I
have you cant help but know the business
quite well, you just know what you have to
do. It's not rocket science, you've got to try
and defer capital expenditure, you've got to
try and preserve cash, do other things to
make sure you've got liquidity and rreirn-
rvhile reduce costs, snip operntions thzrt lre
costing you money."
It may not be rocket science, br-rt rl,rk-
ing cuts and rebnlirncing operrtions tbr ;r
rnuch reduced level of tr,rthc demrmd is '.u-r
enormous chrrllenge ttrr ;rirli r-re s u-orldrvide.
Horv do vou make ch;lnqes u'ithout hzrrm-
SEPTEIVl B ER 2OO9 AUSTRATIAN AVIATION
CEO
- what is
ing the business, and to what extent does
the airline's underlying business model
need to be changed?
"In our case, critical to our success and
our strategy is our nefwork, and weve been
very careful not to damage the nerwork.
The nerwork has helped us fill planes where
other airlines have lost 10 points ofload
factor, we haven't," said Tyler.
"We can fill flights, it is not a problem
filling planes, the main problem we've got
is the front end ofthe plane has thinned
out so much. You would have seen the
recent IAIA figures where they said there
has been something like a 20 per cent
reduction in traffic in the premium classes
- that's about it, and the yield (has fallen)
even more. So the revenue is down even
more because the yield is down, and that
has had a huge impact on our overall yield."
Just by how much was detailed in the
half yearly results, with Cathay Pacific/
Dragonair passenger yield falling almost 20
per cent when passenger numbers 'only'fel1
four per cent.
"The other probiem we've got is cargo,"
Tyler contir.rued. "The cargo market has
beer-r l-rit ever-r h:rrder than the passenger
m.rrket. "
Thirt hit has seen Cathayt cargo arm cut
no ferr.er than six 747 freighters from its
fleet, retiring five and transferring another
to subsidiary Air Hong Kong. Overall,
Cathay and subsidiary freight capacity
(including belly hold space) has been cut by
11 per cent, with loads down 14 per cent in
the first half of the year.
 "But r.ou do what you have to do."
So thr, Cathay has limited cost reduction
to trimming, rathcr than slashing, its routes
rnd capacity, with plans to'parlionly half
rr dozen or so aircraft, and an unpaid leave
scheme rather than job losses.
"We ve also done unpaid leave. Almost
100 per cent ofour stalTsigncd up fbr some
unpaid leave. We've staggered it so that
the lower paid are given a lot lcss than the
higher paid, and that I think was seen by all
,rs being fair, and as a result we'vc bccn able
to get almost all the stallonboard."
An unpaid leave schcmc rather than job FLEET LEADER Cathay currently 0perates 11 777 300ERs !,vith 19 0n order, and h0lds purchase rights 0n a
losse- and effective communicrlion rp- further 20. (Cathay Pacific)
p'orch with sralTrl,":rlpc.rr. t.r be peying
dividcnds beyond direct linancial savings.
my class Hong l(onglTaipei we'r,e started something we dont necd at the moment
"I spend a lot ofmy time talking to Ca-
se ing sandwiches instead ofhot meals as .o *e re r,rlking to Boeing rborrr dcl.rying
th.ry people, talking to the media who com
they're cheaper, but that money is going to those, and wc're t.rlking to Airbus about
municate what's going on,"Tyler expJained.
'And you know that you're getting through
get directed to where we need it. So we arc delaying some A330s again a great
not cutting budgets there, wc're not taking aircraft, we will nced them, but we dont
whcr r (diam"nd level) Mrrco Polo (lre-
i.rbin crcw olT fliglrrs. wc rc srill invcsring in rcally need thcm quite as early as we're
quent flycr) member told mc at (a recelt)
long haul cabin refurbishmcnts, wcie still contracted to take them."
lunch,'your crcw are fantastic, and yor.r
investing in good inflight entertainment Another fect change is reconfiguring
know what, thcy rcally get it'. They asked
because \,vc want to make sure pcople keep the seating arrangements in thc airline's 12
him at the end of thc flight'how was the
frying us. And ... . utt ing rhc pcrnut. frnm 777-300s used for regional Asian routes.
flight, howwas the service?', and he said
'it was great', and the crewmember said to the service is not going to save mc cnough "We're going to rcduce the number of
moncy to counter the loss ofall my pre- business class seats in our 777-300s in
him,'well it is important that you Aie happy
mium tramc, so it is not going to soh,e the the region, where we ve had too many for
with the service because we know thc com
problem, and itjust might make it worse." a long time, and we're going to put more
pany is in a difficult position and we want
Plans to parkjust halfa dozen or so economy class seats in, so thxt will help the
to make sure )rou comc btck dgain.
