Published in May 2015 issue
By Ken Donohue
No strangers to Eastern Asia, having flown in the region for several years, Ferrell and his Aussie partner sensed the large trading opportunity with China following the ravages of World War II. They purchased a U.S. Army surplus DC-3 for US $30,000, equivalent to $384,000 in today’s dollars, had it converted to civilian use, packed it full of goods from the United States, and flew off to Shanghai.
Like a modern-day Marco Polo, Farrell’s interest lay in the trade of goods, not the movement of passengers, and so the DC-3 first carried cargo between Australia and China. Given its beginnings, it is little wonder that Cathay Pacific is one of the world’s leading cargo operators.
In 1946, Ferrell was forced to move his operations, as the colonial aviation authorities insisted that, if the airline was to retain its base in Hong Kong, it needed to move from Shanghai to the British colony. On September 24, 1946, Cathay Pacific came into being, and the airline’s two DC-3s were registered as VRHDA and VR-HDB. Passenger service initiated to Manila, Bangkok, Singapore, Shanghai, and Sydney. Today, those destinations are high-capacity routes for Cathay. In the case of Bangkok, the airline offers 90 flights a week. In the 1940s, charters were also operated from Hong Kong to London’s Gatwick Airport, a return trip that took 30 days.
In late 1947, Ferrell’s hold on the small, profitable airline was loosened when authorities deemed that the American needed to reduce his investment to no more than 10 percent. A year later, the British trading firm, John Swire & Sons Ltd., acquired 80% of the airline, with Ferrell and de Kantzow each retaining 10%. Nearly seven decades on, the Swire Group still retains 45% ownership of Cathay Pacific.
The airline business was as tough then as it is today. Competition from more-established airlines, such as BOAC (British Overseas Airways Corporation) and Australia’s Qantas, proved challenging for the fledgling Hong Kong airline. Cathay’s Hong Kong–Sydney service was doomed in the early 1960s, when the Australian carrier introduced the Boeing 707 on that route. Cathay’s turboprop Lockheed Electras were no match for the new Boeing jet.
Cathay’s growth has seemingly been a conservative one. It was in the 1960s that the airline began giving serious thought to its future. Should it retain its role as a small, regional carrier, or up the ante, go all in and begin flying longhaul routes, with all the trappings that went along with that? According to Gavin Young—in his book, Beyond Lion Rock: The Story of Cathay Pacific Airways—there was a great difference of opinion on expansion among the Swires and Cathay itself. But the jet age was forcing the airline’s hand. With Cathay’s competitors flying new Boeing 707s and DC-8s, the airline needed to remain relevant; however, those aircraft were too large for Cathay’s routes, so it opted for the Convair 880, which became popular with passengers.
Despite the intense competition from a dozen carriers plying the Bangkok–Hong Kong route, and even more operating to Tokyo, Cathay Pacific was beginning to receive international acclaim for its in-flight service. The foundation for today’s Cathay was being set.
By the late 1970s, Cathay’s fleet consisted of eight Lockheed Tristars and eight Boeing 707s; yet, the airline still hadn’t secured the long-coveted Hong Kong–London route, which had been monopolized by British Airways. In 1979, Cathay, along with British Caledonian and Laker Airways, applied for traffic rights on that route. British Airways was offering ten flights a week, but, sensing new competition on the route, it dropped three flights from its schedule. With its newly-acquired Boeing 747-200, and two more on order, Cathay was hoping to serve London with three weekly flights. Negotiations lasted into the first half of the new decade, but in the end, the British Civil Aviation Authority only granted rights to British Caledonian, shutting out the Hong Kong carrier. Cathay’s executives and others in the city were shocked. A vigorous, and very public, appeal against the decision ensued.
On June 17, 1980, the British government overturned the Civil Aviation Authority’s decision and granted Cathay, British Caledonian, and Laker Airways traffic rights between London and Hong Kong. A month later, one of Cathay’s new Boeing 747-200s set off from Hong Kong for London’s Gatwick airport, with a stop in Bahrain. It had taken almost 35 years, but Cathay’s network now reached to the other side of the world.
Given the huge waves of emigration, over the decades, from Hong Kong and mainland China to Canada, it’s not surprising that Vancouver (YVR) was Cathay’s first foray across the Pacific to North America, beginning with twice-weekly service in 1983. Three years later, daily service was introduced with a tag on to San Francisco (SFO). Cathay enjoyed fifth freedom rights between YVR and SFO, until a dedicated non-stop service to the California city was inaugurated. Vancouver is still one of Cathay’s most important destinations, with the airline offering twice-daily service, and one of those flights continuing to New York.
Surely, Ferrell and de Kantzow could never have imagined that their small carrier would grow into one of the world’s most respected airline brands, serving 50 destinations on five continents, with its own fleet of 146 wide-body aircraft.
