Few airline heads can claim to have had as tough an initiation as David Turnbull. When he was appointed managing director of Cathay Pacific Airways late in 1996, it was at one of the world's most profitable carriers. Only months later its fortunes began to take a radical turn for the worst.
Problems began in mid-1997 as the UK handed back Hong Kong to China. The ending of 150 years of British rule was to have been a momentous period and expectations were high that Hong Kong's vibrant fortunes would be boosted. Instead, it marked the beginning of a dramatic downturn. Profits collapsed for Cathay in 1997 - not helped by some highly publicised engine troubles on its Airbus A330 fleet. Then, in 1998, when a management reshuffle resulted in Turnbull being named as deputy chairman and chief executive, the airline posted its first net loss since 1963. Not only was Asia in the midst of economic turmoil, but Cathay had to contend with the controversial opening of Hong Kong's new airport at Chek Lap Kok.
Turnbull and the management team came under intense pressure to act. A swathe of cost-cutting plans included job cuts, the reduction in frequencies on some regional routes and the retirement of older aircraft. That was enough to help Cathay limp back to a small net profit for the first half of 1999, but by May the carrier had become embroiled in a bitter struggle with pilots. That led to a damaging two-week "sick-out". But then, just as it looked as if there was no cure, things started to improve. By the end of last year, the carrier had effected a convincing return to profitability.
Radical action
Although difficult, in many ways the downturn was a necessary wake-up call for Cathay, which for years profited greatly from its dominant position as Hong Kong's de facto flag carrier. Two local challengers sprang up in the mid 1980s but Cathay and parent Swire Pacific - one of Hong Kong's most established conglomerates - soon brought them under its control. Indeed, an old industry joke had it that one of the quickest ways to make money in Hong Kong was to start an airline, and wait to be acquired.
Turnbull cautiously agrees that the group is in better condition today due to the tough times. "It was not very good for the people who lost their jobs - and there were a lot of them. If you include the aviation group, around 5,000 people left in one way or another, by a mixture of voluntary redundancies and forced redundancies," he says, in a characteristically blunt and almost impatient tone. "But I think the company's in better shape now."
The forecast is for the better shape to continue, although he is quick to warn against becoming over-optimistic. "Loads are up, yields are up a little bit, our cost situation is good, with the exception of fuel," he says. But he adds that the upturn towards the end of last year was in comparison to the horrors of 1997 and 1998. Revenues this year are likely to be little more than they were in 1996 before the problems began. "Revenue fell hugely during the Asian downturn and the only reason we are making money now is because we cut costs," he says. Yields across Asia fell by 25-30% and by 40-50% on routes to Japan.
Turnbull, who is known for being forthright, also points out that even at its height, when the group was showing annual net profits of around HK$3 billion ($400 million), the margins were poor by broad investment standards. "If you look at the capital invested, the average businessman would think it's a rotten return. Given the effort and the money put in, it's actually not huge," he says.
Yet Cathay seems back on track. The first quarter of this year saw passenger
numbers up by 8%and freight by 12%, encouraging Cathay's moves towards a major fleet expansion. Orders have been placed for seven A330s, one Boeing 777 and three Boeing 747-400 freighters. One Airbus A340 and three A330s are also to be leased, helping lift the fleet by nearly 25% to 80 aircraft through to 2001. The airline is separately looking at placing a major order for ultra-long-haul aircraft in the second half of this year, primarily for use on new non-stop services to New York and Toronto.
Cargo, in particular, is set for expansion. It had proved the "outstanding business of the year" in 1999, as sales grew 21%to a new record of HK$8.4 billion. As a result, the fleets of its own cargo division and of subsidiary Air Hong Kong are likely to be expanded. "Cargo is already a third of our business and it may well run to 40%," Turnbull says. "Cathay has always been quite good at cargo - we've got three freighters coming and I suspect we'll be ordering more."
For 14-year-old Air Hong Kong - Cathay bought 75% of the dedicated freight carrier in 1994 - business is also positive. It operates three 747-200Fs on scheduled services to Japan, Europe and the Middle East plus charters elsewhere.
Growth forecast
Cargo growth is forecast due to a lucrative partnership forged with DHL Worldwide Express. Under the agreement, which took effect in March, Cathay is carrying express freight for DHL on weekly overnight flights to Osaka, Seoul, Singapore and Taipei. Freight is carried on passenger aircraft that would otherwise have remained parked overnight at airports.
Turnbull believes more tie-ups are likely and not just in cargo. A different form of agreement took effect recently with General Electric Capital Aviation Training, under which Cathay has leased out vacant flight simulator bays. Airline analysts in Hong Kong doubt whether such partnerships would have been pursued with such vigour if the boom times were to have continued uninterrupted and neither would alliances have been embraced so enthusiastically.
