Rupert Hogg, CEO, Cathay Pacific Airways, tells Graham Newton that the carrier’s transformation program is on track to achieve sustainable long-term performance
The third runway at Hong Kong International Airport and associated infrastructure will support Cathay Pacific’s efforts to take advantage of the growth opportunities on its doorstep. But like all airlines, it must ensure it has the staff and technologies in place to handle demand.
Is the transformation program proceeding as planned?
We’re halfway through our transformation program and it is showing encouraging results. We delivered a profitable second half in 2017, which means we are certainly progressing in the right direction.
We have all the components of a great brand and experience and our transformation is about delivering strong and sustainable long-term performance. We are focused on three specific areas. The first is the customer and specifically what the customer values. That’s based on real insight because we have better knowledge of the customer now. There is a new dining proposition that is based directly on customer feedback, for example. Also, there is Wi-Fi being put on all our long-haul aircraft. And we’ve invested heavily in award-winning lounges. Shanghai will be the next lounge to be transformed later this year.
The second area is finding new sources of revenue. One aspect is building the network at the macro level. There are still opportunities to serve new or under-served destinations. Five new long-haul routes and four regional routes have been opened or will soon be opened in 2018, following three new destinations in 2017. The pace of growth to European destinations is high.
Our airline is also doing a lot more through new distribution capability (NDC). We’re seeing quantifiable results using NDC. Customers can see the richness of our product. And it will help us to sell products that meet the travel needs of our customers.
Then there’s cargo, a huge part of our business. And it’s not just general cargo, but also those shipments that need special care, such as pharmaceuticals. We have a state-of-the-art terminal capable of handling 2.6 million tonnes annually and a young freighter fleet. We need to leverage that platform.
The third area is productivity. Everything we do has got to be done more productively and cost efficiently. This is more than just the normal cost disciplines. It is about redesigning how things work. Rather than looking at how organized the business is, it is looking at how we should actually run the business and how technology can disrupt in an advantageous way.
It’s not possible to keep on squeezing out productivity on existing processes. You need to rethink how you do things.
Is the heavy investment in new fleet an important part of the transformation?
We are starting from a good place. We have already taken delivery of 22 A350-900s and we will have eight -1000s by the end of the year.
New aircraft will be arriving one a month on average until the new runway in Hong Kong opens in 2024. It’s not only A350s. We also have the Boeing 777-9x arriving from 2021. And from 2020, we take delivery of 32 A321neos. That upgrades the entire narrowbody fleet. We already have a young, modern fleet and it’s only going to get younger.
Sustainability is very close to our hearts and these aircraft are better on fuel consumption, which means they also emit less. And they give us a great platform to attract customers as they allow us to redesign the cabin and include features that will improve the customer experience in economy. By 2024, there will be new seats on about 70% of our fleet. We are still putting in-flight entertainment on the seatback. With Wi-Fi, there will be an increase in the use of personal devices, but we still see the seatback screen as an important interface with the customer.
What is "I Can Fly"?
"I Can Fly" is an educational concept that aims to nurture an enthusiasm for aviation and a spirit of social service among young people. It was launched by Cathay Pacific in 2003 in Hong Kong, and since then more than 3,700 students have already graduated from the initiative.
Leveraging the strengths and resources of Cathay to enhance the development of aviation education in Hong Kong and further afield, the “I Can Fly” program has since opened its doors to ventures involving young people in mainland China and North America.
How important will the third runway at Hong Kong International Airport be to your growth?
The third runway will be commissioned in late 2024 and with it comes a new terminal. But those developments are just part of a much bigger picture.
In late 2018, a new bridge connecting Macau, Zhuhai and Hong Kong will open and there is also high-speed rail development in the region. The improvements are part of a plan to have a connected economy in the Greater Bay Area, where the population is bigger than the United Kingdom and the GDP is higher than in the San Francisco Bay Area. Our airport is reinventing itself as a multi-modal hub to serve this region.
Cathay already has its airline code on the Macau ferry and the downtown check-in has been working successfully for years.
In terms of international passenger traffic, Hong Kong is the biggest hub in Asia and third biggest in the world, handling about 75 million passengers per year.