In his history of Cathay Pacific, Gavin Young noted that there was never a hint of self-congratulation in the Swires. “Success was never to be taken on trust, for Jock [Swire] was a steadfast believer in the dangers of hubris,” he wrote. “‘Pride goes before a fall’ was a maxim Swire employee needed to pin to his office wall. It was stamped on his brain from the day he joined.”
It was no shock then that, when Cathay Pacific was again named “World’s Best Airline” in the annual Skytrax World Airline Awards, there was an understated, business-as-usual response to the accolade. “We are immensely proud of our achievements,” said Tom Owen, the airline’s Senior Vice-President Americas. “Our underlying ethos is ‘to be’, rather than ‘to be seen to be’. This is the fourth time in the last decade that we’ve been acknowledged as the best airline in the world, but we are not the best business in the world. We have a deep desire to raise the return for our shareholders. We are a great airline, but we can be a better business, with improved margins and profitability.”
While some airlines boast about flying the biggest airplanes or serving the most destinations, Cathay is focused on continuing its tradition of providing a premium experience, not only for the passengers in the front cabin, but also for its Economy Class passengers.
“The premium market is a justifiable and profitable part of the market for us,” said Owen. “We believe traveling should be a fantastic experience. This has to be the case for all of our touch points with the customer— from our on-board product, the experience on the ground, and even the interaction people have with our website.”
While low-cost airlines have been well established for some time in North America and Europe, they are just starting to grab a larger share of the market in Asia; but, unlike many full-service carriers that have dabbled in the low-cost sector, Owen told Airways that Cathay has no intention of establishing a low-cost division of its own. The airline’s core strength is being a premium carrier, so moving into other sectors would detract from what it does well. “There are about 15 low-cost carriers operating into Hong Kong, so we understand competition,” said Owen. “We believe we can compete with the low-costs, especially when we explain the value of a full-service carrier. We may have a higher net fare, but your meal, baggage, and seat assignment is included. We don’t have hidden extras; so, often, the overall fare will be the same.”
Ferrell was on to something when he set up his airline in Hong Kong. Owen said that being based there is very advantageous, because half the world’s population lives within five hours of the city. Coupled with the ideal geography, there is a huge upsurge in travel from China, India, and other growing markets in Asia. So much so that Cathay believes there is enough traffic for the low-cost and full-service carriers. And, if it comes down to a price battle, the airline will use its wide-body capacity to its benefit. Owen did concede that they have seen a reduction in yields, especially in Asia, where the biggest battles are being waged. “We have a strong brand, which is a terrific upside for us,” said Owen. “Chinese customers are very brand-conscious, and more of the middle class in China are travelling.”
In the early 1990s, Landor Associates was commissioned to design a new brand for the airline. Landor’s market research suggested that the green and white colors of the existing livery had equity, but the green and white stripes that had been in place since the 1970s were considered outdated and had no Asian meaning or style. A fresh, new look was introduced in 1993, featuring a single calligraphic brushstroke, evoking the spirit of a bird’s wing.
This past year, a small change was made to the airline’s imagery, creating a more contemporary and cleaner look. “We didn’t see a reason to make a large change,” said Owen. “We have a winning image that is recognized around the world. It’s an evolution of where we’ve gotten to.” The new look will resonate further than just the airline’s visual presence. The airline is refining its services and products, in the air and on the ground, to present a more sophisticated and elegant style. An easierto- use, re-launched website and new lounges at Hong Kong International Airport and at Tokyo’s Haneda airport are the first to see this simplified design.
I had the opportunity to experience The Bridge, Cathay’s newest lounge at Hong Kong International Airport. Its sophisticated, yet simple, style was refreshing and comfortable. The creative lighting and furnishings gave me the feel of being in a friend’s living room—though I don’t have any friends with a fabulously long bar and a grand view of the airport’s airside operations.
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It hasn’t been all high flying for the airline. One cannot ignore the labor strife that began in 2001, when the Hong Kong Aircrew Officers Association voted to take limited industrial action when a long-standing dispute with the airline’s management over pay, rostering and flight safety issues went unresolved. This was a common tactic in the countries where many of Cathay’s expat pilots came from; however, in Hong Kong, a different standard was about to be set. The company sent the pilots a strong message when it preempted any such action by the pilots by dismissing 49 of them, about half of which were Captains. In the end, more than 60 pilots were dismissed or demoted. What ensued was a lengthy and costly legal battle, which, 11 years later, provided some vindication for the pilots when, in 2012, the Final Court of Appeal sided with them on three prime issues— breach of contract, breach of the employment ordinance and defamation. This was little solace to the sacked pilots and their families, whose lives had been impacted. In the end, perhaps, it was the airline that had won. Whatever the case, it remains a stain on the airline’s history that will take time to fade.
