stop press - Cathay Pacific

Recently, I was asked – with flights seemingly
so full why did we lose money in the
first half and are we doing better now? It’s
a sensible question – one that I expect
many of you wonder about as well – so
I wanted to use this opportunity to share
with everyone my answer.
In the simplest terms, there are cost and
revenue factors which have combined to
make 2012 a difficult year. Let me explain
further.
On the cost side, the biggest issue is
fuel. Fuel is our single largest cost.
We planned for fuel to be expensive this
year, but it has been even more expensive
than we anticipated. The actual cost of fuel
into plane - because we have to pay more
for aviation fuel than the cost of the crude
oil you see reported in the newspaper
– has exceeded budget by about 6%.
Now, 6% may not seem like much but,
looking at all our flights together on an
annual basis, if we had done nothing,
this higher fuel price would have meant
our total fuel bill this year would have exceeded
the high budget we had planned
by HK$2.5 billion!
The increase in the price of fuel since
2010 has had a big impact on the operating
cost of our routes. On a 747-400 flight
to London, fuel today represents 62.5% of
the total cost of the flight. In 2010, when
fuel was substantially lower, it represented
only 47.9%. That is a big jump! Let me try
to put that into perspective. Taken over a
year, on that one flight pair alone, the fuel
bill will have increased by HK$110 million
– again, on just this one flight pair.
To directly address the fuel situation,
we have limited options. We can and do
hedge, but hedging is not a miracle solution,
particularly when fuel prices have
been stubbornly high for so long. Hedging
is like an insurance policy – which like every
other insurance policy costs money to
buy – and so it offers some protection, but
it doesn’t remove all of the risk.
We can try to raise ticket prices, but this
is extremely difficult to do in the current
weak economic environment.
We are allowed to collect fuel surcharges,
but these require regulatory approval
and help us recover only about 50% of the
extra fuel cost we pay. So this also helps,
but cannot fill the gap.
Finally, we can take steps to reduce
fuel consumption and this is where we
have been most aggressive. Retiring the
747-400s from our fleet more quickly and
replacing them with fuel efficient 777-
300ERs will help us tremendously. The
777s are overall more than 20% more fuel
efficient than the 747-400s. As we move
into 2013 and take delivery of more 777-
300ERs, we’ll see an even bigger benefit
but the full benefit will not be realized until
2014.
The cost issue, however, encompasses
more than just fuel. There is significant
cost pressure all around us. We are seeing
increases in airport charges, overflight
charges, catering charges, landing and
parking charges, handling charges and
passenger costs to name a few. So we
must tackle our cost base where we can.
Our Chief Operating Officer Ivan Chu is
leading these efforts.
Turning to the revenue side, cargo has
been a huge challenge. Not just in 2012,
but for most of 2011 as well.
Cargo has always been important to CX.
In good years, cargo can be almost 30%
of our total revenue although the result for
2012 will be well below that. 2010 was a
boom year for cargo, but a weaker world
economy changed all that and not for the
better.
Cargo volumes track the health of the
world economy – a weak economy means
lower cargo demand. Faced with this situation
in 2012, we have cancelled freighter
flights and we have also parked some of
our freighters. But cargo doesn’t only travel
on freighters.
Invisible to most customers, but not to
our bottom line, cargo also travels in the
bellies of our passenger aircraft. Cargo
volumes in our passenger aircraft year-todate
are below budget and overall cargo
revenue this year is lower than 2011 by
around 13%.
Inside our passenger cabins, loads have
been good. Not as good as in 2010 when
the load factor averaged 83.4% or even in
2011 when it was 80.4%, but certainly quite
good at 80.2% through October. Still, you
can see that we have a lost a little bit here.
While load factor is important, yield is
equally important. Yield basically means
average ticket prices. To understand this,
we have to talk about both premium traffic
(First and Business Class) and Economy
Class traffic.
This year, premium traffic has been soft
also due to the world economic situation.
Our top corporate customers in the financial
industry are travelling more than 15%
less than they did the previous two years.
As a result, load factors in the premium
cabins are slightly below where they were
in 2010 and 2011 and average fares are
also lower.
In our Economy Class cabins, load factors
are also slightly down over where they
were in 2011. But the real problem has
been a decline in average ticket prices,
which are below budget and below last
year by about 4%.
Many airlines are facing similar challenges
and thus the competition for passengers
is even more intense than usual.
Put all that together – high fuel prices,
cost pressure on all fronts, some less fuel
efficient aircraft, lower cargo revenues,
weaker premium revenues, lower average
ticket prices in Economy Class due to competition
– all at the same time and the result
is a very challenging year.
We know that aviation has its ups and
downs. We have lived through both ups
and downs over the past five years. What
is important now is that we continue to pull
together as one team, that we continue to
provide our passengers and shippers with
great products and services so that they
keep choosing to fly and to ship with us,
and that we work hard to make Cathay Pacific
more productive and more efficient.
As we have before, we will get through
these difficult times and we will be well-positioned
to take advantage of the improvement
in the world economy when it comes.
More cost-cutting measures introduced to preserve cash, boost revenue
With the end of 2012 fast approaching, Chief
Operating Officer Ivan Chu has called on
the team to push to reduce costs further as
business continues to stall.
Despite a small pick-up in the cargo
market, driven by shipments of high-tech
products out of the Mainland, the overall
situation is still worrying, Ivan told staff in the
Friday Telex.
“The cost-management initiatives we
announced back in May have been making
a positive impact. Unfortunately, we haven’t
seen much improvement in the underlying
business trends,” he said.
“Compared to the same time last year,
we are a bigger airline with more staff, more
passengers and more assets – yet our
revenues are in decline. That’s obviously
not a sustainable situation, especially in a
continued high-fuel-price environment.
“We cannot allow costs to rise faster than
capacity or revenue, so we must look very
carefully at how to do things more efficiently
and more economically,” he said.
In a memo to department heads, the
COO stressed that more needs to be done
on the cost side.
“If you have had any doubts on the need
to contain costs, let me lay those to rest here
and now. This is proving to be an extremely
difficult year,” he wrote.
He told the senior management team
that a number of “difficult, but necessary”
decisions had been made, including:
•
•
•
Not holding the management
conference this year
Further restrictions on duty travel in
place, with a recommendation for
“minimum or no cost” to the company
Not using company funds for festive
gatherings
•
•
Entertainment expenditure reduced
to a bare minimum, even if already
budgeted
Stricter enforcement of the current
headcount freeze
“It is never pleasant to have to resort to
such restrictive measures, but they reflect the
negative operating climate in which we find
ourselves,” Ivan said.
He urged the team to look for new sources
of revenue and ways to further manage costs
that don’t impact safety or our customer
proposition.
3