But Cathay, which for years shied away from partnerships, recognised during the downturn that it could not remain so independent. Turnbull says its founder membership in the oneworld alliance in 1998 is also aiding performance. He expects the alliance to add around 10% to Cathay's bottom line this year and about 5% to overall revenue.
The benefits have "hardly started" Turnbull says. "Cathay does well for a number of reasons. For one, for the moment, we're the only oneworld carrier in Asia, and for another, the small guy is always going to do well. Look at the USA: American Airlines is giving us that power of distribution which we could never have had on our own."
The pullout of Canadian Airlines has been tougher on Cathay than other members, however, as Canada, with its large Chinese population, is a key market. Having a domestic feed through Canadian was a major boost, which disappeared with the carrier's takeover by Air Canada and the Star Alliance. "That is a bit of a blow. Canada is an important market for us and that is a rather unwelcome development. We are twice a day to Vancouver and we go once a day to Toronto. These are good large natural markets for us."
Cathay is often compared to Singapore Airlines (SIA). Both are based in city states, highly dependent on the quality of their international brand, and traditionally make huge profits. In recent years, SIA has complained about "plateauing growth", however, and its plans for expansion mainly cover the purchase of stakes in other airlines. Turnbull says Cathay holds a different view, however, and suggests that it, too, will feel a need to go on the acquisition trail. "There is a lot of growth to be had in Asia. Compared with Singapore, Cathay is fortunate because of Hong Kong's better geography," he says, pointing out the Hong Kong market is twice the size of that in Singapore. While Singapore might also be positioned to tap into neighbouring Malaysia or Indonesia, both have their own flag carriers. Cathay also has China right "on our doorstep".
The Swire philosophy, he adds, is to invest in businesses where the group "can have control". In the airline business that is problematic due to foreign ownership restrictions and people in the carriers simply not wanting to hand over control. Because of this Cathay is "not terribly interested" in acquisition.
Instead it is looking at growing its own route network. Three or four new destinations are being assessed, although Hawaii is the only clear possibility. Turnbull also wants flights to be operated "every two hours or so" to key Asian points within a few years. Given Hong Kong's traditional role as "gateway to China", it seems only natural that Cathay would seek to profit from the forecast growth there.
Turnbull says that talks have been held with China Eastern Airlines in Shanghai, on a tie-up to allow passengers to fly on its domestic flights through a codeshare arrangement. "We've been talking with them," Turnbull confirms. The question is still open as to whether the deal is likely to be in the form of a strictly commercial arrangement or a wider equity-based partnership. "I imagine a commercial alliance would be the easiest. But our minds are completely open," he says. A partnership could bring oneworld into play.
Competition
Turnbull is quick to point out that a China Eastern link would not be "competing" with Dragonair, the airline which for much of its 15 years had been known as Cathay's "sister carrier". Dragonair is Hong Kong's second passenger airline, operating to 17 cities in China and nine other secondary points in Asia. Cathay and Swire took control 10 years ago but ceded that to China in 1996. Control moved to China National Aviation (CNAC), the commercial arm of the regulatory Civil Aviation Administration of China. CNAC purchased a more than 40% stake after a tough fight for control of Hong Kong's aviation industry in the run-up to the colony's hand-back in 1997.
Although Cathay and Swire hold a combined 26% stake in Dragonair, the smaller carrier has been steadily forging its independence and many expect it to start competing head-to-head on key routes in the coming years. A starting point is in the area of cargo carriage to Europe - a market which Dragonair plans to enter this summer with its first dedicated freighter aircraft. For years Cathay has had an extensive arrangement with Dragonair for flights to and from the mainland. Turnbull says that while Cathay has no intention to operate its own aircraft to China again - it did so until it bought into Dragonair - there is a need for a greater reach within the country. "Dragonair cannot offer domestic services within China, like Beijing-Shanghai, so if you're going to have an alliance properly covered at the end of the day and assume that in 20 years' time the China market is going to be so big, then obviously you're going to need someone," he says.
Cathay fought vigorously against Dragonair's launch in the early 1980s, seeking to block it from winning route licences. After it was launched, a "one-airline, one-route" policy was implemented by the government under which only one local airline can operate on a given route. Many expect this to be lifted in the coming years, however, allowing Dragonair to operate to key regional points served by Cathay. Turnbull himself concedes that it could be a possibility. "I think it would be an unwise person who would bet that it would last forever, the way the world is changing. There are already some examples, especially in the cargo area," he says.
However, he does not regard sharing routes as all bad: "Over the years it's served Hong Kong pretty well - the biggest example would be Dragonair and China. We used to fly to China, and that has enabled Dragonair to develop into a good and viable carrier, by avoiding unnecessary duplication and wasted resources." It would not, he says, make sense for Cathay and Dragonair to compete head-on in markets which cannot sustain it, especially in the main passenger ones. "It would mark a pretty great breakdown of understanding between Cathay and Dragonair," he says. "It's much better that we work together - they concentrate their resources on building up what they've got and likewise us. Otherwise the end result would be two people bashing away at each other and they'll both end up weaker."
