How a disgraced United Airlines chief influenced Cathay Pacific’s decision to forgo a budget airline
Chairman of Hong Kong’s flagship carrier reveals that a dinner with Jeff Smisek, who was forced out of United amid a corruption scandal, helped convince him to stay out of the low-cost carrier market
Cathay Pacific Airways’ decision to hold off on launching a low-cost carrier was influenced by an executive who was forced out of United Airlines, the Hong Kong carrier’s chairman has revealed.
In a surprising revelation, John Slosar said that part of the reason he has been dead set against launching a budget airline came from a dinner he had “a few years ago” with Jeff Smisek, the former United Airlines chief executive who resigned in 2015 after a major corruption scandal.
“The most important thing he said was, ultimately the idea that you could have a separate [budget] airline … and your main brand doesn’t compete turns out to be a false assumption,” Slosar told students at Polytechnic University in a speech last week.
Slosar, 61, said the failures of Ted, United’s budget carrier, and Song, under Delta Air Lines, had crystallised the conservative views of Smisek.
He told Slosar that such a move would risk cannibalising Cathay’s premium business model.
Smisek “was saying don’t go down the path of setting up all these different airlines, figure out how to make your main brand compete in the main markets, that is what you ultimately have to do”, Slosar recalled. “Given the point about segmentation, its really hard to segment out, I think there is a lot of sense in that. Jeff sort of convinced us that was the right way to look at it.”
Slosar said that passengers do not choose low-cost carriers because of their business model but rather because they seem to offer the most convenient service.
Achim Czerny, an associate professor in aviation management at Polytechnic University, who listened to Slosar’s talk, said: “Basically, what this means to me is that he doesn’t seem to see the need to establish a Cathay [low-cost carrier] any time soon.”
Despite increased competition from budget airlines and recent heavy revenue losses, Slosar has remained adamant that there would not be a launch of a no-frills carrier.
Cathay Pacific lost HK$575 million (US$73.5 million) in 2016 and suffered HK$2.05 billion in losses in the first half of 2017 faced with competition from mainland Chinese, Middle East and low-cost carriers.
While Cathay has maintained a “never say never” stance on starting a budget-arm to cater for price sensitive travellers, Hong Kong International Airport is at near maximum capacity in terms of traffic, leaving no room at home for such a launch.
The decision not to launch a budget airline, Slosar said, came as the likes of Air Asia boomed amid a growing appetite for air travel in the region, and traditional airlines responded in kind with their own competing low cost brands.
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Hong Kong Express, the city’s only home-grown budget airline, competes for price sensitive travellers in East Asia, mainly Japan and South Korea. To Southeast Asia, the brands of Air Asia and Jetstar are also squeezing Hong Kong’s flagship airline.
“Cathay Pacific is missing out on a huge growth opportunity by not launching its own budget airline arm,” transport research analyst Corrine Png, CEO of Crucial Perspective, said. “It was not a wise decision.”
Png said launching a low cost carrier should not be seen as a defensive move for traditional airlines.
“Low cost carriers have grown significantly in Asia in the past 16 years since they were first launched here and many of the established ones have higher profit margins than Cathay Pacific,” she added.
Slosar, however, said it would be cheaper to run a twin-aisle widebody plane with more passengers compared with a single-aisle plane.
“I would definitely have lower costs than any low cost airline for sure.”
Last week, Swire Pacific, which owns Cathay Pacific, announced it would return its family to the chairman’s role, replacing the American-born executive.
Slosar would retire from his top roles at Swire Pacific, Swire Properties and aircraft engineering company Haeco, but remain as the airline’s chairman.
Smisek led United, then the world’s second largest airline, after its merger with Continental in 2010 which he also led. During his tenure, the airline faced many financial and operational issues, as well as customer and employee relations low points, helping drag the airline’s image and reputation to among the worst in America.