Cathay Pacific to be more “innovative” – is it just Hogg-wash?

In a tweet announced following its disastrous 1H17 results, Cathay Pacific Airways (CX) said it was “committed to be a more innovative airline for customers”. See the results here.

CX, which is majority owned by the Swire Group, posted a loss of HKD2.05 billion (USD262 million) for the six months ended June 2017, compared to a profit of HKD353 million for the same period in 2016.

When measured in terms of yield (the amount of money an airline makes from carrying a passenger over a kilometer), the picture looked even worse. CX’s yields continued to slump, down 5.2% to 51.5 HK cents. By comparison, Singapore Airlines’ latest yield stood at 10.3 Singapore cents, just over 1 SG cent higher than CX.

Rupert Bruce Grantham Trower Hogg – if there’s a prize for the poshest airline CEO name he’d probably win it – took over as new boss at CX on May 1 this year, and he vowed to return the carrier to “its winning ways”.

Innovation isn’t just a buzzword at CX. The airline takes innovation so seriously that it’s formed the Innovation Council, essentially a team of general managers with emphasis on using state-of-the-art technology to better streamline operations and customer comfort.

There’s no doubt CX has been innovative before, which led to it winning Skytrax’s coveted World’s Best Airline four times in the past 15 years.

And we are sure many flyers will agree that the Betsy Beer is one of CX’s most creative compositions. The amber nectar is supposedly “10% carbonated, which offsets the numbing of the senses in-flight for a lively sensation on the tongue”… And you thought being a member of the mile-high club was cool!

Sadly, the Betsy brew isn’t likely to improve CX’s yields, battered relentlessly by low-cost carriers, Chinese airlines offering direct routes to other countries (meaning less people going to Chek Lap Kok to connect on CX) and partly also due to CX’s decision to “shrink” its economy class seats, from 9-abreast to 10-abreast and insisting that passengers won’t feel squeezed.

CX A350-900 TAKE OFF (1)_

Apart from structural issues the airline faces, CX hasn’t been very good at playing the hedging game. The airline has lost huge sums betting on jet fuel. In 2016 CX lost HKD8.4 billion on fuel hedges. The year before that it blew HKD8.5 billion. The clever boys at Swire weren’t so clever after all…

So it isn’t all about intense competition (yes, go on, blame Akbar al-Baker and his Gulf gang for your woes) or the absence of a discount carrier for CX’s current plight. It’s about complacency and it’s also to do with the cost of CX staff. This is after all, one of the costliest airlines to run in the world.

CX pays its people really well, partly due to the high cost of living in Hong Kong and partly because they could afford it before. Those days are over. CX has to drastically cut expenses and people at least until the bleeding stops.

In 2016 Hogg (then the COO) was paid HKD11.2 million, up from HKD6.52 million the previous year. He was the highest paid director last year. CX said an independent committee determines directors’ compensation.

We think the answer to CX’s problems is new blood, and not another transfusion from Swire. Hogg is on a three-year contract but CX is unlikely to sufficiently recover during his reign. The board ought to consider an outsider if results by end-2018 show further deterioration. Now that would be a real innovation.

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