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City Weekend

‘I’ve got the toughest job’: Cathay Pacific chief says the best is yet to come from struggling Hong Kong airline

Ivan Chu Kwok-leung admits revenues are back to 2009 levels but remains optimistic about industry potential and new investments

PUBLISHED : Friday, 30 September, 2016, 4:40pm
UPDATED : Friday, 30 September, 2016, 11:04pm

Ivan Chu Kwok-leung helms Cathay Pacific Airways – Hong Kong’s biggest airline and one of the city’s most iconic symbols – as chief executive.

The company marked its 70th anniversary last week and today bids farewell to the Boeing 747 aircraft that defined aviation, brought success to the airline and connected Hong Kong to the rest of the world.

But while Cathay has been a high-flyer in the past, the airline is an outlier in the industry today, struggling with dwindling profits and intense competition at home in Hong Kong International Airport. The chief, a Cathay lifer of 32 years, talks about the company’s history, its current problems and its future.

How would you reflect on this 70th anniversary milestone? It is a time for us to look back, and also look forward. It is a reminder to our team that we are a great company and a great airline which has lasted for so long. Who would have thought that back in 1946, when the airline was founded, that Hong Kong [would reach the stage where it now is] as the third biggest aviation hub in [international] passenger volumes, and for many years now, the biggest cargo hub in the world? We contributed in part to the success of Hong Kong. In turn, Hong Kong contributed to our growth and prosperity, and a lot of people, not just our staff, have benefited.

What’s your view on the state of the airline industry and its future? In the airline industry there are a few things we cannot control that will determine and have a major impact on performance. First it’s the world economy – we depend very much on the growth of it. The other major factor is the fuel price. Other factors could be unforeseen and separate events: such as security concerns associated with terrorism and political elections. Then there are also uncertainties and black swan events like Brexit. We don’t sail on calm seas all the time. Every decade there will be challenges; every few years, actually. I would be surprised if 12 months went by without something happening. In 2003, the airline faced a major challenge with Severe Acute Respiratory Syndrome (Sars). It was a major epidemic for the world, not just for Hong Kong.

Did Sars show just how bad it can get for the company? Definitely. When you think about the fear and the uncertainty at the time. In the airline industry there are a few things we cannot control that will impact performance. Sars was one such example. We are also in a low moment now, but looking forward, I am absolutely confident that we will bounce back from this low.

How challenging is the situation now for Cathay? I think we’re back to 2009 [revenue levels]. So when we look at this, people will blame our fuel hedging policy. In fact, if you look at our financial results, I would say we have an income issue, and we have seen passenger and cargo revenues drop to 2008/2010 levels. But of course, the airline is much bigger in size, with much higher costs now compared to then. As the company [looks to] the immediate future, we have to adapt to the new revenue environment. When we see a slow economic environment and demand which is really soft with high supply in the market – not least from the Gulf carriers and Chinese carriers with their long-haul services to the United States and Australia – then this kind of capacity will take time to absorb.

Will it get worse before it gets better? It will take the world economy to improve for us to do better. Nobody has a crystal ball, but we are confident about all the things we are doing, particularly in working on revenue and continuing to invest in new aircraft. We have 22 new Airbus A350s coming in next year. The aircraft will be great – it’s a fantastic plane and the customer can see it and feel the benefits. It also has very good economics: 25 per cent in terms of fuel efficiency, so that is going to be very helpful.

Will investment slow to protect cash flow? That’s not the track we’re going to take. Let me assure you: we’re going to take those aircraft because we think it will improve our competitiveness. The A350 will allow us to spread our wings and win our battle against one-stop carriers. So we are going to do more non-stop flights. In the last five years, we have offered flights to 10 new cities in Europe, that’s close to 100 non-stop services a week. We don’t manage our airline on a quarterly basis. We take a long view, that’s why we have done so well in the last 70 years. We’ve always been conservative particularly in our finance, and also in our hedging – even though people criticise us for that – and we will continue to manage the airline in a very prudent manner but really focusing on customer services on the ground, in the air and now online.

The company has traditionally been conservative, but is it now taking a more bullish tone? The issue is this: crisis, difficulties, irregularities at airlines that affect day-to-day services are not new. We saw the collapse in travel from 1997 through to 2003. Then there was 9/11, and the slowdown in 2008 and even 2016. So in every decade, we will have two, three or four of these events. Lets hope we don’t have too much. We do not make decisions for investing in the airline’s future based on ups and downs – which are inevitable – so we do have down moments, but our belief is that these will pass.

Where do you see the airline going in the long term, and what direction would it take? I feel the best is yet to come in the next 10 years. Why am I so confident? I believe this century is about the Pacific century in terms of aviation. With half of the world’s population only five hours away from Hong Kong, we’ve yet to see the full potential in local aviation tapped. There is so much more demand to come in the next 10 to 20 years. We are surrounded by young high-growth economies. The demographics are on our side. GDP per capita is growing very fast. There is general improvement of people’s livelihoods in China, Southeast Asia and India. It’s very clear in terms of air travel, that this is the place you want to be. Hong Kong is the third biggest international hub in the world and will continue to be. With the third runway being built, it’s going to enhance capability and connectivity in a big way, and that’s fantastic. I don’t think we’ve seen the best of Cathay Pacific yet.

Do you think you have the toughest job among the top Hang Seng Index executives? I think probably, yes. Our focus is really on our staff, so that we understand them, address any of their concerns, and ensure they understand where we are coming from. We also want to engage staff and communicate with them. I don’t think we should avoid those issues. They are part of the nature of the business … we should take them head-on. It’s very tough running the airline. But in such a tough business, stormy seas also make good sailors, and we have to rise above it. We have to survive and adapt to the situation.

What do you think of Hong Kong’s political climate? There is no doubt in my mind political stability is important for economic growth. It’s very clear. If there are uncertainties then there is doubt – people won’t invest, don’t create jobs, and don’t travel. And that’s bad for Hong Kong. Economic growth and prosperity are important for everybody. Economic growth drives demand for travel but if you look at the last few years, this has been on the low side. We have seen what happened during the Occupy movement and in its aftermath. From a self-centred perspective, we know when there are negative news, and when there is a lack of political stability and uncertainty, then people don’t travel that much. It’s very important that Hong Kong is seen to be prospering under the “one country, two systems” policy as well as being well supported by China, and anything that is contrary to that would not be good for prosperity.

Do you think Hong Kong is stable? I think Hong Kong is going through a difficult stage. And in other parts of the world, there are also uncertainties such as the US presidential election – so we see less travel and less investment. It’s not good for the economy and not good for companies.

How would you define your three-decade legacy at Cathay? I have a lot of confidence [in my team], and my confidence of rising above the current challenges is based on my belief in my team. They are experienced, loyal, and keen. We share the same values of managing the airline and the business for the future.