Such a "bloodbath" would be bad for Hong Kong, he argues, adding that there should be room in the market for both carriers.
The bigger question is over Swire's commitment, or ability, to continue dominating aviation in Hong Kong. The share reorganisation which saw the biggest single stake in Dragonair go to CNAC also allowed CITIC Pacific, another Chinese company, to take its shareholding in Cathay to 25%, leaving Swire holding 44%. Turnbull swiftly dismisses any speculation, saying that there is "no plan" to divest in Dragonair and every intention to keep the status quo at Cathay.
Liberalisation
Regarding opening up internally to allow more local competition, much has been made in recent years of the Chinese Special Administrative Region's pledges to liberalise for the benefit of outside operators. The US Government recently took Hong Kong to task on this, claiming, after air services talks on a sought-after open-skies agreement failed in April, that the former colony was reneging on promises to open up. Turnbull scoffs at the US accusations, however, and charges hypocrisy from a country that he says itself restricts outsiders in many ways. US carriers want unrestricted rights to operate within Asia, but are not willing to allow Cathay to operate domestically in the USA.
He adds that Hong Kong is already an open market. Cathay has a 28%share of slots at Hong Kong, compared with 75% for Delta Air Lines at Atlanta or even the 40%or more that Singapore Airlines has at Changi. "We have about the smallest share of any airline around in this part of the world," he says. "The one area that annoys us is the bullying by the Americans." He believes that the US demands for Hong Kong or others to "open up" their markets, misses the main purpose of a bilateral treaty which should be to provide for more service between the two countries. That, he argues, is needed regardless of any "open skies" philosophy.
After a trying three-and-a-half years, Turnbull clearly still has his work cut out for him. But no matter what the future holds, the present is at least better than the recent past. As Turnbull says: "We're happier with our life now than we were two years ago, that's for sure."
Company climber Born in the UK in 1955, David Turnbull graduated from Cambridge University with an MA (Hons) in Economics in 1976. Turnbull joined Swire that year and has since held various posts within the group. 1976-1982 Worked for Cathay Pacific as country manager in Dubai, Malaysia, and the Philippines. 1983 Moved to the company's Hong Kong headquarters to become manager international affairs. 1985 Becomes commercial director of Swire Group Australia and managing director of New Guinea Australia Line (NGAL) Shipping Line. 1990 Appointed managing director of Hong Kong Aircraft Engineering Company (HAECO) 1993 Becomes deputy managing director corporate development for Cathay Pacific. 1995 Becomes chairman of HAECO 1996 Appointed managing director of Cathay Pacific and director of Swire Pacific. July 1998 Becomes deputy chairman and chief executive of Cathay Pacific, after rising up the corporate ladder at UK parent, Swire Group.
Cathay's roller-coaster
1996 March: Cathay and parent Swire Pacific agree to a sell-down in Dragonair to China National Aviation (CNAC). Another Chinese company, CITIC Pacific, agrees to increase stake in Cathay to 25%. CNAC agrees not to establish competing airline in Hong Kong September Managing director Rod Eddington resigns to become executive chairman of Ansett. David Turnbull named managing director. 1997 May Airbus A330-300 fleet grounded for two weeks over reliability concerns with Rolls-Royce Trent 700 engines August First-half profits fall as soft summer travel market and A330 grounding hurt. Defers options on Airbus, Boeing aircraft. 1998 January Announces plan to lay off 760 staff or 5% of workforce as management warns of deteriorating conditions. March Says 747-200s to be grounded; Asia services consolidated; reports 1997 net profit down 55%; 80 more staff laid off. June Chairman Peter Sutch to retire. July Cathay badly hurt by disastrous opening of new airport at Hong Kong. August Loss reported for first half. September Announces formation of oneworld with American Airlines, British Airways, Canadian Airlines and Qantas. 1999 January Flight attendants threaten strike, but problem is later resolved. March Agrees to lease five 747-300s to Pakistan International. May Pilots launch sick-out in pay-cut dispute. June Settlement: some pilots take pay cuts in return for stock options. August Reports first-half return to profitability October Leases three A340s from Air China on improving conditions, orders two 747-400Fs. November Starts hiring cabin crew again. December Agrees tie-ups with DHL, GECAT; orders three A330s. 2000 February Leases ILFC A340. March Posts return to profit for 1999, boosts summer season flights. May Orders four more A330s, says to lease three A330s, buys one 777-200 from Boeing and one 747-400F. Posts 8% rise in Q1 passengers, 11,7% rise in freight volumes.
Source: Airline Business