"When that happcns nanagement is rircrirft, out of a fleet over 120 widebod economics ofthose."
ic,, :rL', reflcr ir rhe qnipping l('r shshing But Cathay has no plans to changc
getting throush to pcoplc, they get it. And
that's not thc lirst time I ve heard that." approach. A de'rl to sell five ofthe rlinct the seating configurations on its newer
older 777-200s lell through crrlier in the 777 300ERs which are used for long haul
Compared to other airlines, Cathay's
verr as the prospcctivc buler \v.ls unirble to flillhts such :rs to New York, despite the
c.lpilcifj/ and fleet reductions have dlso been
raise the finrnce, so no\v the rrirline pllts to slump ir, premiurn trlflic.
rclatively small.
prrk four ,A340-300s and nvo 7J7--100s. .OLrr
"Our hub strategy is very important, so long hrul 777 300ERs hrve 56
nhcn I speak about reducing our schedule I Tl ler :rls., .:rid rhri C.rh.r) P.r..6, i. business clrss selt: ,rnd seven 6rst .less, rrnd
rcfer to snipping, it's not cutting, not m^k- in talks with Airbus and Bocing to dcfer 'o' rh( m.1rkc . \\ ( \'c : 'r rll(r. ,,r' lr:l_ .
ing wholcsalc cuts to damage the ability to aircraft dcliveries. about right."
cilrn the revenue, it's getting thc frcqucncy "We'r'e got some great 747-8 Freightcrs Along'idc rhe A3l0 rrr ir\ j2 in .er r i. r
..r.d i.rpaciry right in diffcrcnr mlrker'. coming, with thc 6rst dcliveries planned and eight on order), thc 777-30OER is
"It's casy to mess up your business by for thc end ofnext year But with slr of fast becoming a corc part ofthe Cathav
.'iving, 'right, we can't aford to do that, so our own freighters out ofopcration it's Pacific fleet. "Wc'rc telling Boeing and
',r'c rvill cut all those flights'because halfthe
. .t..engcr\ on thosc lliShrs were connecting THINNING 0UT Fewer passengers are experiencing CathaV Pacitic's new business class, which'features lie
',r ith other llights, and when you do that flat sleeoer seats set if a arrangement. Pacific)
'.,ru find a rvhole lot ofother flights become
:r:rrrginal. So we've beer very careli.rl about
.rL)\\'we've snipped. As a result wc'vc
'-.rb.rbly made fewer capacity cuts. We've
::Juced our capacity by about eight per
,: nt rrnd other people havc cut morc, but
'icn we've looked at cutting more wc've
.::J rvcic going to cut into flesh and not
: :. s,ed do the death ofa thousand cuts.
' , thlt's been very importirnt."
Tr 1er stresses too that maintaining
- :Jr.rv Paci6ct high scr\.icc strndards
- xirlinc, despite tough
:rr.rins critical to thc
rorric times.
tln the service side ... wc don't wiurt to
- : .rn\-other reason for pcopie to srop llv
: :r irnd start flying someonc else. So we
.::t cut the food budget. Yes in c.ono-

SEPTEMBER 2OO9 AUSTRALIAN AVIATION


CARG0 PAIN Cathay Pacific has parked five 0f its 747-400BCFs (pictured)and hansferred a sixth t0 its Air
Hong Kong subsidiary. (Seth Ja!'/orski)
GE we think they're going to need to
'ginger'that aeroplane up if they want to
keep it competitive, and I think they know
that. We've got 19 on 6rm order (with 11
already in service) and I can see us eveotu-
a1ly probably getting more, especially if
the economics of rhrr airframe rnd engine
are improved."
