Philip Chen: Cathay come home - how domestic crisis turned into drive for new destinations

Sars was just one of the hazards the Hong Hong airline had to overcome. Its operating chief tells Clayton Hirst about his new challenges

It's not easy to wipe the smile off Philip Chen's face. The chief operating officer of Cathay Pacific punctuates the end of each sentence with a quiet giggle and a smile is never far from his face.

It's not easy to wipe the smile off Philip Chen's face. The chief operating officer of Cathay Pacific punctuates the end of each sentence with a quiet giggle and a smile is never far from his face.

But one subject does snap Chen into serious mode - Sars. The world's airline industry was only just starting to recover from the triple effects of the war on Iraq, the downturn in the economy and 11 September when the deadly Asian virus took hold early last year. Cathay, Hong Kong's de facto flag carrier, was hammered as people cancelled their travel plans for fear of contracting Sars.

"The first half of the year was the darkest chapter in our history," says Chen. With Cathay starting to rack up the losses, some rivals even speculated that the airline would ground its entire fleet until the epidemic died down. But Cathay stuck it out. "I don't mind telling you that in May we were down to about half our operation. We maintained the routes but we had to cut down the frequency drastically. On many flights, we had more cabin crew than passengers," he says.

Twelve months on, Cathay is in rude health. Chen, a member of the Hong Kong Tourist Board, helped to organise the "We love Hong Kong" campaign, which encouraged people to leave home and spend money, by providing rewards. Cathay donated 10,000 airline tickets. By the end of the year, Hong Kong was back to relative normality.

This helped Cathay to turn a first-half HK$1.2bn loss (£84m) into a HK$1.3bn profit by the end of the year. The company has emerged from the crisis stronger than many of its competitors.

Compare Cathay to British Airways. Both companies were affected by the same troubles. Cathay carried 10 million passengers to 83 destinations last year, against BA's 38 million to 216 destinations. But Cathay, which is listed on the Hong Kong Stock Exchange, has a market value of HK$54bn (£3.8bn), compared with the London-listed BA, which is worth £3.2bn.

One reason the market rates Cathay more highly than BA is that it has remained lean through good times and bad, say analysts. While companies such as BA, which employs 47,000 people, are still involved in major cost cutting, Cathay, which has a workforce of 14,600, is able to move more quickly. This point will not have been missed by Rod Eddington, who was at Cathay before becoming BA's chief executive.

Cathay is now planning a major expansion in which the airline will go head to head with BA on one of its most important routes: direct flights between London Heathrow and New York. In November, the British Government controversially granted Cathay the rights, much to the dismay of BMI British Midland, which had lobbied for six years to fly transatlantic. As well as BA, Cathay will now compete against Virgin Atlantic, United Airlines and American Airlines.

Chen says Cathay will start flights as soon as he has received European Commission approval. "London is growing in importance in the Cathay network. The future of our industry is all about hubs. Hong Kong, New York and London are the major hubs for aviation transport. Think of our target market - the business traveller; these cities are the key points they have to travel to."

Cathay is to launch a non-stop service in July between Hong Kong and New York, flying over the North Pole. But wary of the still relatively fragile aviation market, it will not offer cheap tickets to acquire custom. "We will not be a price-driven carrier," says Chen. "If you go to the market solely on price, then you will barely make money. It is not a sustainable business model. The Cathay Pacific brand is renowned and I am confident that we will be able to compete on this."

While Cathay's stock is traded in Hong Kong, it has two major shareholders. Swire Group, controlled by the billionaire Sir Adrian Swire and his nephew, John, is an investment company with interests in aviation, property, shipping and drinks. It owns 47 per cent of Cathay.

Swire Group's involvement with the airline dates back to 1948 when it bought the stake in Cathay, which had set up two years earlier with a single Douglas DC-3.

Cathay's other main shareholder is Citic Pacific, a Hong Kong infrastructure investment company which controls some 26 per cent of the airline.

Cathay's two main investors have given it the nod to buy nine medium-sized jets to help the company service its new routes.

With a grin - you wouldn't expect anything else - Chen declines to give any details of the order, which will be announced after Easter. But it is understood that Cathay will spend the best part of HK$8bn on a mixture of Boeing 777-300 aircraft and Airbus A330-300.

"Cathay Pacific is quite evenly divided between Boeing and Airbus fleets. We are happy with both, so that will continue to be our thinking with this order," says Chen.

Cathay is a good breeding ground for airline executives. Chen joined in 1977 and has held a number of executive posts, both with the airline and at other companies controlled by Swire. A year after Chen joined Cathay, Eddington arrived at the airline fresh out of university.

Today both men meet as members of the OneWorld Alliance of airlines. Chen says that Cathay has no intention of pursuing a merger with another airline: "You can't apply the same economies of scale arguments to the industry." Therefore, OneWorld offers Cathay the best opportunity to eke out synergies and savings with other carriers without attracting the attentions of the competition authorities.

Chen arrived in London last week after meeting OneWorld partners to discuss ways to strengthen the alliance.

OneWorld members, including American Airlines, Aer Lingus, Iberia, Lan and Qantas, hope to trump their rival, the Star Alliance, by introducing electronic ticketing. OneWorld wants members to be using e-ticketing - with cost savings and quicker connections - by the end of the year.

Chen believes there is no problem with airlines working together in alliances, but he is critical of state subsidies. While carriers in Asia and Europe have received little in the way of grants, the US government has lavished billions on its ailing carriers. This is despite it sponsoring the so-called Open Skies Agreements that are designed to "create a free market for aviation services".

Chen says: "We love Open Skies, but let's be equal. I believe in a proper level playing field."

When opening the new routes, Chen will have to accept that Cathay is competing on an uneven playing field against US carriers fuelled by billions of taxpayers' dollars.

But Cathay Pacific, having recovered from the Sars crisis, has, if nothing else, the confidence to take on its artificially pumped-up rivals.

BIOGRAPHY

Born: 1955.

Education: University of Hong Kong.

Career: (first job, 1977): graduate trainee, Cathay Pacific.

1984-1988: University Hong Kong, head of MBA marketing module.

1989-1992: General manager, Swire China.

1992-94: Regional manager, Southeast Asia, Cathay Pacific.

1994-97: Chief executive, Dragonair.

1997-98: Deputy managing director, Cathay Pacific.

1998 to now: Chief operating officer, Cathay Pacific.

Other posts: Director of John Swire & Sons; member of Hong Kong Tourist Board; vice-chairman of Hong Kong University of Science and Technology.