Cathay Pacific Airways Limited Business Information, Profile, and History

Company Perspectives:

To Cathay Pacific, a great flight is not just about providing a smooth check-in, good food and comfortable seats, it is about anticipating what a customer wants before they need to ask.

Cathay Pacific believes that the true long-term differentiation between ourselves and our competitors is the unique service style provided by our staff. Our research has shown that service has an even greater impact on passengers' perceptions than the product we offer. To Cathay Pacific, this shows that training and investing in our staff has just as significant a return as our investment in high technology. For this reason, we have been focusing on developing a culture of service excellence. We call this new culture 'Service Straight From the Heart.'

History of Cathay Pacific Airways Limited

After World War II, Cathay Pacific Airways Limited grew from a small regional airline to a prosperous international carrier fueled by trade and tourism. After the 1997 transition to Chinese rule in Hong Kong, the carrier has had to redefine its role at the gateway of southern China. In spite of a traditional determination to go it alone, Cathay Pacific joined the one-world alliance, spearheaded by American Airlines and British Airways, to economically maintain a global presence.

Origins

Cathay Pacific's roots date back to 1946 when 34-year-old American businessman and pilot Roy Farrell teamed up with an adventurous 32-year-old Australian pilot, Sydney de Kantzow, who had been flying the 'Hump' (the route from Calcutta over Burma to Chungking) during World War II. Originally operating out of Shanghai with a lone DC-3, the two entrepreneurs soon moved their operations to Hong Kong, where they were required to officially register their company with the British colonial government. Together they registered Cathay Pacific Airways' corporate papers on September 24 of that year, also forming the Roy Farrell Import-Export Company which, for tax purposes, would lease aircraft from Cathay Pacific. By the end of 1946 the airline had acquired a second DC-3 and had carried 3,000 passengers and 15,000 kilos of cargo between Australia and Asia.

In 1947 Cathay Pacific added five more DC-3s and two smaller aircraft known as Catalina 'flying boats,' which allowed the airline to begin service to Macao, a nearby Portuguese colony on the coast of China. In these years immediately following World War II, Farrell and de Kantzow had to contend with Asia's shifting political boundaries, and their passengers enjoyed few of the comforts that today's transcontinental passengers have come to expect. The Roy Farrell Import-Export Company proved to be a profitable enterprise, operating out of an office on Ice House Street in Hong Kong; at this time it was advertising Australian oysters (considered a delicacy in the British Crown Colony) available by air within 32 hours of their harvesting.

By 1948 Cathay Pacific had a passenger ticket office in the lobby of the Peninsula Hotel, among the colony's most prestigious establishments. While flight crews were recruited mostly from Australia and the United States, de Kantzow began staffing passenger flights with Portuguese stewardesses from Macao and Hong Kong.

Swire Invests in 1948

Early in 1948, Farrell and de Kantzow were informed by the British governor of Hong Kong that, as foreigners, they were barred from owning more than 20 percent of the airline; a British partner would have to be recruited. After negotiations with the British air transport company Skyways ended unsuccessfully, Cathay Pacific's founders turned to John Kidston 'Jock' Swire, head of Butterfield & Swire, a leading trading company in Hong Kong.

Farrell and de Kantzow believed that a British partner would be willing to pay a great deal to join their profitable business. The airline industry was at a crossroads, as 'tramp' airlines running charter flights were giving way to increasingly competitive scheduled airline operations. Since 1946, the Bermuda agreement between the United States and the United Kingdom had regulated the routes airlines could service and the fares they could charge, marking a new era of government restrictions. Swire's influence with the British government made him an advantageous partner. From Swire's point of view, Cathay Pacific had a convenient competitor: Hong Kong Airways, run by Swire's longtime business rival, Jardine Matheson. Negotiations with Swire were fruitful, and in July 1948 the new Cathay Pacific Airways was officially registered.

The first known incident of air piracy occurred that same month when a Cathay Pacific flight, ten miles from Macao and carrying 23 passengers, was hijacked by a Chinese gunman who apparently believed the plane was carrying a cargo of gold bullion. The flight's captain, Dale Cramer, was shot in the head, and the plane crashed into the Pearl River estuary; there was only one survivor. De Kantzow and Farrell decided to use metal detectors on all passengers and baggage on subsequent flights.

The same year, Farrell's wife became ill and he decided to sell his stake in the airline and return to Texas, leaving Cathay Pacific a 90 percent British-owned company. The airline faced increasing competition from Hong Kong Airways, which had been purchased by the British Overseas Airways Corporation (BOAC--now British Airways). While the British government in London tended to give favorable treatment to BOAC, Hong Kong's local government had grown more independent as the colony gained economic power, and gave its support to Cathay Pacific.

