Responding to the rapidly changing market situation, Cathay Pacific’s strategy took into account variables such as fuel prices, fleet deployment and fluctuations in world trade patterns, all of which had shown a marked change globally over the past 12 months. The carrier’s response included capacity cuts, special leave schemes for staff , adjustment of frequencies, focusing on new markets and also included delaying a planned cargo terminal to cut costsamid the global recession.

“In the first half of 2008 Cathay Pacific had to adjust its cargo operation in the face of crippling oil prices,” says Diu, who oversees cargo sales and marketing for both Cathay Pacific Cargo and its venture with Air China Cargo, an all-freighter cargo airline based out of Shanghai.

As jet fuel rocketed above US$140 a barrel, Cathay Pacific faced huge cost problems making it difficult to operate profitably on long-haul routes. Today, with fuel at about US$40 a barrel, the airline is addressing an entirely differentproblem – plummeting demand.

Declining demand
Not only have diminishing exports from the Pearl River Delta and Yangtze River Delta regions hit the airline, its woes have been compounded by the shrinking European and North American markets. “At a time of weak airfreight demand, there’s a need to carefully manage our capacity as we look for new revenue streams to tap into,” Diu says.

In a recent statement to the Stock Exchange of Hong Kong, Cathay Pacific said its first quarter turnover from provision of cargo and other services in 2009, together with its subsidiary Dragonair, was 22.4 per cent lower than in the first quarter of 2008, reflecting the market’s softness.

Due to the present global economic slowdown challenges in the aviation business, Cathay Pacific has introduced a four-tier, top down Special Leave Scheme under which all of the 17,000 staff working for the airline – in Hong Kong (about 13,600) and overseas (3,400) Cathay Pacific Cargo meets challenges head-on Faced with unprecedented air cargo market challenges vastly different from those faced by the airline a year earlier, Cathay Pacific Cargo is tapping a broad-based strategy for coping with the sharp decline in cargo traffic, says Titus Diu, the division’s general manager for cargo sales & marketing. – have been asked to take unpaid leave varying from one to four weeks according to their seniority.

More than 96 per cent of the airline’s Hong Kong-based flight attendants and 99.9 per cent of Hong Kong ground staff , and about 90 per cent of its pilots signed up for unpaid leave, completing a company-wide drive to reduce staff costs amid slumping transport demand. Others could not take up the offer due to contractual issues.

The shrinking demand was underlined by the 123,179 tonnes of cargo and mail that Cathay Pacific and Dragonair jointly carried in April, representing a 13.3 per cent dip on April 2008. Capacity, measured in available cargo/mail tonne kilometres, fell by 12.2 per cent, while the cargo and mail load factor dropped by 1.9 percentage points to 65.7 per cent. For the year to date, tonnage has fallen by 17.3 per cent compared to a capacity drop of 13.6 per cent.

Realising the seriousness of the situation, the airline also took a major step in mid-January 2009, by requesting its wholly-owned subsidiary, Cathay Pacific Services Limited (CPSL), to sign a supplemental agreement with the Airport Authority Hong Kong (HKAA) to defer the completion of its new cargo terminal by a maximum of 24 months to mid-2013. Under the agreement, CPSL will compensate the HKAA for the deferral, but the compensation amount was not disclosed.

No recovery signs
In a candid statement recently to staff , Cathay’s chief executive officer Tony Tyler, says he does not expect a recoveryin aviation demand soon as the outlook is a ‘big worry’. In an interview with theairline’s CX World publication, Tylerstates: “I do want staff to understandthe seriousness of our situation. Theoutlook for our revenue is very poor andit could be a long time before we see thebottom of the market, let alone any signsof recovery.”

Cathay Pacific had its first loss in 10 years after reporting HK$7.6 billion (US$980.63 million) in paper fuelhedging losses. The carrier’s paper fuel-hedging losses this year stood at HK$1.9 billion as of the end of February. “It will take some time to reshape our hedging profile,” says Tyler. “We’ll also be prepared to spend cash on ‘stop-loss’ contracts.”

He says Cathay Pacific expected, among others, weak cargo loads, poor yields negative currency impact which together were making it more important than ever to preserve cash. “We have no option but to take measures that will help us weather the current storm and maintain the longterm sustainability of the business,” he says.

As the economic recession is cutting demand for business, Hong Kong International Airport’s freight volume in March dropped 20 per cent to 198,000 tonnes.

Capacity reductions
Following a very thorough review of every route operated by Cathay Pacific, the airline has introduced a number of capacity reductions. Diu says for its cargo operation, Cathay Pacific will reduce its available tonne kilometres by 11 per cent taking into account the reduction in freighter operations and freight carried in the bellies of passenger aircraft. The weekly freighter frequency will fall to 84 flights – down from 124 a week during the 2008 peak.

Flights to Europe via the Middle East or India will be reduced to 22 per week from 32, while flights to North America will be cut from 31 to 26. Services to Australia will be cut from three to two per week, and the 23 flights per week to Mainland China, mainly to Shanghai, Beijing and Xiamen will be cut back to 15.

Cathay Pacific will also reduce its North Asia flights to Osaka and Taipei by half, from 20 to 10 per week, and its Southeast Asia flights will be cut from nine per week to three. The airline will, however, keep its six flights per week to the Middle East and India. Interms of aircraft deployment, Cathay is negotiating the sale of five aircraft andwill park two more of its Boeing 747-400BCF freighters – taking the totalparked to five – and wet-lease one BCFto subsidiary Air Hong Kong.

On the passenger flights, there will be a reduction in flight frequencies to London, Paris, Frankfurt, Sydney, Singapore, Bangkok, Seoul, Taipei, Tokyo, Mumbai and Dubai. At the same time, more flights will be added to Denpasar, Sapporo and Bahrain/Riyadh.

