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SCMP Reporter

FOR Cathay Pacific Airways to announce an order for US$801 million worth of new aircraft and engines with Airbus Industrie in the midst of its major cost-cutting campaign may have raised some eyebrows.

  However, Cathay chairman Peter Sutch and managing director Rod Eddington insist it makes good economic sense.

  At US$801 million for six 260-seater A340-300 aircraft with CFM International CFM56-5C engines and spares, Cathay believes it has got a good deal.

   Standard Chartered Securities analyst Roland Bruce says: ''This is a good time to be doing this with companies like Boeing laying off staff.''   Boeing, hard-hit by the airline industry's continuing slump, last week said it would reduce the production rates for its B737 and B747 jetliners again next year and into 1995, possibly eliminating 2,000 to 3,000 more jobs.

  This follows an announcement earlier this year that 28,000 jobs, or 20 per cent of its workforce, would have to be shed by mid-1994.

  Rivals Airbus and McDonnell Douglas have faced their own problems.

  All have come up against a string of cancellations and postponements of firm orders and options, and face a drought of new business.

  With Cathay Pacific being one of only a few airlines in the world still making fresh aircraft orders, it is definitely a buyers' market.

  Mr Sutch says: ''Although Cathay, and indeed the whole airline industry, is currently facing difficult times, we believe that this is a good time to buy aircraft, given that we foresee a better business environment in the second half of the decade.''   Both Boeing and Airbus have been very anxious for Cathay's custom, giving Cathay freedom to play one against the other to get the best possible deal for its shareholders.

  The final choice was between Airbus' already-proven ultra-long-haul A340-300 and the new B777B series being developed by Boeing, which will have a longer range than the initial shorter-range B777A series which Cathay already has on order.

  The B777B will be heavier than the first model, enabling it to carry more fuel and consequently fly further non-stop.

  However, the B777 programme has been running more than a year behind the European consortium's rival A340 programme and it was this factor that swung Cathay's decision to opt for Airbus.

  Cathay had been told the B777B could not be ready for delivery until 1997 at the earliest - too late to meet the Hong Kong carrier's scheduling needs.

  Its six new A340-300s will be delivered in 1996 and 1997 and used to service non-stop European and Australasian routes.

  As a stopgap, Cathay has agreed to lease four 233-seater A340-200s from Airbus - planes which had originally been ordered by Philippine Airlines (PAL) which has since struggled to meet its commitments with the European airframe manufacturer.

  PAL has willingly agreed to take delivery of its A340-200s late, once all of Cathay's own A340-300s have been delivered.

  Cathay has also announced options for a further eight A340-300s, which if taken up will cost the carrier at least another US$1 billion.

  The US$801 million Airbus order includes US$210 million of CFM56-5C engines and spare parts, the only engine compatible with the A340-300.

  Cathay has traditionally been a loyal Rolls-Royce fan and has no problems with the Trent engine, which is compatible with the B777B series.

  As with Cathay's flagship aircraft, the B747-400, the A340s will have a three-class configuration, and underfloor capacity for 33 LD3 cargo containers or 11 pallets.

  The aircraft will each be powered by four fuel-efficient CFM56-5C engines, recognised for their low fuel burn rate and for being more environment-friendly than many of their counterparts.

  Mr Sutch says: ''The purchase is fully consistent with the objectives of Operation Better Shape, the company's programme to adapt to a more competitive and higher-cost business environment.

  ''The A340 is an extremely economic aircraft to operate and will contribute to the long-term profitability of the airline.''   The new aircraft will be used initially to operate on non-stop routes between Hong Kong and Amsterdam, Paris, Rome and Zurich.

  ''Our customers want non-stop services to a range of European and other destinations and the A340 is well suited for this,'' the Cathay chief says.

  The A340 will be used to service Cathay's smaller markets in Europe, the so-called long thin routes, as well as more major trunk routes at off-peak times.

  Mr Eddington says the carrier has found it unviable to operate larger 400-seater B747-400s or Tristars on such services without doing double pick-ups at two European cities to get enough passengers to fill the plane.

  Mr Eddington says Cathay needs 230 to 250 passengers on a B747-400 flights to Europe to make a profit.

  The smaller A340-300 and A340-200 would have lower break-even levels making direct flights to more European destinations viable, he says.

  ''It is an exciting development for us because it gives us the opportunity to use our European network in a more profitable way,'' Mr Eddington says.

  ''It will mean more non-stop routes for customers, which is what they like, and better profits for the company because our non-stop routes tend to be our most profitable.''   Some of Cathay's ageing Tristars servicing these routes will be brought back to Asia to service regional routes when the A340s come in operation.

  Mr Eddington concedes that because of the A340-300 order, Cathay is now likely to take up fewer of its existing B747-400 options.

  It has three B747-400 aircraft on firm order, including two freighters, plus options for a further 11 over the next five years.

  Cathay also has 11 B777As on firm order and 11 options, and 10 A330-300s firm orders with eight options.

  Six of Airbus' previous A330-300 options have been brought forward and were transferred into A340-300 firm orders as part of this week's deal.

   Airbus managing director Jean Pierson says: ''With both the A330 and A340 aircraft in its fleet, Cathay Pacific Airways will be able to benefit fully from the unparalleled levels of commonality offered by the A330/340 family, and will fully benefit fromthe flexibility between both programmes.

  ''We are confident that together the aircraft will help to ensure that the airline maintains its position as one of the most successful and highly respected carriers in the world.''   The total value of Cathay's Airbus Industrie/ CFM International deal is US$801 million and not US$1.11 billion as reported yesterday.



Cathay maintains order was timely