Aviation, Corporate Q&A

Looking north

Airline boss talks of big opportunities in China

Looking north

Tyler: listening to his partners at Air China and offering advice too

From peering through the barbed wire on the border thirty years ago through to his now regular trips to meetings in Beijing, Cathay Pacific chief executive Tony Tyler has seen more of the Chinese aviation world than most.

Last week, Tyler talked to WiC about his three decades of China-related experience.

Top of the agenda was how Cathay has evolved from early life as a “British” airline to one underscored as much today by its cross-shareholding with local giant Air China, and an extensive mainland route network courtesy of wholly- owned subsidiary Dragonair.

When did you first arrive in Asia?

I joined the Swire Group in 1977 but I began at Cathay Pacific in 1979, so just before China was about to start opening up.

The way that China was regarded has changed so dramatically since then.

I remember being taken up to the border to look across the fence into the paddy fields and at a few PLA (People’s Liberation Army) soldiers wandering around.

The border was completely blocked off. But now China is an integral part of most things that we do at Cathay.

How did your China business grow?

We started out flying to Beijing and Shanghai in the mid-1980s. But in those days the Chinese government regarded Cathay as a British carrier, and British Airways was also flying there, through Hong Kong. So we could only get seven flights a week.

Around 1990 we were approached by Citic [a Hong Kong red chip] who had been a CX shareholder since our flotation in 1986. They suggested that the two of us take over Dragonair [then a struggling, small carrier flying into China out of Hong Kong].

Citic had the connections to get more traffic rights; we had two China routes and our track record. Having 40-something percent of that potential new business looked a lot better than being frozen at seven flights a week.

Then in 1996 CNAC [the China National Aviation Corporation, a state-owned holding company] bought into Dragonair too. This helped to build a wider range of destinations in China, serving as Cathay’s pseudo network there. It has also helped Hong Kong’s growth as an aviation gateway.

In 2006, we bought back full control of Dragonair, and strengthened the cross-shareholding with Air China.

We’re still not a pure international airline, as far as relationships with mainland China are concerned, but nor are we a mainland carrier.

In that sense, Hong Kong has a unique status – as does Cathay too.

But in terms of positioning for future growth, we are well placed. Although that’s still not to say that it is going to be easy to make a lot of money on China routes in future!

What about the last 12 months? The global slowdown has hit hard?

Yes, cargo nudges in at around 30% of our revenue in a good year and it’s not going to do that this year, I’m afraid.

Of course, Chinese economic growth has been impressive this year by world standards. But the main strength in aviation terms has been in domestic flights, where they’ve bounced back after a poor year in 2008.

International travel in and out of China over the same period has been much more in line with international travel elsewhere. That has been weak, in particular for premium traffic. So the strengthening of the Chinese economy hasn’t really had the full effect that you might expect.

Having said that, if we look at our sales figures, China has done as well as any other sales territory. The best of a pretty poor bunch, you might say!

Pearl River Delta revenue has been growing especially well. There aren’t many sales areas around our network where we can say that recently.

Cargo has started to come back a bit out of China in the last two months too, although this is a peak time of year, so there is a strong seasonal element.

And the Cathay brand in China? Is it a well known one?

It isn’t. But the Dragonair brand is. A year or two ago I was on a tour in Chengdu and the guide asked me what I did for a living. I mentioned I was at Cathay Pacific. What’s Cathay, she asked. So I showed her my business card and she immediately recognised the Dragonair logo. Ah, Dragonair, she said! A sample of one in 1.3 billion: but it suggests that the Dragonair brand is well known.

Under the Air China deal we’ve committed to keeping that brand for six years too. It will be someone else’s decision what to do with it when the time comes but I’d be very surprised if we don’t keep it for a long time. There’s a lot of brand equity invested in it.

How about the relationship with Air China?

On the commercial side we do a lot of work, with code shares and some joint venturing on routes. We’re also planning to launch a cargo operation together out of Shanghai.

Then there are various secondment programmes. There is a percolation of ideas happening but it will be a while before you recognise real commonalities across the two airlines.

The cultural context and history is very different, and we don’t run a China domestic operation either, so there is not much we can teach them there.

But in the long haul international market we have been competing for 30 years, so in that area perhaps we can help them lift their game.

Still, we don’t presume to tell them how to do things. Their people are very bright and do a good job. International carriers flying long haul into the mainland are going to find it quite hard work to make these services very profitable. It’s a very competitive market.

It works for us because we have a comprehensive network. China becomes a feeder for our Hong Kong hub, and allows us to pick up revenues from different places.

We’re not dependent on a single 12-hour flight to Shanghai, turning round and going back, like some of the European carriers.

The risk [for them] is that you end up as a one-trick pony. Our network leaves us pretty uniquely positioned.

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