Cathay Pacific had an additional advantage. Hong Kong Airways was obliged to offer its European passengers all the luxury and personal service they had come to expect from BOAC. Cathay Pacific, on the other hand, as a regional airline increasingly catering to the small Chinese traders accustomed to traveling on Swire's ships, did not have to offer expensive frills and consequently saved on overhead costs.

Under Swire's tutelage, de Kantzow instituted a number of changes. Swire's right-hand man Ian Grabowsky revamped Cathay Pacific's lax accounting procedures. More pilots were hired and each flew fewer hours, to stave off fatigue and possible mishaps. Eventually de Kantzow tired of Swire's control and announced his resignation from Cathay Pacific in April 1951. The parting appeared to be an amicable one.

Cathay Pacific suffered losses in 1951 approaching HK$1.5 million, a figure which increased over the next few years. Swire recognized the need to replace the airline's aging fleet with new aircraft, and began to look for a new partner for the company. In 1953 the London-based P & O shipping company paid HK$2.5 million for a 31.2 percent stake in the airline.

At this time, two important executives joined Cathay Pacific's management team: Captain Kenneth Steele became flight superintendent in charge of training flight crews, and senior engineer Jack Gething took over the Hong Kong Aviation Engineering Company, a division of Cathay Pacific responsible for airplane maintenance.

In September 1958, a new 8,350-foot runway was opened at Hong Kong's Kai Tak airport, in time for the arrival of Cathay Pacific's new DC-6 aircraft. That same year, Captain Bob Howell took the first DC-6 from Hong Kong to London. The larger, more modern airplane also pioneered the Hong Kong-Taipei-Tokyo route.

Merging into the 1960s

In 1959 BOAC, having endured heavy losses throughout the decade, agreed to merge Hong Kong Airways with Cathay Pacific. Swire's organization gained control of the airline, while BOAC received a seat on its board of directors. By the following year, Cathay Pacific's fleet of new aircraft included a DC-3, a DC-4, a DC-6, a DC-6B, and, notably, two Electra jets. At this time, Bill Knowles became the airline's chairman and Duncan Bluck its commercial manager.

Hong Kong's growing importance as an economic power resulted in an increasing number of routes serviced by Cathay Pacific. Late in 1959 the airline began flights to Sydney, prompting Qantas, Australia's national airline, to retaliate by announcing its own Sydney-Hong Kong jet service. The British government urged Swire to aggressively compete with Qantas to prevent an Australian concern from gaining an economic foothold in Hong Kong. This scenario proved typical in years to come: Swire saw his company simply as a regional airline flying to regional destinations such as Manila and Singapore, but to the British government Cathay Pacific was a British-owned company playing a major role in advancing Hong Kong to a position of economic prosperity and leadership in the region. In this instance, the matter was settled in August 1961 when Qantas, with the help of government subsidies, began flying newer, more expensive Boeing 707s to Hong Kong, forcing Cathay Pacific out of that particular market.

The loss of the Sydney-Hong Kong route to Qantas convinced Swire not to attempt to compete with government-backed intercontinental carriers; to his thinking, the objective was to offer the best service in the Asian market, not necessarily the best in the world. But Swire's regional view was opposed by commercial manager Bluck. Throughout the early 1960s, Bluck argued for more flights to Japan, which had experienced tremendous economic growth in the postwar years, and for flights to Canada and the United States, which were doing an increasing amount of business with Asian nations. Bluck also urged the purchase of better, more expensive planes for Cathay Pacific's fleet.

Bluck's boardroom arguments succeeded. In January 1962, Cathay Pacific announced that it would purchase new Convair 880 jets manufactured by General Dynamics in the United States. The first Convair 880 arrived in Hong Kong in November 1964. By 1968, Cathay Pacific had five of the jets in its fleet, having retired or sold its other aircraft.

During this time there had been changes in management as well: in 1963 Gething and Steele retired and were succeeded by Don Delaney as engineering director and Dave Smith as flight superintendent. A year later, Bill Knowles retired from his position as chairman and was replaced by H.J.C. (John) Browne.

Early in 1965 Browne informed Cathay Pacific's board that the expansion into the Japanese market was a success, with passenger traffic for the airline up 26 percent over the previous year and well over half a million passengers carried into and out of Kai Tak airport in 1964. Three ticket offices had opened in Japan, which, along with Taiwan, now accounted for 90 percent of the airline's passenger capacity. In 1965, Jock Swire retired, leaving Cathay Pacific in the hands of his two sons, John and Adrian.

On June 15, 1972, one of Cathay Pacific's Convair jets was involved in what seemed at first to have been a midair collision over Vietnam. After initial speculation regarding the identity of the other aircraft, investigators turned to the possibility of a bomb having been placed on board. British and Hong Kong police identified their prime suspect: a Thai policeman whose recently insured wife and child had been on board the flight. Charged with sabotage and murder, in May 1974 the policeman was found not guilty; no further suspects were ever brought to trial.