In contrast, the 4'340 and passenger
747 400 fleets are starting to be cut, with
the newly announced retirements to leave
11 and 21 in the feet, respectively.
"Clearly iffuel prices stay high then our
747s are going to look less like a good idea
earlier, and we may want to phase them
out quicker."
Interestingly though, it seems that unlike
major competitors such as Qntas and Sin
qrpore Ai11ine.. Carhay woni be replacing
7.17s with .4380s.
"We've done a lot of analysis of the
A380, and I dont want to upset anybody,
but with our fleet and with our network we
see better ways ofmoving people around
than the current version ofthe 'A380,"
Tr ler srid. "l've no doubr rhe A 380 i. going
to be very successful aircraft and a very
strong competitor with good economics.
\\re believc there are aircraft at the moment
n ith better economics for our particular
netwotk."
Tller said the airline is not looking to
l.rrqer aircraft at the moment as fiequency
ir critical to its business model.
'I s ouldnt rule out rhe 747-8 Interconti
rtnral :rs rvell, that might do the job for us,
-:: .rt the moment we dorit want a bigger
.::::,plane, u,e're quite happy to go with
: ::.:::erl :rnd not capacity. And with the
--- -i.,,lER.l-e\'e got three flights a day to
\.. '. 1 :r rhc -\380 cant do New York.
- :':..cngers like frequency, and
_ _ - -::l-: .r:r' ir .utcessfhl airline econom
- : -..:..:...ell ,rnother 100 or so
_
: _ :. : -:::-: ::::]e oidtrr: -{t the mO-
' _ :: ::::..:mr:e 100 passengers
_ _- .: . .. :: :i.rn the oncs
you are carrying, ifyou've got a sensible
revenue management system. So by de6ni-
tion you're carying another 100 low yield
passengers.Ifon the other hand you've a
flight at a different time ofthe day youie
in a different market, connecting different
places, you have people who may want to
put a full day's work in before they fly, or
they want to go in the morning and not the
evening it's a different game, and then
you've got a chancc ofgetting passeogers
that are high yie1d.
"That's the game we play, the frequency
game, and the 777 is a real winner, across
the Pacific it's a real winner."
Longer term, it looks like Boeing and
Airbus will have an interesting battle on
thcir hands. depending on how well Boeing
can'ginger'up the 777, and ifthc A.350t
potential is realised.
"The A.350 looks a very interesting
aircraft indecd.Ifit does what it says on
the box, I think we'd be very interested in
that aircraft."
On the other hand,Tyler described the
787 as a little small. "The 787 is a very good
aircraft, but a bit small for us, and perhaps
not quiet the range we want. The 787 10, if
ir happens, might be a "tronger competitor,
but then you're starting to get into -4350
territory. Itt the less obvious one for us,
although I'm sure eventually it will be a
very good aircraft."
But for now, Tyler said he is "very happy
with what we've got at the moment".
That's not surprising, given any discus
sion of new aircraft types is premature until
Cathay can successfully weather the current
challenging environment, and presumes
that there is no more fundamental redraw-
ing ofthe airline map, due to the growth
oflow cost competitors in Asia such as
AirAsia and Tiger, and the as yet unan-
swered question ofwhether premium tramc
in time bounces back to traditional levels.
"That is the big question that is on the
minds ofall airline managements around
SEPTEI\iIBER 2OO9 AUSTRATIAN AVIATION
the world -what is the new normal?"Tr1e:
mused. 'At thcmoment, we re in rece5-
sion. at the momenr we're \eeing negatile
figures.That will not last forever, eventurrll.
we.tart seeing posirive rr:rlic and po'i-
tive revenue growth. So the que'tion i.,
when the world turns to positive economi.
growth how strong is premium traffic
going to be. On our network the average
premium yield ratio is something like five
to one in terms offront-end/back end - is
that going to be achievable (whcn grou'th
returns)l That is the big question.To be
honest nobody knows that."
Tyler, though, remains confident that bu.i
ness tavel will return to some degree at leasr.
"I dont believe premium trLel has
sropped lorever Tfyou're a busincssrrrI i r
Hong Kong and you've got to fly some
where for 10 hours and start work imme-
diately, you need to go flat and get some
sleep." Continued the Cathay boss, "There
is going to be a market for flat beds, the
question is how much will people par' lbr
it, and how many are going to do it, lnd I
dont know that yet."
