What Cathay Pacific’s Death By 1000 Cuts Could Teach US Airlines

This opinion piece in the South China Morning Post suggests that Cathay Pacific’s ownership dump the airline “while it still holds valuable assets like landing slots, a decent cargo business and maintenance facilities.”

They’re eroding their brand with cuts, and as a result mitigating their ability to compete in the premium sector and unable to fully compete in the low cost sector.

Granted a good portion of current financial woes come from fuel hedging losses, something very familiar to US airlines.

Cathay Pacific had a more or less government-granted monopoly in Hong Kong. It conspired with the government and its home airport to limit competition from low cost carriers. But that’s been eroded by the growth in nearby Chinese hubs. In response, they’ve pursued cuts.

Sustaining the cost, and passing on the pricing structure of a premium airline to passengers is unsustainable when confronting the onslaught of competition from mainland airlines.

Cathay is mired in a stuck-in-the-middle strategy – unable to compete as a discount airline and unable to sustain a premium brand. They respond in the typical, smug, self-immolating Hong Kong (and I mean Hong Kong British and Chinese) fashion that characterises many of the local businesses when confronted with real competition – they cut quality.

…Controlling your brand is paramount when your business is in turmoil. Instead of reinventing the business or innovating, management chooses to die by a thousand cost cuts over time.

I noted Cathay Pacific’s substandard new business class seats last week.

What lesson are observers drawing from Cathay Pacific? Ben Sandilands points out,

cutting into quality (and legroom in economy class) is pretty dumb if you expect to continue to sell as a quality carrier, and not just another, absurdly cost burdened attempt to become a quality low cost carrier.

It is very difficult, although maybe not impossible, to retain historic expectations of full service quality in a low cost business model.

For the American carriers, Basic Economy — certainly as practiced by American and United where full fare customers one day cannot even bring on a rollaboard bag the next — erodes their brand. Surprising absolutely no one earlier this month American Airlines was screwing up and rebooking even paid first class passengers into Basic Economy on flights that weren’t even supposed to offer it during irregular operations.

As JetBlue’s Marty St. George pointed out last summer, “We still want to make sure that when a customer walks on a JetBlue airplane, no matter where they sit, they will have the best experience of any airline.” The US legacy carriers have walked away from this approach, and Cathay Pacific seems to have done so as well.

The problem legacy carriers face though is an eroding of what was traditionally business they’d see. Devaluing their brand won’t help them grow, but it’s a natural if uninspired reaction. While Singapore Airlines is pursuing a strategy of separating out low cost carriers (the merged Tiger Air and Scoot) from the full service airline, that only works if you can separately fill planes on each. And US airlines have a decidedly negative experience with low cost airlines within an airline — such as Delta’s Song, US Airways MetroJet, United’s TED (derived from the last three letters of the airline’s name, also known as ‘the end of United’).

Cranky Flier interviewed Willie Walsh, CEO of the parent of British Airways, Iberia, Aer Lingus, Veuling, and Level, and he seems to think the reason US ‘low cost carriers within a carrier’ failed was because the parent airlines didn’t want those new brands to succeed.

Delta has gone out and acquired stakes in foreign airlines, diversifying away from the US market. They own chunks of Virgin Atlantic, Gol, Aeromexico, and China Eastern for instance. United is seeing litigation from its recently announced deal with Avianca. American is reportedly close to investing in China Southern. These may ultimately prove better strategies than their simultaneous attempts to undermine their own brands.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. Sorry, but I think there are few lessons to be learned for the US airlines from Cathay’s woes.

    You say it’s a dumb idea for the majors to launch “basic economy.” I think you are completely wrong about this. While it’s not customer pleasing, it’s a BRILLIANT strategy when you’re forced to compete against Frontier and Spirit who sell only on price but add ancillary fees. There is no other way to long term compete, when the majority of customers for air travel buy only on price. If you insist on believing your product is “worth more” than that, you just wind up with half-empty unprofitable airplanes (remember, your high paying customers value frequency) and a formidable Ryanair-like competitor.

  2. This salient analysis of Cathay Pacific is the truth serum required in the executive suites of all transportation–air, rail and cruise. Succinctly, it dissects the issues well appreciated by customers who continue to be told when voicing concerns how “we do not understand how unique their industry is…”

    Contrary to their strutting peacock attitude dismissing customer input, it behooves these executives to appreciate what how it is the customer who really defines brand loyalty, service, and customer experience.

    This article is absolutely the best analysis of the airline market today. As our legacy mileage programs continue to be shredded in parallel to our expectations of comfort and service, should only reinforce Jet Blue’s position in the marketplace.

  3. Delta/Northwest I believe used to own part of KLM. Does it still have that ownership?

    Asian passengers, by and large, lack the “collective memory” of North American and European passengers of what an airline ought to be. The low-cost competition there is fierce. Yet an airline like Bangkok Airways seems to be doing quite well by competing on quality and overall travel experience.

  4. You also got to factor possible bias in SCMP.
    Chinese govt supposedly want to merge CX with Air China and SCMP may be part of an agenda to keep the pressure on CX.

    That said CX are facing challenges in their business, but they have a long ways to go before they catch up with the US carriers.

  5. Gary please explain how CX’s hard product in J is substandard? You and Ben preach that reverse herringbone is best and “not all lie flat seats are created equal”. Seriously other than the lack of wifi how is CX deficient? Refreshment centers pax never use are not standard, especially when in a premium cabin pax can order whatever they’d like at any time from attentive crew.