Global Expansion in the 1970s and 1980s

The tragedy did not dissuade Cathay's directors from expansion. By 1974, eleven 707s had been added to the airline's fleet. That same year, Cathay renewed its Hong Kong-Sydney service with 707s, putting its earlier defeat by Qantas behind it. The success of the Australian run was followed in 1976 by thrice-weekly flights to the Arabian Gulf, first to Bahrain, and later to Dubai in the United Arab Emirates. Asian laborers were increasingly in demand throughout the Gulf following the 1973 oil crisis and newly wealthy Arab sheiks were eager to purchase the high-tech electronic products then available in Hong Kong.

But getting acceptance from London for Cathay Pacific, sporting a union jack on its tail, to fly the 'Golden Route' from Hong Kong to London proved a surprisingly drawn-out process. In December 1979, the Hong Kong airline applied to the United Kingdom's Civil Aviation Authority for a license to land in London. But British Airways, enjoying a monopoly on the Hong Kong-London route, fought Cathay Pacific's application at Civil Aviation Authority hearings. To complicate matters still further, British Airways' rival British Caledonian joined with Laker Airways to compete with Cathay Pacific for the run to Hong Kong. Finally, in March 1980, London authorities ruled against Cathay's application, choosing British Caledonian instead. The news was difficult to accept in the Cathay boardroom. The Hong Kong airline appealed, and was finally granted a license in June of that year to land in London. Cathay Pacific joined other deluxe international carriers by taking two jumbo 747s into its fleet.

In 1981, Cathay Pacific carried over three million passengers and 97 million kilos of cargo to 23 destinations. A year later, six 747s were employed on its routes, some flying to London nonstop in 14 hours. Another international destination added in 1983 was Vancouver, which had one of the largest Chinese communities abroad.

In 1984 Bluck, who had become chairman of Cathay Pacific, answered charges that Asian airlines were prospering because of the low wages paid to their workers and lower overheads than faced by Western airline carriers. Bluck, quoted in Gavin Young's Beyond Lion Rock, responded, 'Japanese cars, VTRs and TV sets have been able to penetrate western markets because of quality, reliability, the application of modern technology and price. So too will Asia-Pacific airlines continue to win customer support, not by low prices but by quality of service.'

In 1986 Cathay Pacific carried nearly 4.2 million passengers and 182 million kilos of cargo on its way to becoming a beneficiary of the economic boom then developing in the Asian Pacific region. Hong Kong's proximity to burgeoning centers of growth in southern China were expected to further benefit Cathay Pacific. The impending takeover of the colony in 1997 by the Chinese government, however, was seen as a potential liability. The political change was expected to hinder the airline's attempts to win crucial air service rights through bilateral agreements with other countries.

In anticipation of the change in government, the Swire Group announced in January 1987 that it was reducing its share of ownership in Cathay Pacific. This was followed by an announcement that the China International Trade and Investment Corporation (CITIC), China's principal commercial arm in Hong Kong, was taking a 12.5 percent shareholding in the airline. The Chinese government stake, coupled with the airline's welcoming a new director onto its board--Larry Yung, son of the CITIC's chairman--was seen by observers as proof that China was sincerely interested in the future prosperity of Cathay Pacific and Hong Kong in general.

New Rules in the 1990s

In 1991, the airline posted profits of HK$2.95 billion, just slightly below 1990 profits of HK$2.99 billion. Maintaining its profitability was an impressive achievement at a time when many U.S. and European airlines were floundering amid recessionary and Gulf War woes. Also at that time, drawn-out negotiations between London and Peking appeared close to ending, suggesting agreement on a new international airport to be built on Hong Kong's Chek Lap Kok Island at an estimated cost of HK$13 billion. Scheduled to open in 1997, the new airport was expected to face increasing competition from low-cost airports in neighboring Macao and Shenzen, China.

Cathay's forecasts predicted its cargo business growing by eight percent per year throughout the 1990s. Transporting freight had contributed approximately 20 percent of overall airline revenue in the first six months of 1991. Richard Cater, Cathay Pacific's cargo marketing manager, stated in the February 24, 1992 issue of Aviation Week & Space Technology, 'We see ourselves as a passenger airline with a very important cargo element.' The growing cargo business was welcome at a time of recessionary gloom in much of the Western world, and falling airline passenger traffic due to the Persian Gulf War.

Although Cathay Pacific remained profitable under the Swire Group's control, lingering uncertainties over the outlook for Hong Kong under Chinese rule clouded the company's business strategy. Despite the instability of the world economy, Cathay Pacific counted on its reputation as a premier Asian carrier and on a continuation of the Asian-Pacific economic boom to maintain its place in the global airline trade.