But ifthe curreot shift by business
travellcrs from the front end of lhe Jirir.Ll:
to economy does become the new norm .
then full service airlines like Cathal' face
the competitive threat ofthe burgeonine
Asian low cost airlines.
"Operating with our legacy cost strucmre
in an expensivc place like Hong Kong -.
".
never going to match, as an overall airline
opcrarion, AirAsia! costs. However. i(i
nor to srywe can't competc with AirA.i.r
using our back-end capacity in targeted
markets to make sure they don't have it all
their own way. When you take the average
cost of a back-end seat of a Cathay Pacilic
777 -300 operftLg in the region, when lou
think that there are premium passengers
- although not enough at the moment
r-rnfortunately sitting up the front and
you've got cargo in the belly, and you've got
the overall efficiencies ofa big network to
bring down your overhead costs,we can sell
very cheap down the back and sti11 make
the whole package economically sensiblc.
"So even though on an overall basis our
cost per seat is going to be higher than
theirs ir doesni mean we can t compete
with them in targeted segments, and that's
what we have to do, clearly, because if we
don't, they'll hollow us out."
Clearly, then, the low cost cariers have
the potential to reshape the Asian airline
market, but Tyler is more sceptical about
that other much discussed issue with the
potential to transform the airline industry
consolidation through mergers and takeo-
vers, eventuating.
"I'd love to see it, I think it would be
great, I just dont think it's going to hap-
pen,"Tyler, who became chairman ofIAIA
in June, said ofconsolidation. "The airline
industrr is tirn.l.rnrrr.:l ., .l: -:.:r:.:r :::
brc.ru'c irdur.r r. :..: ...
othcr industrl'under the sun .loe: iri-i-::r
ofthe sovcrcigntv of tnllic rights. -\nd
ii\.ou diJrir hivc rh.rr you rv.uld ger b:q
irirlines fornring with a whole lot ofnichc
c.lrriers doing thcir thing. And then thcrc
would be some chancc thilt the industry
would rcturn its cost ofcapital. (But)
personally I don't think it's going to heppen
irny til're (soon)."
Tylcr is dso sceptical ofarrangcmcnts
such m the dual-listing structure devised for
the mooted Qntirs BA mcrger late last t,e ar.
"It looked to mc ficrTdishlv complicated UNI"IKELY 8ED FELLoWS T0ny Tyler says there have been n0 serious discussi0ns between Cathay pacric
tnd dilllcult to run. ArT d to be honest also afd Qantas about equiiy tie-ups.
I looked .rt that idee and I couldn't rerllv
.ce rr here rlrr .r n, rgic. rvc-c conring from.
Cost synergics would bc very dillicult to
qet rnuch out oll lnd then even the revenue
'Australia uill
aluays be a critical strategic
synergies,I pcrsonally couldnt see, given
the fact thcv alrcrdy l.r.rd the JSA which
marketfor Cathay Pacifc, we see it as part of our
allows them to pool the bie arers ofoverllp
(on the kangltoo routc), it w,1s hard to sce
backyard."
lruu rlrct rtcr'c 'c.tl r gr,irrg tu gcr.r r.rrr
hugc syncrgics. A:rd I gucss thct cimc to those dorvn. But gencrallr' spcrrkine thc Air Chinr is that in tl'le vears
sharc r,vith
thc samc conclusion, lvhcn thcy lookcd rt it Australian mlr-kct lTls held up." to colnc tnyone rvho is thinking offlr,ine
more closchr" And rvhile Austl ia mrl bc intportant to to Chinr rvill think ofonc or thc othcr of
That ccrtainh suggcsts aol kind of lbrmal Crther', it is Chine rvhich is the mrin focus. us rnd thc Honq Konq or Bciiing hLrbs.
rir -ul\ \virlr Qrnu. i. highlr L.rrlikcll..lc-f irc 'Absolutelr',"'l\'lcl rcpliccl, n'hen irskccl So bcnvcen the nvo ofus rvc'll position
sonlc andysts picking Clthrl, Prcific, rs rvell if Chine is the ir.rin glmc tirr Cerh.u, oLlrscl(es verI strongLr'.'
