Hong Kong airline Cathay Pacific has earmarked more than HK$1 billion (NZ$171.7 million) to revamp its business class cabins on long-haul Boeing 777 and Airbus A330 aircraft as the company recovers from the recession.
Cathay will scrap its herringbone-style seating in business class cabins – a flat-bed layout where passengers have their backs to the windows and can't easily converse with travelling companions.
The new cabin configuration, to be phased in during the next two years, will mean wider seating and flat-beds tilted towards the windows, and better work-space, storage and multimedia facilities for business class passengers.
Cathay Pacific flies between Auckland and Hong Kong 12 times a week but drops that to 10 flights during winter.
Cathay completed its last business class revamp three years ago. CEO-designate John Slossar says flat-beds have evolved considerably since their introduction about 10 years ago and Cathay's new product, 2 1/2 years in the making, had been approved by a "foresighted" board when Cathay was suffering the worst effects of the global financial crisis.
"Like other Asian airlines, our focus is on business class," Mr Slossar says. "It was a bit of a reach for our board at the time but it was supportive of the need for the new product."
Cathay has noted in its annual reports of the past three years the "extremely challenging" conditions after the global financial crisis hit in late 2008. Its home market of Hong Kong was "deeply affected" by the economic downturn, particularly passenger demand for premium seats.
It reported a record HK$8.69b (NZ$1.5b) loss for the 2008 year after passenger yields slumped 19.5 per cent. First and business class revenues fell 27 per cent, economy class by 17.9 per cent and cargo turnover by 31.6 per cent.
Particularly hard hit were premium yields in South Africa and the southwestern Pacific – the region that includes Australia and New Zealand.
Like most airlines, Cathay Pacific does not disclose the percentage of revenue and net profit provided by premium passengers. But in this part of the world, it's estimated business and first class produce about 20 per cent of earnings. In some regions, such as the US where premium cabins are bigger and have more seats, the figure is estimated at between 30 and 40 per cent.
Hong Kong did not suffer a western-style recession, says outgoing Cathay Pacific CEO Tony Tyler, new CEO and director-general of the International Air Transport Association in Geneva.
Rather than losing their jobs, Hong Kong businesspeople tended to lose only their bonuses. However, demand for business class travel dropped as corporates downgraded executives to economy class.
"Our front-end business out of Hong Kong is heavily dependent on financial institutions, most of which were hit hard by the financial crisis," the company said last year.
Conversely, economy class demand was strong during the recession "but needed aggressive fare promotions to stimulate demand in a very competitive market. This depressed yield."
In the all-important freight division, demand weakened from late 2008. The US and Europe, key markets for exports from Hong Kong and the People's Republic of China, suffered badly as consumers cut spending.
Cathay's group cargo revenues fell by 29.9 per cent in 2009 and yields by 26.8 per cent. Globally, an estimated 20 per cent of airlines' wide-bodied freight fleets were parked (many in the California desert) or decommissioned as the recession bit.
Business started to improve in the third quarter of last year, Mr Tyler said. By quarter's end, yield and load factors had returned to their 2008 levels.
Cathay reported a profit of HK$4.69b (NZ$800m) in 2009 and told the stock exchange on November 16 it was set to report a record HK$12.5b (NZ$2.1b) profit for the year to December 31, in spite of fuel prices 51 per cent higher than in 2009.
The re-stated profit includes a HK$1.7b (NZ$300m) contribution from its strategic partner Air China, one-off asset sales of HK$2.165b (NZ$400m), and a 57.12 (NZ$101m) fine imposed by the European Union after claims of anti-competitive behaviour – a fine Cathay may appeal.
Mr Tyler says the company is expecting an outstanding financial result.
"Two years ago, we suffered a record loss. This year we expect to make a record profit. This only goes to show that we must manage our business prudently, so that we are able to thrive in the good times and survive the bad times."
In its interim report for 2010, the company notes a sharp increase in demand for business travel on flights originating in Hong Kong "though this is not matched by a comparable increase in demand for travel starting in other major cities".
Hence the move to revamp business class cabins and Mr Slossar's comment that "we have listened intently to our customers and focused on what they were saying".
Three business cabin prototypes were eventually built, housed within Cathay's offices near Chek Lap Kok airport. "Everyone had a go at sleeping in them, including me," he says.
So important did Cathay regard the investment that about 3000 of its best customers were invited to a launch party at Hong Kong's convention centre last month, where customers could try the new cabin seating for themselves and view a raft of new staff uniforms. More than 100 overseas journalists were flown to Hong Kong for the event.
Will the investment pay off?
Mr Slossar says he expects a return on the HK$1b "well before" the normal seven to 10-year useful life of the product.
"For the past two years, there has been more capital raising on the Hong Kong stock exchange than any other exchange in the world. A decade ago, most people thought that would not be possible. So there is more reason for people to keep coming to Hong Kong."
Mr Slossar said he did not anticipate any specific fare changes, nor did he expect any trading down of first class passengers "though it would be a great result if our business class is seen as an alternative to first class".
On the downside, the airline has ongoing anti-trust issues with the governments of the United States, the European Union, New Zealand, Australia, Korea, Canada and Britain.
Cathay says it cannot fully assess the impact of these potential liabilities but has made a HK$26m (NZ$4.5m) provision in its accounts this year.
Jenni McManus travelled to Hong Kong as a guest of Cathay Pacific.