Peter Sutch led Cathay Pacific as managing director beginning in 1992. He subsequently became chairman of the company as well as its parent, John Swire & Sons (HK) Ltd. David M. Turnbull took over as managing director in December 1996, replacing Rod Eddington, who returned to Australia to lead Ansett Airlines.

In 1996, Swire Pacific sold a major portion of its airline holdings to Chinese interests. It reduced its stake in Cathay Pacific from 53 to 44 percent and its stake in Hong Kong Dragon Airlines (Dragonair) from 43 to 26 percent. CITIC upped its holdings in CX (Cathay's IATA designation) from ten to 25 percent while selling some of its shares in Dragonair to the China National Aviation Corporation (CNAC), which also held about five percent of Cathay Pacific. The Chinese reportedly had threatened to set up their own airline in Hong Kong, pressuring Swire into diluting its holdings (it issued new shares rather than selling the ones it owned). Cathay Pacific eventually acquired three-quarters of another small competitor, Air Hong Kong.

Because of its strong position in Asia, Cathay Pacific was being courted by many global airline alliances, but the carrier felt inclined to go it alone, remaining true to its regional focus. The company did set up a new direct route to New York. It also teamed up on the ground, setting up a maintenance company in Xiamen, China, with Singapore Airlines and Japan Airlines.

Before the change of government in Hong Kong, CX had begun to build its first proper headquarters (the HK$448 million Cathay Pacific City) and had reworked its corporate image (it had until then painted Union Jacks on its planes). Thanks in part to the sale of Dragonair shares, the company posted a profit of HK$3.8 billion (US$488 million) for 1996, up 28 percent.

However, tourism after the handover of Hong Kong on July 1, 1997 was less than expected. The number of Japanese visitors fell 62 percent in the second half of 1997 compared to the same period in 1996--from 1.4 million to just over 500,000. CZ upped its flight frequencies to Europe, Australia, and the United States, following tourist dollars.

The Asian financial crisis cut business traffic. Further, since Hong Kong tied its currency to the U.S. dollar, Cathay's costs rose in comparison to those of its neighbors. Significant gains in cargo operations were temporarily threatened by computer problems at the new airport's shipping center.

Steep landing fees at the new Hong Kong International Airport at Chek Lap Kok added to Cathay's burden. Billed as 'the world's largest construction project,' the new airport did give CZ the impressive setting it lacked to showcase its sterling service. However, it was expensive. Cathay Pacific provided half the total commercial investment-HK$1 billion, including the cost of its new headquarters.

The company laid off 760 employees in January 1997. The cost-cutting was not sufficient to avoid a loss of HK$542 million (US$70 million) for 1998, its first in 36 years. (Most of this came from write-offs of older aircraft.) A falling share price prompted Hong Kong to invest in both Cathay and Swire. For its part, Cathay attempted to take over struggling Philippine Airlines Inc. in late 1998.

As cockpit crew accounted for 40 percent of labor costs, company executives asked this well-paid bunch for concessions in 1999. The pilots reluctantly agreed, after two weeks of 'too stressed to fly' sick-outs that cost the company an estimated HK$500 million. (Flight attendants had held a three-week strike in 1993 that cost Cathay Pacific HK$200 million.) The Wall Street Journal reported that most of Cathay's pilots were British, and not one of them was an ethnic Chinese from Hong Kong.

Cathay Pacific adopted a new corporate identity in 1999. During the year, passenger levels rose on nearly all routes, particularly U.S. ones, and e-commerce helped push up cargo revenues 20 percent to HK$8.4 billion. The company posted a profit of HK$2.2 billion in 1999 on sales of HK$28.7 billion. The optimistic figures prompted the conservative management to begin to expand its fleet again with Airbus planes and two Boeing 747 freighters.

After years of courtship, Cathay Pacific finally succumbed to the economic appeal of code sharing and joined the oneworld alliance led by American Airlines and British Airways. The airline saw Hong Kong as more of a hub than a destination by then. The opening of China's airways raised the prospect of CX flying passengers directly to the mainland again, rights the carrier had lost after it acquired a portion of Dragonair in 1990.

Principal Subsidiaries: Cathay Pacific Catering Services; Hong Kong Aircraft Engineering Co. (HAECO); Hong Kong Dragon Airlines (18%).

Principal Competitors: British Airways plc; China Airlines; Singapore Airlines Ltd.

Chronology

• Key Dates:

• 1946: American and Australian pilots establish Cathay Pacific in Shanghai.
• 1948: Swire trading house buys into Cathay Pacific.
• 1959: Cathay Pacific merges with BOAC's Hong Kong Airways.
• 1987: China invests in Cathay Pacific through CITIC.
• 1996: Swire reduces its holdings to 44 percent.
• 1997: Great Britain returns Hong Kong to China.
• 1998: Cathay Pacific posts its first loss in 36 years.