|Law Kian Yan
When John Slosar took over from Tony Tyler as Cathay Pacific’s chief executive in April 2011, the airline had tripled its full-year net profit to HK$14.1 billion ($1.8 billion). Just 18 months later, amid a weak operating environment and high fuel prices, Hong Kong’s flag carrier has posted a half-year loss of HK$935 million and may end the year in the red.
Slosar cannot help but make a quip about the timing of his predecessor’s departure for IATA, saying with a laugh: “It is probably a testament to the great skill of Mr Tyler in knowing when to leave. I am not sure I can ever hope to aspire to such fantastic insights. I will do my best.”
Do not bet on that happening any time soon. Slosar, like Tyler, is a Swire Group princeling – one of those mostly British men who are recruited from Oxbridge after graduation by the Hong Kong-based conglomerate. He is a rare American among them, with degrees from both Columbia and Cambridge universities. Soon after joining Cathay’s parent in 1980, he was identified as a potential star.
He has since risen up the ranks, running Hong Kong Aircraft Engineering and Swire Pacific’s Beverages division, which manufactures, bottles and distributes Coca-Cola products in Hong Kong, Taiwan and large parts of China. Slosar is credited with turning around the latter and making it one of the top bottlers in the world.
He has also held various appointments at Cathay and ran their offices in the USA and Thailand. Before taking on the top job, he was the chief operating officer and was responsible for the airline’s day-to-day operations.
The Ohio-native, who has a ready smile and speaks English with an Anglo-American twang, is also fluent in Mandarin. That comes in useful as Cathay’s aviation interests in China, which Slosar says will be one of the stories of the decade, continue to grow.
Central to that is the Oneworld member’s relationship with Air China, which owns 29.99% of Cathay. The Hong Kong carrier in turn owns 19.27% of Air China.
“It is our single most strategic relationship,” says Slosar. “Look at what it potentially gives us. This market is just getting bigger and bigger and bigger, people going to and fro from China from all parts of the world. I don’t think anybody will have as much capacity as us and it is really up to us to make something out of that. This relationship will continue to deepen.”
While there continues to be speculation that Air China could launch a takeover bid, that is contingent on Swire being willing to sell its 40% stake – and Swire is not. In any case, the Chinese also know that they do not have the expertise to run Cathay and are far better off learning from them instead.
The one venture that the two airlines did start, a Shanghai-based cargo airline, has been buffeted by the persistently weak freight market amid the economic downturn. “The way these things work out, if you had a choice, you probably would not have started this venture in 2011. But there we are, this is for the long term and we are not going to panic about the short term,” he says.
Hong Kong’s position as the region’s leading cargo hub and Cathay’s exposure to the segment means that a bigger worry for Slosar is a structural change in the current business model, especially the tendency to rely on converted freight aircraft. Slosar points out that high fuel costs “really kill that model”.
Cathay’s orders for the Boeing 747-8F have helped the company, especially since the aircraft are deployed to North America where an upturn in the economy means they are “working a treat”. Europe, however, remains in the doldrums and that is hard to overcome even with the growth in intra-Asia trade.
“There is some thought that some of the changes we see in air cargo may be structural, maybe a permanent movement to sea freight,” says Slosar, who then adds with a laugh: “But the problem is when the next upturn comes, you realise that it is not so structural!”
That goes to the heart of the biggest challenge in the airline business – its cyclical nature. “While you are trying to manage that roller coaster, you have to make medium and long-term decisions on aircraft, fleet, product and seats.
“It is hard for the management and very hard for the boards too. You are asking them to spend a lot of money when things are not good. How do you square that circle?”
Cathay’s board, however, has supported Slosar in many of those decisions over the last 18 months, some of which sources familiar with the airline say he tried to push through unsuccessfully when he was the second-in-command. There has been a big drive to cut costs, and that has led to the accelerated retirement of Cathay’s flagship, but fuel-thirsty, Boeing 747-400 passenger aircraft that were probably kept on for too long.
A decision on whether Cathay will order the 747-8I or Airbus A380 could be made in 2013, but the airline is more than happy to make the Boeing 777-300ER the backbone of its long-haul fleet. This suits Cathay’s strategy of offering premium passengers the “flexibility and frequency” of multiple departures on a daily basis to a wide range of destinations.
“New aircraft are much more pleasing to the bottom line. And certainly, everybody in the industry would agree that the 777-300ER has turned out to be such a fabulous aircraft – reliable, very fuel efficient, crew and passengers love them. Again, maybe by luck more than skill, we have the option of doing some pretty quick restructuring of our fleet. It makes us a little bit smaller capacity-wise on long haul, which is not really a bad thing in a difficult environment,” he says.
