It was the early 1990s and Augustus Tang Kin-wing was among the key executives involved in a massive shake-up of Cathay Pacific Airways called “Operation Better Shape”.
The airline’s bloated staff structure needed fixing from top to bottom, with concerns growing over staff costs, particularly pilots’ pay.
The result included slashing layers of duplication and expensive managers, introducing less lucrative pay packages for Hong Kong-based pilots, a hiring blitz for less costly foreign cockpit crew outside the city, and moving business units to locations with lower labour and office costs.
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Those reforms sowed the seeds of strained labour relations and a more combative workforce that dogged the airline for decades, but also ensured profitability until 2017, outside of major global crises.
Tang, now 61 and chief executive officer, is likely to draw on that experience as the Cathay group embarks on what may well be the biggest overhaul in its 73-year history as it prepares for a post-pandemic world.
The Covid-19 pandemic has brought international air travel to a standstill, crippling airlines globally, with Cathay itself losing a record HK$9.87 billion (US$1.27 billion) in the first six months of 2020.
Tang must face his board by the last quarter of this year with a plan to transform the airline into an “optimum size and shape”.
The world is very different, and we don’t know what the future holds. The only thing we do know is, the future will be very different to what we were expecting it to be
Cathay Pacific chairman Patrick Healy in late June
It will be painful, not least for its 33,000 staff worldwide, including 4,100 pilots and more than 12,500 flight attendants. The group employs 27,600 people in Hong Kong.
“It is inevitable that we need to make some difficult but necessary decisions,” Tang told reporters last week when asked, after the company announced its record losses, if staff numbers might shrink further this year.
The airline's chairman, Patrick Healy, also made clear that cuts made so far were nowhere near enough.
Cathay employees have already endured several months of reduced pay through unpaid leave, 566 cabin crew in North America have been axed, and pilots over 50 years old have been offered early retirement.
The overhaul is also expected to cover cutbacks in how much it flies and where it goes. Cathay has already slashed its flying schedule.
As in the 1990s, Tang must leave no stone unturned as his team goes about cutting costs and reorganising operations to prepare for an uncertain future.
“Tang knows how difficult it is to get these cost-cutting projects to work because of all the obstacles to overcome to get people to accept them and cooperate and to implement change,” said a former Cathay veteran who spoke on condition of anonymity. “It’s a tough business.”
Airlines worldwide are taking drastic steps not only to stem the cash haemorrhage inflicted by the pandemic, but also in anticipation of a very slow return to pre-crisis levels of global air travel.
The International Air Transport Association (IATA) now expects air traffic recovery to happen only in 2024, a year later than it previously thought, with projections of US$84 billion in losses this year alone. The Asia-Pacific is expected to be the worst-hit of all regions.
“The world is very different, and we don’t know what the future holds,” chairman Healy told the Post in late June. “The only thing we do know is, the future will be very different to what we were expecting it to be.”
Steve Saxon, a Shenzhen-based partner of McKinsey & Company who leads its travel, transport, and logistics work in China, is more optimistic.
He pointed out that the industry bounced back strongly from previous crises, including the September 11, terrorist attacks on the United States and the severe acute respiratory syndrome (Sars) epidemic of 2003.
“Our view is that travel is coming back,” he said, although he expected key differences in how business and leisure travel return.
Businesses might see savings to be had by cutting travel expenses for jet-setting employees. The pandemic has forced companies around the world to adapt to work-from-home arrangements, replacing face-to-face meetings with videoconferencing that can get work done equally effectively.
The possibility that business travel will shrink has stoked fears about the impact on corporate travel, a key source of profitability for established airlines like Cathay.
Saxon is confident airlines can rely on leisure travellers to ensure the industry bounces back, and quickly too.
“Over the last 50 years, tourism has been the strongest trend globally, with people wanting to go see the world. Even now, we see a very strong desire for people to travel again,” he said.
He pointed out that on mainland China, where Covid-19 has been largely brought under control, airlines remain positive about the future and the profitable domestic market is humming again.
