Speculation: Cathay Pacific Will Downgrade Economy Class In The Next Year

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There has been a lot of speculation surrounding Cathay Pacific over the past 18 months as the airline struggles with various economic pressures. In the financial year to December 2017 Cathay Pacific posted a net loss of HK$1.26bn and we’ve seen the airline have to fend off suggestions that it would have to introduce buy-on-board meal service to help raise more revenue.

Last week the Cathay Pacific CEO Rupert Hogg was interviewed by Bloomberg TV and, while he didn’t give all that much away in the 8 minute piece I’ve watched, there were a few interesting comments that he made.

Hogg admitted that Cathay’s 2017 financials were “sobering” and that they were what kicked off the “transformation program” that is now in place. The transformation that Cathay is embarking upon is built around three “pillars”:

• Finding new sources of revenue
• Adding value to customers
• Being more productive and efficient than in the past

The second pillar sounds good to me but the first and the third worry me a little.

What Cathay’s CEO Told Bloomberg

Hogg suggested that new revenue is already being brought in by the 22 aircraft that Cathay have taken delivery of in the past two years as they’ve already been used to start up new routes and more new routes are on the way (Cathay announced a new route to South Africa last month and is starting up three new routes to Europe this summer).

When asked how Cathay Pacific plans to grow its Business passenger travel Hogg focused on four specific areas:

• More new aircraft and new routes (Cathay expects to take delivery of 79 new aircraft in the next 4 years)
• Heavy investment in lounges
• Food
• Wi-Fi

Hogg believes that the new aircraft will give Cathay a very young long-haul fleet which will appeal to Business travelers and, if the airline can also use the aircraft to add “lots of frequencies to key destinations”, Business passenger revenue will grow.

There was only a brief mention of the lounge investment but with the announcement of the opening of a new lounge in Hong Kong and with the quality of lounges Cathay has recently added in London (reviews here and here) it’s clear the airline is serious about its lounge offering.

On the food front Hogg said that the airline was “going to do a lot more on food” and that “food is going to be a concentration” for the airline….but stopped short of mentioning the idea of a dine-on-demand service in Business Class.

Cathay Pacific is looking to roll out wi-fi across the whole of its long-haul fleet but, even though Hogg said that the roll out would be done at a “rapid pace, it’s still going to take at least two years to get all the aircraft refitted.

According to Hogg Cathay Pacific is looking at what customers “really value” and that’s where the airline is focusing and investing its resources.

When asked about Economy Class passengers Hogg said that Cathay would have to be “cost competitive” and that the challenges the airline faces include the fact that capacity is growing faster than demand.

In a statement I found interesting Hogg went on to say that Cathy will be “driving things that the customer values and is prepared to pay for“.

He then repeated the idea that the airline is looking for new sources of revenue and said that Cathay “cannot isolate [itself] from the reality of the commercial cut and thrust“. The airline “needs to be more productive and more efficient year on year“.

Thoughts

I don’t like it when I hear an airline CEO discussing their airline’s need to find new sources of revenue.

Yes, new routes will bring in new sources of revenue for Cathay Pacific but I don’t think that’s going to be enough to get the airline back on track. More importantly I don’t believe Hogg thinks it will be enough either.

While adding frequencies, new aircraft, rolling out wi-fi and doing something nice with the food offering may help grow Cathay’s Business passenger revenue, I can’t see it doing all that much to boost Economy Class revenue.

The overwhelming majority of Economy Class passengers don’t choose their flights based on the food, the aircraft or the availability of wi-fi – it’s price that’s key.

People want cheap tickets above all else (it’s why low-cost airlines are so successful) so Cathay needs to find ways to keep its Economy Class fares low while raising more revenue….and the normal ways airlines do that are generally not good news for travelers.

When Hogg says that Cathay is looking for new sources of revenue in Economy Class I can imagine a few negative changes that the airline could bring in:

• Buy on board food for regional flights (I think this is coming despite denials from Cathay)
• Hand baggage only fares
• Introduction of seat selection fees
• New fees on award travel

Also, and while this wouldn’t really fall under the heading of “a new source of revenue”, Cathay Pacific could add more seats to its aircraft to try to earn more revenue per flight. This would match up with Hogg’s desire for the airline to be “more productive and efficient year on year”.

Cathay Pacific 777 – Image Aero Icarus via Flickr

Cathay is already in the process of moving its 777 aircraft to a 10-across seating configuration (copying most of the rest of the airline world) but there are other aircraft it could densify too.

• The Cathay Pacific A350 offers passengers 32″ of seat pitch in Economy Class while the likes of Delta and Lufthansa offer just 31″ in their A350s.
• Cathay’s A330-300 aircraft also offer 32″ of seat pitch in Economy Class but airlines like Delta, Lufthansa and Virgin Atlantic all offer just 31″ in their Economy Class cabins on the same aircraft.

If Cathay wants to add more seats there’s definitely room to do so.

Bottom Line

With Cathay Pacific’s CEO repeating the need for the airline to find new sources of revenue at least three or four times in the 4-or-so minutes he was discussing passenger travel (he also discussed Cargo) I’m inclined to believe that Cathay has something planned.

It’s unlikely the airline will do anything to upset its premium cabin flyers too much but I think more cuts or “enhancements” to the Economy Class offering is an inevitability.

Watch this space for updates.