It’s a fantastic gateway for the Greater Bay Area and Hong Kong will become a super-connected multi-modal airport.
Do alliances still have a place in the modern industry given the increasing prevalence of other forms of cooperation?
First and foremost, alliances are a great proposition for the customer. Customers know they can enjoy the same recognition, and earn and burn, across multiple airlines. So, if you took alliances away, it would certainly mean a degradation in customer service.
But, of course, the industry is very dynamic. Traffic flows change. That is why you see airlines doing other types of deal and deals beyond the alliance. It is a normal business response. Our work with Air New Zealand, a Star Alliance member, has allowed a long thin route to not only survive but thrive. As for joint ventures (JVs), Cathay has not been a big practitioner, but it is a big believer. JVs provide an opportunity to coordinate schedules and the product and introduce scalability. We have to be careful in choosing the right partners to ensure we provide our customers with more diverse offerings and choices.
Are you still bullish about growth in the Asia-Pacific region?
We are the gateway to mainland China, which is still growing at an enviable rate and there is more growth in the wider region. There is no doubt that the opportunity for airlines comes from GDP growth within Asia.
Indonesia has a population of 260 million and there are 100 million people in Vietnam.
We can also include India, another huge market. We have a number of destinations there. And for Indians looking to connect to the west coast of the United States, it is just as quick to go via Hong Kong as it is to go via Europe.
But, these opportunities won’t exist if infrastructure doesn’t move in lockstep with the growth in demand. Some governments in this region are ahead of the global curve, but there is still a lot more to be done given the traffic forecasts we are seeing. It’s not that the right thing hasn’t been done, but the right thing must continue to be done and accelerated.
There can’t be a limited supply in infrastructure because that will only push up the price of using that infrastructure and that will eventually affect everybody, including the customer. Airlines make a huge investment in fleet and new technologies. Governments should invest in the necessary infrastructure.
Will biofuels ever be made available at the right price and the right quantity?
Biofuel is clearly the way to go for the industry and we have a role to play. We were an early investor in a company called Fulcrum, which has just commenced the construction of its first plant in Nevada converting waste. When it gets properly up and running in 2020 it will do 10 million gallons a year. That demonstrates scalability is possible. But biofuels also need to achieve parity in pricing with fossil fuels and preferably be lower. That’s not something an individual carrier or the industry alone can do. It needs the cooperation of governments and the logistics industry. But it’s the goal we should go for because it is absolutely vital.
To deal with traffic growth, more staff are needed. But is the industry attractive to potential new recruits?
The issue of training is vital because traffic is going to double. We can attract people as this is an exciting and interesting industry.
We are investing heavily in our future by nurturing young talent in Hong Kong through the use of structured career programs aimed at fresh graduates in general management, IT, engineering, ab initio pilots and various customer service roles.
Our commitment to the industry does not stop at our shores. We support and sponsor the training academy set up by the government and the airport authority. That adheres to the International Civil Aviation Organization’s (ICAO) “nobody left behind” principle so it does a lot of external training of aviation professionals in developing countries.
Separately, we’re trying to encourage young people through our “I can fly” program (see panel p19)and we’re seeing the first ones coming through into the company.
What skillset does the modern airline CEO need?
As a CEO, you need to set a vision and a strategic direction. But this is always a people and customer business. You must be able to motivate and inspire people to serve the customer and to buy-in to the strategic direction. Making complex things simple and relatable is also vital.
But you do need to understand that this is an era with many new business models and in which the speed of technological development is exponential. These two developments are converging to offer new challenges and new solutions. The scale is vast, and you must get a grasp on that.
It is also vital for me to be open-minded. No one can be an expert in everything. We are using blockchain technology to increase efficiency in many areas of our business. We have an excellent team of people driving it. All of us at Cathay work as a team to complement each other’s strengths and capabilities. There are many people from within and outside our organisation who have great ideas and expertise. It is my responsibility to create and provide them an environment in which they are encouraged to raise, foster and develop their ideas, which translate into additional value for our customers, thereby enhancing the value of Cathay Pacific.
If you could change one thing overnight, what would it be and why?
It would be to complete the transformation program. Nothing succeeds like success. Being successful in all three areas of our focus will give the airline a sustainable platform for future development.