Where Cathay Pacific's CEO Sees Trouble Brewing for Airlines


When Cathay Pacific (CPCAY), one of Asia's top airlines, raised fares in 2008 after the U.S. economy tanked, it didn't see its business or its bottom line suffer. But as the airline industry hiked fares again in the face of rising fuel prices and political turmoil in the Middle East, Cathay's CEO isn't sure it will see a repeat of that happy outcome.

The airline didn't have "revenue problems in 2008," Tony Tyler, chief executive of Hong Kong-based Cathay Pacific, told me during a recent visit to New York. "As fuel prices went up and up and up, we put prices up, but we didn't see softening of demand. Passengers were prepared to pay more."

"At the end of the day, if people want to travel, they will have to pay for fuel," Tyler added. "But the worry we have now is that if fares go up, it could have a dampening effect on demand. At the moment, we think that if we put prices up, people will still travel, unless there's a terrible recession."

When it comes to jet fuel prices, "one has to assume the worst," he said. He noted that Cathay Pacific hedges its jet fuel purchases "to some extent. But it's a temporary palliative."

The price of crude oil, which is used to make jet fuel, is now at a two-year high, and U.S. airlines have raised fares five times since the beginning of the year in an attempt to compensate. Until recently, jet fuel purchases represented 30% of airlines' total costs; they now represent 40%.

More Consolidation in Europe, but Not in Asia

Tyler, who is leaving Cathay Pacific shortly to run the International Air Transport Association, a global aviation trade group, said the other major challenges facing carriers are infrastructure and airport constraints: "Next generation" measures to modernize the U.S. air-traffic control system, which ultimately would increase capacity, have yet to be passed. And Tyler said progress on the "Single European Sky" project, which would create a unified air-traffic control system there, has been "painfully slow."

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With the exception of Frankfurt, where a new terminal and runway are being built, no major new airport facilities are being planned in Europe. "Everybody wants to fly, but no one wants an airport," Tyler said.

Although airlines in the U.S. have consolidated -- most recently in the United-Continental (UAL) and Southwest-Air Tran mergers (LUV) -- Tyler predicted it would be a "long, long time before there is consolidation across aero-political borders in Asia. There needs to be a complete revamp of the basis on which we fly, laws governing bilateral traffic rights, airlines owned by nationals. If somebody waves a magic wand, then we'll see cross-border consolidation."

In Europe, he feels, it could be a different story. Pointing to what he called Europe's "big three" airlines -- British Airways (BAIRY), which combined with Iberia last month; Air France (AFLYY), which earlier merged with KLM; and Lufthansa (DLAKY), which has taken over Swiss, bmi and Austrian Airlines -- Tyler said it was possible other small European airlines "could gravitate to the Big Three. Life may become more difficult for them. I can't see a fourth one emerging."

A Smart Move for Oneworld

Later this year, the industry's Oneworld alliance -- of which Cathay was a founding member -- will move its executive offices from Vancouver, B.C., to New York. Tyler predicted that the move "will be a real shot of adrenaline to the alliance," whose other founding members include American Airlines (AMR), British Airways and Qantas (QUBSF).

Oneworld, he added, constantly adds new members -- among the latest is S7, a Russian domestic carrier -- which widens its network, creates more opportunities for member airlines' frequent fliers to earn and use mileage, and gives them more access to airport lounges worldwide. He also said Oneworld carriers' fares "are made much more competitive by sharing," because alliance airlines have to provide other alliance carriers and their passengers "cheap access to the network."

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