as llal'.wsi:r Airlines, :ls potcntiirl prrtncrs cspecirlll sincc tlrc 2006 dc.l1 thit sir\\' BLrr rhc tie up .rlso hrrs poliric..rl benriits
i 'r'tlrc Au.trtli.'n ,rirlinc irr rlrc rvrrkc of :r lo\v.!vr 100 1'qr',q',' ur-Dr.rion.rir. in positioning Cathil Prrci6c in meinl.rnd
thc coll..rpsc ofthe BA dcal. So hm thcrc rvhich spccialiscs in flr.ing benvcen I Iong China. "Ever),onc cln sce thrt h;11-ing 11 stlil
cr-cr been any scrious discussions benvecn Kone rnd m.rinlrnd Chinir, itnd thc tegic liicnd likc that is a good thing." Plus it
the two airlincs, rvhich rre both lbundins \\v.rpp:rq cquir\ w'th Chinc.c 4rrg.:'rr'rr givcs neinllnd China, throush Air China,
mcmbcrs ofthc oneworld allirncc? sorrc dcgrcc ofinflucncc ovcr Cirthirv
"No, rve htr,cn't,"T1'ler conirmcd. "Ovcr "We're not going to domin;rtc Chincsc "Wc'rc vcrl rnLrch norv pert ofthc grcatcr
thc rears rve'r,e h.rd somc vcrl'high lcvcl lviation, let's bc rcelistic, but s ith our pert Chinr l-irtion f:.rnrih, .lnd br' linkjns rvitil
inlbrrnrl discussions ..rbout whet if, but nership rvith Air Chinl I think rvc cen gct Chirr uclc rcrr uell positioncd.'
rou prcttV quicklt'come up against somc oursch.cs into r fosilion that we'r-c got nvo Whcn cconorric grr)\vth rctlu ns, thirt
r elv dillcult ob stacles. 'Ihc rc is thc grcirt hubs, Hong Kong ancl Beijing... (rvhich) plrtnership lnd Cathirv Pircihc's uniquc
ri)\'crcignq'obsticlc lbr iL stirt, if ]ou cirn titrc lro.itior . :r. thr frcrr icr
rvc c.rtr itr positioning within Chinl oliers thc
L^ clcomc that you'\,e thcn got go\rernence hubs lor rnvonc fl1,ing into Chinir, out of l\rnrrsc of u v(r\ hr:rlrhr l,,ng lcrrn -u'Jrr
r:sucs end )<tu've got rnti-trust issues, and Chinr, rrouncl China.'Ihc r-ision thrt wc for the airline. I
,r h.rt r,vould thc price bc."
Regardless, Australil rcmdns '.rn imlor- STEADY PAIR 0F HANDS The 53 year old Tony Tyler s a 30 year Cathay Pacific v€teran. (Cathay Pacif c)
' 't rr.rrkcl lorC.rrl'.rr Pr.iti..,r'd"llc
. . r 1'.'- prrl,'rrncd rcr.nn,rhh rvcll rcl:rrivc
:,1rthers.
'':\ustrllit rvill.rlw.tvs be e critical stritc-
.. nr,rrl,cl lbr C,uh.ry l:r. i6,. wr J, ' .rr it
. pirrr ofour blckyiud, and one tlut rve'r'e
: iitcd in and bccn committcd to for
.rrl rerrs,"Tvlcr said, noting that Cathr]
:. rr llrgc pilot bodv brsc in Austrllil,
:.i rhirt thc tirlinet vcry 6rst flight rvas to
. ..:r;r1ir, crrrling dav old chicks in 1946.
:.ir'cd thc airlinc wcs co founded br .rn
-:rir1irn, Sldncv I(antzow.)
l}e Austrilirn mirket hrs been all
- :. \\rc hrvc hld to tcmporirrih reduce
_ : i.(lLrcncics
to SYclncl Wc rvcnt to four
: : r c trimmcd thirt back to tlrrcc, wc\,c
' r,rrih rcduccd thrcc oirhc Brisblnc
- :-.lith thccr.Lrrcnt conditiols th()sc
_ -:-lqgling l bit so scre trinrncil