The final countdown has begun to tick over Chinese rule over Hong Kong. With the clock ticking away, senior airline executives in the colony have been engaged in a last-minute game of musical chairs, before the Union Jack is hauled down on 30 June.
The end-of-year departure of Cathay Pacific Airways' charismatic chief Rod Eddington for Ansett was probably the worst-kept secret of 1996. Equally anticipated was the elevation of David Turnbull to the position of managing director, with Philip Chen as his deputy.
Chen returned to the Cathay fold in March after a three-year stint at Dragonair and is now widely tipped to succeed Turnbull as the first ethnic Chinese to head the airline. Heading in the opposite direction to Chen is Stanley Hui, who left Swire to take over the helm of newly Chinese-controlled Dragonair. He is succeeded as chief operating officer of Cathay's subsidiary cargo carrier, Air Hong Kong, by Kenny Tang.
Although the names and faces at the top have changed, the issues they confront have not. As well as having to acclimatise to the post-1997 political environment, where allegiance is to Beijing rather than to London, there are the challenges of maintaining international competitiveness, developing fresh routes, funding new equipment and moving to a new and ultimately more expensive airport at Chek Lap Kok.
China secured major inroads into Hong Kong's aviation industry as the result of a HK$8 billion ($4.7 billion) share deal between Swire and mainland Chinese investors Citic Pacific and the China National Aviation (CNAC). The deal gave China control of 64.4% of Dragonair, diluting Swire's hold on Cathay to 43.9%.
Many observers have suggested that Beijing ultimately will not be content to stop there. Whether Cathay remains a UK majority-owned and managed airline in the long term is open to debate, but what is clear is that 1996's accommodation has bought Swire time. Turnbull says that there are no other changes now planned, but does not rule them out in the future.
Longer-term plans
Dragonair's longer-term plans had called for the airline to be floated on the Hong Kong exchange, but these proposals appear to be taking a back seat to CNAC's own ambition to list. The airline, in the meantime, has unshackled itself from Swire and begun to use its new ownership to full advantage in China.
Hui acknowledges: "The changes in shareholding are helpful to further developing our operations in mainland China, in particular given the relationship of CNAC and CAAC to the authorities there. I would be very surprised if we don't get more opportunities in China."
Dragonair's immediate priority is to develop a standalone management structure, independent of former sister carrier Cathay. "In practical terms, the Ìrst thing that happened was when they offered the job to me, I had to resign from Cathay," says Hui. "As a result of that change, the secondment arrangement will gradually disappear to give the airline full independence in terms of management."
At an operational level, Dragonair has also begun to part company from Cathay, with the airline's decision to take responsibility for its own cargo sales and distribution from July. Other moves includes a new joint headquarters building with CNAC at Chek Lap Kok, separate from Cathay, and the acquisition of its own Airbus A320/A330 flight-training simulator.
AIRLINE AUTONOMY
While the two carriers are moving apart in some areas, they remain very much interdependent in other respects. Swire and Cathay retain a 25.5% holding in Dragonair and have a presence on the airline's board. Cathay still provides the smaller carrier with a worldwide computerreservation system, engineering and technical support and in turn relies on Dragonair for access to China and parts of Asia.
The must important ingredient for such a relationship to work are complementary, rather than competing, air services. Under the Hong Kong Government's long-standing "one airline - one route", policy, there is no room for any other type of arrangement. Whether this remains the case after the handover and opening of the much larger airport at Chek Lap Kok remains to be seen.
The CNAC's parent body could have a major influence on this. Pressure from Beijing has already resulted in Air China being allowed to launch a weekly service from the Chinese capital to London via Hong Kong, the Ìrst such concession ever made to a mainland carrier.
Hui has no doubts about what the changes mean. "We've been constrained in terms of what we wanted to do because of the existing terms of the Sino-UK air-services agreement. After 1 July, it is going to be the Central Government, in consultation with the Hong Kong Special Administrative Region Government, that will determine air services between here and mainland China."
Dragonair has already reaped some early rewards, launching new services to Chongqing and Qingdao and increasing its Chinese network to 16 cities. Depending on the development of suitable airport infrastructural and market demand, it also has permission to add Fuzhou, Shantou and Urumchi. The latter point poses a particular technical hurdle, given its remote location in China's far west.
Outside China, Dragonair is examining a range of possible new destinations, including additional secondary points in Japan, such as Komatsu or Niigata, and Pusan in South Korea. Other potential Asian points not yet served from Hong Kong include Yangon and Vientiane. Any suggestion that the carrier is looking to go beyond the region are dismissed by the airline. "It's straightforward, we're a regional carrier limited by the fact that we have Airbus A320s and A330s, and we normally stay within a 5h range. I think we have enough to do in the region and we don't have any plans to go beyond that for the foreseeable future," claims Hui.