Dragonair will also see a 13 per cent cut in capacity. Flight services to Bengaluru, Busan, Sanya and Shanghai will be reduced while services to Fukuoka, Dalian, Shenyang, Guilin and Xian will be suspended.

Schedule adjustments
Due to Cathay Pacific’s capacity changes, the airline’s schedule will see a number of reductions or additions. On its London service, the airline will make ad hoc cancellations of 17 round trips in May and more are likely in June upon further review.

Cathay Pacific’s Paris service will see a reduction of seven round trips off the twice-daily services in May. Plans also include reducing the service further to 10 flights per week from June to the end of August, then daily from September, subject to changes in accordance with demand. Similarly, on its Frankfurt service, Cathay Pacific will cut nine round trips off the 10-flights a week service in May. From June, the airline will cut three weekly services to make it a daily service.

On the Sydney route, Cathay Pacific will cut one flight daily to three flights per day, and on the Singapore route, it will cut 10 flights weekly to 32 flights per week. Its Bangkok service will see a cut of four flights weekly to 31 flights per week. The airline’s service to Seoul will be reduced by one flight daily to four flights per day, and its services to Taipei will be adjusted according to demand, with ad hoc cancellations. So far, Cathay Pacific says it will stop four daily flights to Taiwan. For its Tokyo/Taipei and Mumbai/Dubai services, which are currently operated with 747 aircraft, the airline will reduce the capacity by using smaller A330 aircraft.

Aside from reducing capacity, the airline is also adding more capacity on some routes. These include an addition of four flights weekly to Denpasar to its existing daily flight from July to September. The airline’s Sapporo service will also see an addition of three flights weekly to become a daily service inJuly/August. In addition, its Bahrain/Riyadh service will receive a boost withthe addition of three flights weekly tobecome a daily service from August.

New markets
Regarding new markets, Diu says that Cathay Pacific has identified Indonesia, Vietnam and South America as having real potential, and the airline has acted quickly to start up new services to tap demand in these areas.

On January 9, the airline started flying its freighters twice a week to Ho Chi Minh City and Jakarta, and on 12 February boosted freighter frequencies to Milan in Italy from three to six a week. “With the change of consumption habits in mainland China, luxury products from European countries have become very popular. There is still room for an increase in the luxury goods trade from Europe,” says Diu.

From 6 March, Miami and Houston were added to Cathay Pacific’s list of US freighter destinations. This new service follows a Hong Kong-Anchorage-Miami- Houston-Anchorage-Hong Kong routing and is being operated with one of the new Boeing 747-400 Extended Range Freighter s (ERFs).

“Miami and Houston are both gateways to South America’s markets and, given the current economic downturn, we have to develop new markets and new products to sustain our long term business,” Diu says. “The major commodities transported into South America are primarily electronic goods, fashion and semi-finished products, while exports are mostly of seasonal perishables and garments. These goods are often transported via Europe so we’ll be opening up a new opportunity into Asia.”

The response from the market to the Miami/Houston launch has been positive with suppliers and forwarders welcoming the provision of a one-stop solution. “We are working with partners in order to provide the best possible product for them to send to places in South America like Brazil and Argentina,” Diu says. “From a Cathay Pacific perspective this is important – the current weak cargo market means we need to find new revenue streams.”

Recent export statistics from the Mainland China highlight why the airline is keen to tap into South American trade. At the end of 2008, export markets from China suff ered negative growth for two months in a row – down 2.2 per cent in November and 2.8 per cent inDecember.

Future development
Despite the present economic woes, Cathay Pacific Cargo continues to look ahead, and its major strategy has been to upgrade its freighter fleet as well as redeployment of aircraft on more appropriate routes.

Diu says the airline is in the process of retiring its fleet of Boeing 747-200F and 747-300F “Classic” freighters, and is replacing them with modern Boeing 747-400ERFs and from 2010, the newgeneration Boeing 747-8Fs. “From an operational efficiency point of view, it is more eff ective to operate extended range instead of the Classics, and the new freighters are highly fuel efficient – consuming 22 per cent less fuel per revenue payload tonne than a Classic – and are also more environmentally friendly,” he says.

Cathay Pacific recently announced it was bringing forward the retirement of the Classics and all will be phased out by August 2009. Although the aircraft did a sterling job in helping Cathay Pacific build its cargo operation over the past 25-plus years, it is now considered an inefficient aircraft and cannot be used in these exceptionally challenging times.

Diu says the downturn has not affected the airline’s commitment to Hong Kong. “That commitment has never been in doubt, but of course we are aware of increasing competition from other airports in the region – in particular Pudong, Taipei, Incheon and Narita,” he says.

“In order to continue Hong Kong’s success as a hub for exports to the Mainland, we need to maintain and build critical mass through new routes, and at the same time manage our costs well in order to compete. The introduction of the new ERFs will enable us to move greater amounts of freight in a more efficient way, adding a further boost to Hong Kong’s position as the world’s leading international airfreight hub.”

Th e airline expects part of the cost efficiency to be achieved through using new fuel-efficient aircraft such as its 10 new Boeing 747-8 freighters which are expected to give a competitive advantage in terms of cost and payload. Another important part of cost management relates to government fees. “At a government level, they need to work harder to get charges at Hong Kong International Airport down – one would say that charges at HKIA are still on the high side,” Diu says. “What’s more, other stakeholders such as the cargo terminal operators also need to contribute by keeping costs down to help keep the hub competitive.”

Diu admits that operating in an environment where supply is increasing while demand is on the decline means Cathay Pacific Cargo has to ensure that its own pricing is competitive. “We will always be responsive to market demand,”he says.