  6. Just flew CX regional BKK-HKG in C and the seats were far worse than the ones shown in the photo. That being said, they were no worse than domestic F on US carriers and the food and service was good.
    The real problem – which Gary sort of conveys – is that you can’t be everything to everyone. You need to find a market niche and serve that customer well. You can do well as the Dollar Store or Louis Vuitton, but if you try to be everything in between you will fail miserably.
    This is why WN succeeded for many years and Spirit succeeds now. There is also room at the high end where SQ does well by providing superior service.
    But trying to have 5 classes of service on a single plane, or trying to compete at both the low end and high end on the same jet, is bound to fail.
    And of course this simply aggravates those of us who are willing to pay more for a better economy class product, but don’t have that choice anymore because everyone is racing to the bottom.

  7. In my humble opinion the biggest problem airlines have is following through once they have a plan. I believe it does make sense to have a basic economy that is as basic as can be with business class and possibly First Class that offer service comensurate with the premium fare they charge.

    While I appreciate and crave upgrades and special treatment when I buy a cheap ticket airlines have to stop listening to self serving pundits like us.

    1, Maintain a robust economy business. Increase sales by cutting prices but keep passenger flow high to maintain the ability to fill frequent flights.
    2, Make frequent fliers understand that you are what you pay, EVERYDAY. Crews, leases and gates cost money every day. If you want to be treated as an important person pay for it. It is no secret that many frequent fliers do it on the company’s dime and then de,and special perks when they are too cheap to pay.

  8. @Tom has a good point. South China Morning Post is owned by Alibaba, and who knows who wants what in China nowadays. The cited article is an opinion piece and not a news story. There always is a back story with things in Hong Kong. You have old money being pushed around by the new money from the mainland. CX made a big mistake with fuel hedging. Lesson learned the hard way. CX should had observed how poorly other airlines did with fuel hedging, but like I said they learned the hard way. Now will Swire Group sell the rest of CX to Air China? I sincerely doubt it. With the integration of Dragon Air, CX really has an Asian network. CX and HAECO are crown jewels of the Swire group. CX and HAECO control Hong Kong’s airport. We talk about fortress airports in the US. Nothing compares to the fortress that Swire has at HKG! Besides CX is regarded as being the safest Asia airline, excluding Qantas as not really being an Asian airline. One doesn’t sell a company based on a single year’s financial results.

    Sorry I don’t agree with this post. And I definitely don’t agree with the opinion piece it is based on.

  9. What’s not known by some readers here is that, days before, a very “rainbows and butterflies” pro-CX puff piece was also run by the SCMP, so the op-ed mentioned by Gary comes with additional context. SCMP ran two very different CX-related pieces.

    CX is still a great airline, but the writer of the op-ed does well to at least point out CX has rested on its laurels for far too long, and is in very serious danger of falling further out of favour.

    As for the “substandard” business class seats, it’s not the seat design that’s an issue, the problem is the build quality. I flew on B-LRA (a few months old A350) and the finishings on the Zodiac seats were truly shocking.

  10. Nary a mention of the M3 who are having the major impact on CX (and SQ) premium customer base outside Hong Kong. As in every other market they enter, the M3s are sucking passengers in the critical front cabins and dumping seats in the back to undercut the two Asian carriers who themselves had relied on transit passengers over local originating ones. Yes, the LCCs may be an issue at either end of the originating passenger segment of the market, but the bigger margin transit customer has been the real money maker for CX (and SQ) and this is where the real toll is being taken.

  11. @ iahphx and @ Charles regarding “basic economy”: the point that Gary has been making on his blog is that the “basic” fares are not cheaper; they’re the old lowest fare with reduced service. That creates a perception that the brand is cutting services for the same price, and I agree with Gary that it is a dangerous strategy. I can’t think of a brand that has successfully moved from premium to basic without losing their premium (i.e, their most profitable) customers in the process.

  12. I flew C class on CX’s 777 from LAX to HK last November. I found the whole experience to be very satisfying. The seat was acceptable considering that that flight was like 15 hours both ways. Not sure that even the 1st class seat does not become uncomfortable after 15 hours.The service was exemplary. The food outstanding. I have been flying CX since 1985. The only issue that I have is that CX has done away with their 747s

  13. I just flew CX 889 JFK-YVR-HKG. I flew it a few years ago and remember a vastly different experience. I may be wrong, but I think the first time was 747, this one 777.
    I was in business class and the seat was very uncomfortable for sleeping (no extra sleep pad offered). A ridge hit right about lumbar level. Side sleeping was ok, back impossible. The food was good, but, except breakfast, was delivered on a tray all at once. (This is a late night departure.) There was no amenity kit!! I had been counting on that, but was fortunate to find most of what I needed in my carry-on–just no eye mask. The cabin was empty but for two or three others JFK-YVR, but filled up in Vancouver (at least one empty seat near me). The service from the cabin crew left nothing to be desired. So, now I know.

  14. @Kathy. I read your post with interest. I flew Cathy Pacific a couple of weeks ago JFK-HKG in business and received an amenities kit. I though about the JFK-YVR-HKG route. I am glad I chose the direct route.

    Overall, I feel that all the airlines are degrading their economy service as fast as they can. I hope it stops.

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