Surely part of the restructuring is a take-it-or-leave-it for the pilots – take a new contract or redundancy
A Cathay Pacific veteran speaking on condition of anonymity
The Cathay group comprises Hong Kong’s main carrier as well as Cathay Dragon, budget airline HK Express and all-cargo unit Air Hong Kong, with a total of 235 planes. During the worst of the health crisis, two-thirds of the fleet was grounded.
The company has been kept alive by the Hong Kong government pouring in HK$27.3 billion, as part of a HK$39 billion pandemic rescue package.
Governments worldwide have come to the aid of their stricken carriers with massive multibillion-dollar bailout packages. Singapore Airlines raised a hefty S$11 billion (HK$62 billion) with the help of government investment company Temasek, which owns about 55 per cent of the airline.
But Cathay chairman Healy said last Wednesday that a return to profitability alone was not enough, as repaying the government was non-negotiable.
“The recapitalisation was not a grant – it is an investment by our shareholders and by the Hong Kong government – and that investment requires a return,” he said. “This means that Cathay Pacific must find a way to return to profitability in order to generate that return for our shareholders and for the Hong Kong government.”
Cathay Pacific can cut schedules until March 2021, aviation bosses say, as they relax ‘use it or lose it rule’ for airlines on runway slots
Since 2016, Cathay’s core airline business has generated significantly less profit – or lost money – compared to such subsidiaries as its Asia Miles travel reward business and associates like Air China, in which it owns an 18.13 per cent stake.
If the actions of its competitors are any indication, the current crisis is likely to prompt the largest job cuts in Cathay history.
British Airways, a rare major airline not to receive substantive government support, has already axed 6,000 staff out of 12,000 planned job cuts. Germany’s Lufthansa has said 22,000 staff will go. United Airlines warned that 36,000 employees may lose their jobs, while American Airlines put the number at 25,000.
Cathay has trimmed staff in recent years. After two consecutive years in the red, the group made changes last year for greater efficiency and a less top-heavy management, letting go of 1,200 employees.
Those efforts paid off and it returned to the black, generating a HK$2.35 billion profit in 2018 before profits slid to HK$1.69 billion last year as anti-government protests hit tourism hard, before the pandemic struck.
For the past three decades, pilot pay has remained a thorny issue for Cathay, whose cockpit crews could once boast they were the world’s best paid.
Despite changes introduced in the 1990s following Operation Better Shape, the legacy of allowing different pay arrangements for pilots who signed on at different times over the decades returned to haunt the airline.
Handsome allowances for housing and children’s education at expatriate schools have helped keep the total pilot wage bill inflated but, facing stiff union opposition, successive management teams have tried and failed to tackle the issue.
For example, the airline has tried to renegotiate housing allowances which, in 2017, entitled 43 per cent of pilots to receive as much as HK$1.2 million per year – a figure disputed fiercely by the union.
In 2018, the airline rolled out a new era of pilot contracts with radically lower pay and benefits. Older pilots complained they could lose as much as two-thirds of their total earnings.
So far this year, Cathay has already offered early retirement to older pilots. As it moves towards more drastic action, the airline has given strong hints of more “difficult decisions” to come.
“Surely part of the restructuring is a take-it-or-leave-it for the pilots – take a new contract or redundancy,” said a company veteran not authorised to speak to the media.
There is considerably more that CEO Tang is expected to look at in the months ahead, not least of which is unwinding some of the expansion that was already in the works when he took over in 2019.
Initially, hubs are going to struggle and airlines that rely on connecting traffic are going to struggle
IATA chief economist Brian Pearce
He succeeded Rupert Hogg, who became CEO in mid-2017, when the airline was in the red. Rapid growth dominated the agenda and, by the following year, Cathay had added a record 10 new destinations to its network of 93 worldwide.
It then took over budget carrier HK Express in a HK$4.93 billion deal last year that added nine routes Cathay did not previously serve. Cathay itself also added three routes, making for another record year of expansion.