TAIWANESE TURBULENCE
Cathay and Dragonair derive a significant amount of revenue from traffic between China and Taiwan. In the case of the latter carrier, it is around 15%, while the former's thrice-daily Kaohsiung service accounts for some 20% of income. With the restoration of shipping links between the island and the mainland, both airlines are bracing themselves for the possibility of direct flights soon.
Hui concedes that "-we will be hit to a certain extent". He adds, however, that "-the whole market will actually grow and that, perhaps, will compensate for what we may actually lose as a result of direct flights". Turnbull is similarly optimistic that any damage can be minimised by the anticipated large numbers of new Chinese travellers who will opt to take the "circle route" to Taiwan via Hong Kong,
Cathay has begun to focus more attention on Asia, on flights to Europe and North America. "We haven't got an ambition to cover the world with our green tails," says Turnbull. "Flying more in Asia is obviously important-having a strong Asian network is our strength".
Like Dragonair, the country also has its eye on Pusan and the capitals of Myanmar and Laos, as well as Davao in the Philippines, Medan in Indonesia, and Danang in Vietnam. Long-term plans also call for frequencies to be increased to existing Asian destinations and more direct non-stop flights to be developed, such as to Bombay and Delhi in India.
Further aÌeld, the burgeoning economies of the Middle East are stimulating interest in flying to Cairo and Istanbul. The growing per capita income of certain Eastern European countries, such as the Czech Republic, also offers great potential over the next five years. "There is money in these places," concludes Turnbull.
Cathay's efforts in the Western European market will be focused on improving yields. "Frequency is an important point in the selling game," contends Turnbull. "Daily sells better than four times a week and there is no doubt that you can get better yields. We will be double daily to London and need to look at what we can do with Frankfurt and Paris."
A recently ratified new bilateral air-services agreement between Hong Kong and the USA gives Cathay unlimited frequencies on six passenger and eight freight services into the USA. Its immediate plans, however, are confined to launching only one new route, in addition to its Chicago, Los Angeles and New York services.
Turnbull explains: "We're still bedding down New York. Our name is not well known on the US East Coast-some people have never heard of Cathay Pacific and they might think it's a restaurant or something."
A more practical hurdle to expanding into North America is the lack of suitable equipment to enable non-stop, all-year-round flights to Toronto and New York. Cathay's interest appears to be focused on the proposed 15,350km (8,300nm)-range Airbus A340-500 derivative, rather than the planned rival Boeing 777-200X. The airline operates shorter-range versions of both aircraft, but is understood to prefer a four-engined aircraft for transpacific operations.
A new ultra-long-haul airliner forms part of a wider Cathay requirement for additional aircraft. The airline is now more than midway through a $9 billion fleet-modernisation programme, under which will it will re-equip with 11 777-200/300s, 13 A340-300s and 12 A330-300s by 1999. "Evidently, we're going to need some more from then on, which we're going to have to order at the end of the year, or in early 1998," reveals Turnbull.
Despite Boeing's decision to shelf the 747-500/600X growth derivatives, Cathay is still a firm believer in an ultra-large-capacity aircraft, provided that it can offer a significant reduction in seat-kilometre costs. "We can use a 650-seater and I believe that, one day, it will be built," says Turnbull. "If it was available tomorrow, we could probably use it to Los Angeles, London, Tokyo, Osaka and Sydney."
Airbus orders
In the past eight months, Dragonair has placed new orders for two additional A320s, increasing its fleet to nine aircraft, leased another A330-300 from International Lease Finance and acquired a sixth by converting an A330-300 option previously held by Cathay. The airline is deferring any decision on five A320 options until after the handover. "By the third quarter, we should have a fairly good idea what the opportunities will be-and then we can make firmer, slightly longer-term plans," says Hui.
The fleet plans of both carriers hinge heavily on the opening of Hong Kong's new $6.36 billion airport in April 1998. Equipped with two 3,800m (12,460ft)-long runways and a terminal capable of handling 35 million passengers on opening, Chek Lap Kok represents a major advance on the slot-congested Kai Tak Airport.
The move to Chek Lap Kok has entailed significant investment on the part of the two airlines in new engineering, catering, training and accommodation. Cathay alone is spending HK$4.2 billion on a new headquarters building. It was, therefore, hardly surprising that the Hong Kong Airport Authority's proposed new user charges for Chek Lap Kok, which, on average represent an 85% increase on Kai Tak, have met with a barrage of criticism.
Cathay and Dragonair have the most to lose and are at the forefront of this debate. Hui warns that the proposed new charges could "-break the economics" of some marginal short-haul routes, forcing airlines to discontinue those services. Turnbull makes the more fundamental point that "-in Hong Kong, every hotel, shop, restaurant and regional office benefits from, and needs, an airport. If there wasn't an airport here there would not be anyone else here".
Source: Flight International