Opened in 1998 to replace Kai Tak, Hong Kong International Airport is a victim of its own success. Close to reaching capacity about 15 years sooner than expected, the airport is now servicing more than 60 million passengers a year, double the number that passed through the airport in its first full year of operation 15 years ago. At peak times, the airport is completely full. A new, mid-field concourse, connected by a people mover to Terminal 1, is set to open later this year, and, while this will create more capacity in the short term, Owen told Airways that the airport’s congestion is beginning to impact Hong Kong’s ability to attract new flights and services. “The airport is doing a good job to increase movements and efficiencies, but it is incremental,” he said. “What’s required is a third runway to cement Hong Kong’s role as an aviation hub.” According to Owen, approximately 8% of Hong Kong’s GDP is derived from the aviation sector. That’s why Cathay Pacific is supportive of the third runway project. “It will be constructed,” asserted Owen. “But it’s still a number of years away, and the biggest challenge for Hong Kong, in the interim, is to remain relevant, with the number of mega-hub airports nearby in the region competing for business.”
Like children in a toy store, airline executives around the world have been giddy with excitement over the past few years, staging photo ops as they roll out their new Airbus A380s and Boeing 787s. Cathay has a fleet of 146 aircraft, with over 80 more on order, but you won’t see those two aircraft types in Cathay colors any time soon. The airline’s strategy is to be profitable by offering more frequency, so, when it looked closely at the different wide-body aircraft on the market, it could fly either two A380s a day to New York, or it could offer five daily flights utilizing smaller aircraft. “Our approach is customer-driven,” said Owen. “By offering more frequency, we are able to offer our passengers more options. We fly four times a day to Los Angeles; we couldn’t provide that kind of service operating a couple of A380s on that market.” And, while Owen concedes that the Boeing 787 is a terrific aircraft, Cathay’s network ambitions and fleet mix showed that the Airbus A350 is the right aircraft for the future.
The new Airbus A350s will be used mainly for growth, but are also intended to replace some of Cathay’s aging Airbus A340s, which are coming to their end of life and will be put into service on thinner routes where there is less business traffic, and also to secondary destinations in the U.S. and Europe.
The airplane that started Cathay’s long-haul passenger operations—the Boeing 747—ended service to North America last year, with a final flight from San Francisco to Hong Kong. With the newer, more fuel-efficient Boeing 777s crossing the Pacific now, Cathay expects to retire its remaining passenger Boeing 747s by 2016. Some might find it surprising that, since its first flight to Vancouver more than 30 years ago, Cathay has only added six cities to its North American network. While other carriers have been aggressive about adding new destinations, Cathay’s focus has been on building up its gateway cities, primarily New York and Los Angeles. “Our trans-pacific growth has been extremely significant, with ASKs (available seat kilometers) up 27% last year,” said Owen. “This is unprecedented for us, and a big commitment.”
With Boston, its newest destination, Cathay serves six destinations in the U.S. Owen admitted that competition to North America is heating up, with new routes being opened up by U.S carriers and others from Taiwan and mainland China.
Boston is a bit of a departure from the perception of Cathay growing large cities, but, with four flights a week, the airline hopes to take advantage of the large IT and academic market in the Boston area. According to Owen, student travel between Asia and the U.S. northeast is huge, and Cathay’s interline partner, American Airlines, has traditionally been feeding much of that traffic. With its roots in the air cargo business of 70 years ago, Cathay has built itself into one of the largest air cargo operators in the world. The airline operates more than 40 freighter flights a week to North America alone, linking 16 points on the continent. Cathay Pacific is the only scheduled cargo operator flying between Mexico and Hong Kong. And new service to Calgary, Canada, is solidifying the airline’s reach in the freight business.
“Our Boeing 747-8 freighters have been a perfect asset for our cargo operations,” said Owen. “They carry 130 tons of cargo, and are very fuel-efficient.”
Cathay is looking to grow its share of the cargo business in the Americas, which is doing relatively well, considering the languishing economy worldwide. And, unlike yesteryear, not all the cargo is one-way into North America. Increasingly, more cargo is flowing to Asia.
The airline recently opened a new cargo facility at Hong Kong International Airport; this is designed to ensure that Hong Kong retains its status as one of the world’s leading freight hubs. Approximately a quarter of the airline’s revenues are generated through its cargo division.
70 years ago, few could have foreseen the Cathay Pacific of today. With its quiet confidence, the airline continues to set the standard in its services offerings. With an ongoing commitment to invest in service improvements—new aircraft, refreshed cabins throughout the fleet, more efficient ground experience for passengers— Cathay Pacific will surely retain its standing as one of the world’s leading airlines.