Cathay Pacific, which calls Hong Kong International Airport home, has consistently been rated as one of the world’s top airlines.
Pre-pandemic, from this gateway to mainland China, it offered dozens of daily flights across Asia, multiple daily flights to key cities like London, Sydney, New York, Vancouver and Los Angeles and, critically, access to almost two dozen mainland destinations.
On average, transit travellers made up 50 per cent of its passengers.
The pandemic has cast a shadow over air hubs catering to transit passengers, because travellers’ behaviour may change as air travel returns.
IATA chief economist Brian Pearce said it could take a year before hubs see signs of meaningful recovery.
“Initially, hubs are going to struggle and airlines that rely on connecting traffic are going to struggle,” he said.
Travellers are expected to prefer flying direct, rather than raise their risk of infection by changing flights. They may also be wary of travelling long distances, with IATA predicting that long-haul flights will return at the slowest pace of all.
A well-placed Cathay insider said the frequency of flights from Hong Kong to major destinations such as London, Los Angeles and New York will not return to pre-pandemic levels any time soon.
McKinsey’s Saxon agreed that people were likely to prefer direct flights, but pointed out these were in short supply.
“Passengers who would love to travel point-to-point are connecting through hubs because it’s the only way,” he said. “We do see travel coming back by 2023 and we see no reason why the networks won’t look like they do today.”
For Cathay Pacific, a long and slow recovery also means it will need fewer aircraft for a sustained period.
Pre-pandemic, it used different aircraft for different routes, including Boeing 777 jets for flagship long-haul flights to London’s Heathrow and New York’s JFK airports, frequented by corporate and business-class travellers.
It used 777s fitted for up to 438 passengers for regional flights, and Airbus A350-900s to secondary long-haul cities like Seattle, Barcelona, Brussels and London Gatwick.
Cathay needs to restructure now and right-size for the next three to five years, while putting in place the building blocks to eventually resume growth and improve its long-term position
Brendan Sobie, of consultancy Sobie Aviation
Low-cost HK Express used smaller, single-aisle jets for mainly leisure flights to smaller Asian destinations, particularly Japan.
So far, a third of Cathay’s 180 passenger planes have been parked or moved to desert facilities for long-term storage and it has delayed delivery of new aircraft by up to two years.
Part of its challenge is that much of its business is geared towards the premium segment, including business travel and long-haul flights where recovery is expected to be slowest.
Cathay has already said it intends to reduce the number of fleets and configurations over the near-term. That leaves the decision of where to fly to, and how often.
In all of this, however, Tang must keep an eye on his rivals.
“The competitive picture is also in flux,” chairman Healy told the Post in June. “The whole industry is in flux and we have to consider all of those factors as we think about the future.”
Singapore Airlines, Cathay’s closest rival in terms of its operating model, has said it may run less than half its pre-pandemic passenger capacity by March 2021.
That offers clues to what Cathay will do. Both airlines have no domestic network and rely heavily on transit traffic.
Brendan Sobie, of consultancy Sobie Aviation, does not expect Cathay’s overhaul to be a “one time, fix all” plan.
“Cathay needs to restructure now and right-size for the next three to five years, while putting in place the building blocks to eventually resume growth and improve its long-term position,” he said.
“However, the new business plan will need to be flexible enough to adjust as a clearer picture develops for what the overall industry will look like, and what Hong Kong will look like, after the pandemic ends.
“There are so many unknown variables now that will still be unknown when the current review is completed.”
More from South China Morning Post:
- Cathay Pacific Airways warns of harsh outlook as Hong Kong’s flag carrier confirms record HK$9.9 billion loss in first half of 2020 caused by coronavirus crisis
- Cathay Pacific can cut schedules until March 2021, aviation bosses say, as they relax ‘use it or lose it rule’ for airlines on runway slots
- Hong Kong’s Cathay Pacific delays aircraft deliveries, slowing cash burn amid Covid-19 travails