Biding your time
Cathay also ordered Airbus A350-1000s at the Farnborough air show, in addition to the A350-900s that it selected earlier, with Slosar dismissing criticism of the larger variant and saying they are “just fine” for Cathay because of their new technology and engines.
Then, he adds with a chuckle: “One thing that I’ve learnt in my time is that you’re always in the best negotiating position if you’re buying when other people aren’t.”
Boeing’s potential 777-300ER replacement remains an option if it is a step up from the A350-1000 and Slosar is also leaving the door open for the Boeing 787-10 as a replacement for its Airbus A330s on regional routes. Two engines are clearly better than four for Cathay, which is content to see the two airframers battle for its orders.
“We are very happy to see strong competition in that space as it is a space that a lot of our fleet is always going to occupy. Having both manufacturers really trying to innovate and add value in that space – we see that as a good thing,” he says.
Another big step has been a decision to refresh Cathay’s in-flight product, which has not met the high standards of its customers for several years. This includes a new business class product and the introduction of a premium economy class. “When we took a look at things a while back, we saw that we did not have the product that will help us to achieve the best position that we want. Even regionally, we had a real spectrum of different products with different aircraft. It was inconsistent and not the top notch stuff that we think we needed to have,” he says.
So in early 2009, despite the uncertainty caused by the collapse of Lehman Brothers, Cathay’s board approved a plan to launch a new business class product and Slosar “challenged” the engineers to roll it out within 18 months instead of the three years it would normally take. That target has been met, with all of the airline’s 777s already updated and work beginning on the A330s.
“How important is this? Crucial,” he says. “The most powerful brand building experience is using the product and saying ‘gosh, this was a great product and I will be back’. We have had fabulous feedback on the business class and the premium economy. Giving people the reason to come back – that’s what we want and are starting to achieve.”
Keeping up with the neighbours
That will be crucial as competition heats up. From the Gulf, the likes of Emirates, Etihad and Qatar Airways continue to chip away at the market by developing an extensive network using their hubs, and taking a leaf out of Hong Kong’s book to become finance and service centres. Slosar acknowledges the challenge, but also points out that not all long-haul traffic flows naturally through the Gulf.
In China, the hubs in Beijing, Shanghai and Guangzhou and their respective home carriers Air China, China Eastern and China Southern are growing rapidly. Taiwan, with its carriers China Airlines and Eva Air, is also using the liberalisation of cross-straits services to rival Hong Kong and Cathay. A third runway for Hong Kong International Airport is “crucial” if the city wants to stay ahead and Cathay must remain “competitive and offer a unique product with great value and benefit”, says Slosar.
“They are going to compete with us – all competitors need our attention. But what really matters is that we get out there and do the things that we believe will make us successful. Competition, challenges, sharpens people up and makes you think of creative and innovative things to do. All of that has certainly kept us on our toes and good things have come out of it.”
A new competitor for Cathay is on the horizon – a proposed low-cost joint venture between China Eastern Airlines and Qantas. Jetstar Hong Kong’s application for a licence is being reviewed, but Cathay believes that it will be unfair if the two non-Hong Kong designated carriers are given the go-ahead. Slosar says: “We have made our views known – there has to be fair and reciprocal opportunities for all airlines.”
If Jetstar Hong Kong does get the green light, however, it will provide stiff competition to Cathay and its regional subsidiary Dragonair on the highly lucrative short-haul routes. Slosar retorts by saying that Cathay “competes every day” with low-cost carriers such as AirAsia, Jetstar Asia and Tiger on services to multiple points in Southeast Asia and soon, on services to Japan. It has held its own and in some cases, even won market share against the new entrants.
“Nobody is obligated to buy Cathay or Dragonair tickets. I have to give you great reasons to choose Cathay Pacific for your travel. One of the very complicated things in the business is that you have to be a fine dining restaurant, providing fabulous beds and great service in first and business class, and then something in between in premium economy, and back in economy, giving people fabulously great fares to get them to climb into your aircraft,” he adds.
“We have our heads screwed on straight. We know that it is all about being able to promote travel in all classes of our aircraft and the way you do it in economy is different from the way you do it in business and first class. There are some inherent costs in being a network airline, but there are some inherent efficiencies of being big airlines using widebody equipment. We understand those and we use those to our advantage going forward.”
In this challenging environment, Cathay’s strength has been making decisions that will keep it relevant in the coming years. More of those decisions will be made in the coming months, says Slosar: “We keep a really close watch on things because it is about being competitive in the market place. We have some things coming up over the next couple months, which are designed to make us more competitive. When you see them, you will say they make sense in the context of what we have been talking. We are not standing still.”