Positioning to Recover From the Asian Flu

Cathay Pacific: Positioning to Recover From the Asian Flu

HONG KONG – Through a combination of infrastructure and fleet development efforts, Cathay Pacific Airways hopes to position itself on the world airline stage when Asia emerges from its economic crisis.

The Hong Kong-based carrier’s net profits plummeted last year to a three-year low of $217 million. The pattern was a continuum of 1997, which saw passenger yields drop 4.8 percent, leading analysts to lower their 1998 earning estimates.

Peter Negline, an analyst with Salomon Smith Barney in Hong Kong, said that a 50 percent decline of Japanese revenues, representing more than 20 percent of Cathay’s total earnings, are diluting the carrier’s yields. However, the carrier’s increased dependence on Hong Kong travel markets is not easing the pain, as lower interest rates do not appear to be enough to stimulate a recovery in traffic, he added.

By virtue of problems extending back to May 1997, Salomon Smith Barney reports, “it will take a Houdini-style effort for Cathay to escape its problems without undergoing major changes.”

Carrier Retains High Hopes Disappointing as these developments are, Cathay seems to be taking a long-term view about the next century. Among the carrier’s proactive efforts is a near $1 billion investment to create a super hub at Hong Kong’s four-month-old Chek Lap Kok International Airport.

The carrier’s commitment is more than half of the total private sector capital infusion going into the facility.

Cathay City, a $628 million building program, is the jewel of the development strategy. The effort entails concentrating the carrier’s multi-faceted operation in proximity to Chek Lap Kok. The city consists of three office towers, a flight training center, an airline stores building, a staff hotel, various eateries and a leisure facility. These projects complement the carrier’s significant investment in Chek Lap Kok’s passenger terminal building.

Maintaining its Fleet As of October, the carrier’s fleet numbered 63 aircraft, including 10 added this year, and at least three will be added throughout 1999, as ordered. Cathay officials point to their strong corporate balance sheet as justifying the carrier’s ability to stay on course.

Deployment of aircraft to more stable markets, such as Los Angeles and Sydney, and daily non-stop service from San Francisco to Hong Kong, moving in where United [UAL] had previously dominated the route, is another step to skirt fallout triggered by Asia’s economic implosion.

To that same end, the accessibility of 632 destinations through the recently announced Oneworld alliance with American Airlines [AMR], British Airways, Canadian Airlines, and Qantas Airways, is another venture that will elevate Cathay’s position on the global stage beyond its Asian regional dominance.

“Retaining the integrity and market position will allow us to weather the storm,” said Andrew Herbst, a principal with Swire Group, Cathay’s parent company.

Directly and indirectly, Cathay’s large capital expenditure boils down to a time-tested goal in the service game: offer a level of service to customers that distinguishes it from the competition and convince those passengers to come back.

Peter Buecking, Cathay Pacific’s director of sales and marketing, noted the industry has been a leader in technology, selling travel over the Internet and using electronic ticketing.

“It’s going to be interesting to see how the airlines can become better at one-to-one service. I think that is the next frontier, where we customize our service,” he said.

Cathay Pacific’s services at the new Chek Lap Kok facility: * The carrier has a 10 percent stake in Hong Kong Air Cargo Terminals Ltd. (HACTL), which was awarded one of two franchises to operate an air cargo terminal. * HACTL is constructing a $1 billion super terminal, the largest in the world, with the capacity to handle 2.6 million tons of cargo annually.

* Hong Kong Airport Services, a joint venture of Cathay and Dragonair, is in the midst of a 10-year ramp handling franchise it received in May 1996. The venture is now in an optimum position to seize a significant share of the business at Chek Lap Kok.

* Cathay Pacific Catering Services, a wholly owned subsidiary of the airline, has built a flight kitchen at the airport providing 35,000 meals a day. At its peak, preparation capacity is 80,000 meals daily.

COPYRIGHT 1998 Phillips Publishing International, Inc.

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