Cathay Pacific Announces Cost-Reduction Measures

20 April 2009

For Immediate Release

Cathay Pacific Announces Cost-Reduction Measures
In Response To Severe Business Downturn

Cathay Pacific Airways has announced a series of measures that will help it deal with a drop in business resulting from the current economic downturn. In response to deteriorating business conditions, the airline will reduce passenger capacity by 8% and overall cargo capacity by 11% from May. At the same time, in a further effort to reduce cash spend, the airline will introduce a four-tier, top down Special Leave Scheme under which staff will be asked to take unpaid leave varying from one to four weeks according to their seniority.

Cathay Pacific Chief Executive Tony Tyler said: “We anticipate an extremely challenging year in 2009 and a toxic combination of low fares, a big drop in premium travel, weak cargo loads, poor yields and a negative currency impact is making it more important than ever to preserve cash. In the first quarter of 2009 we saw a marked deterioration in our business compared to the same period last year. Turnover for the first three months of this year was 22.4% lower than the same quarter in 2008.

“We have no option but to take measures that will help us weather the current storm and maintain the long-term sustainability of the business.”

Capacity reductions
The capacity reductions are being introduced following a very thorough review of every route operated by Cathay Pacific.

On the passenger side there will be a reduction in flight frequencies or seat capacity to London, Paris, Frankfurt, Sydney, Singapore, Bangkok, Seoul, Taipei, Tokyo, Mumbai and Dubai. At the same time, additional flights will be mounted to Denpasar, Sapporo and Bahrain/Riyadh (see Appendix 1 on P.3 for more details).

Its sister airline Dragonair will also see a 13% cut in capacity. Flight services to Bengaluru, Busan, Sanya and Shanghai will be reduced while services to Fukuoka, Dalian, Shenyang, Guilin and Xian will be suspended.

Flights to Auckland from Hong Kong have not been affected, and the airline will continue to operate ten flights a week between the two destinations. Ian Herald, marketing services manager for Cathay Pacific in New Zealand said that forward loads from New Zealand are “looking positive through the remainder of the year.”

Mr Herald said that the airline was in the process of rebooking any local passengers who had been affected by cancellations throughout the network.

For the cargo operation, the cuts will see a reduction in available tonne kilometres – the measure of cargo capacity – of 11% taking into account the reduction in freighter operations and freight carried in the bellies of passenger aircraft. The weekly freighter frequency will fall to 84 flights – down from 124 a week during the 2008 peak.

In terms of aircraft deployment, the company is negotiating the sale of five aircraft and will park two more of its Boeing 747-400BCF freighters – taking the total to five – and wet-lease one BCF to subsidiary Air Hong Kong.

Special Leave Scheme
Under a Special Leave Scheme announced on Friday (April 17), all of the 17,000 staff working for the airline – in Hong Kong (about 13,600) and overseas (3,400) – will be asked to take unpaid leave of one to four weeks, depending on seniority, over a 12-month period from 1 May 2009 to 30 April 2010.

While the capacity cuts dictate a certain reduction in operating staff, the Special Leave Scheme will help to save money across the board. The scheme has been designed according to three major principles – to preserve cash for 2009, to keep the airline’s operation going, and to be acceptable to all staff. Every member of the Cathay Pacific team is being asked to contribute to the scheme to help the company through this difficult period, with top management and senior staff asked to contribute more. The Special Leave Scheme will be a four-tiered scheme defined by different staff levels.

Directors and General Managers will be part of the scheme. Unlike other staff around the company the airline’s senior managers had no pay rise this year, and they were also excluded from the two-week year-end bonus that was paid to the rest of the team in 2008. In addition Chairman Christopher Pratt, Chief Executive Tony Tyler and Chief Operating Officer John Slosar will forego their 2008 bonuses, while the bonuses paid this year for other senior managers are being substantially reduced.

Cathay Pacific has already implemented a series of other measures to ensure that its financial position stays strong (see Appendix 2 on P.3 for more details).

“The global economic meltdown is hitting the aviation industry hard,” said Mr Tyler.

“Unlike many of our competitors, we get no government financial support or subsidy. We must make our own way as a commercial airline. To do this we must above all preserve cash. We have made it clear that we want to keep our team together as far as possible, but we need to take all of our cost factors into account in these unprecedented market conditions.

“Our staff are being asked to make sacrifices that will be needed to see the company through this violent storm. The pain will be shared from the top down. We have tried to make the scheme as fair and equitable as possible. That means that no matter what level an employee is, everyone more senior is taking more pain. Support from all staff is essential. Cathay Pacific is blessed with the brand, the reputation, the track record of premium service and quality that differentiates us from our competitors and we have to keep these advantages intact,” Mr Tyler said.

APPENDIX 1

The capacity changes being made by Cathay Pacific will result in the following reductions or additions to the schedule.

Planned CX Passenger Flight Reductions (Subject to change)

• London – Ad hoc cancellations of 17 round trips in May and more are likely in June upon further review.
• Paris – Cut 7 round trips off the twice-daily services in May. Plans to cut down to 10 flights per week from June to the end of August, then daily from September, subject to changes in accordance with demand.
• Frankfurt - Cut 9 round trips off the 10-flights a week service in May. From June, cut 3 weekly services to make a daily service.
• Sydney – Cut 1 flight daily to 3 flights per day.
• Singapore – Cut 10 flights weekly to 32 flights per week.
• Bangkok – Cut 4 flights weekly to 31 flights per week.
• Seoul – Cut 1 flight daily to 4 flights per day.
• Taipei – ad hoc cancellations.
• Tokyo/Taipei – Downgraded to an A330 (311 seats) from a 747 (379 seats).
• Mumbai/Dubai – Downgraded to an A330 with the new cabin products (264 seats) from a 747 (379 seats).

Additions
• Denpasar – Add 4 flights weekly to existing daily flight from July to September.
• Sapporo – Add 3 flights weekly to become daily in July/August.
• Bahrain/Riyadh – Add 3 flights weekly to become a daily service from August.

Planned CX Cargo Flight Reductions (Subject to changes)

• Weekly frequency down to 84 from the 2008 peak at 124

The following reductions are compared with the 2008 peak
• Europe (via Middle East or India): to 22 flights per week from 32
• North America – to 26 flights per week from 31
• Australia – to 2 flights per week from 3
• Mainland China - to 15 flights per week from 23, mainly Shanghai, Beijing, Xiamen
• North Asia – to 10 flights per week from 20, mainly Osaka, Taipei,
• S.E. Asia – to 3 flights per week from 9, mainly Penang, Jakarta, Ho Chi Minh City
• Middle East & India – unchanged at 6 flights per week

APPENDIX 2 – OTHER COST CUTTING MEASURES

On the fleet side these include setting aside five aircraft for disposal, parking three BCF freighters, negotiation with manufacturers to defer deliveries of new aircraft and looking into whether to renew aircraft leases that expire.

The airline has deferred the completion of its new cargo terminal by 24 months to 2013 and has pushed back capital expenditure in areas such as airport lounge renovations in Hong Kong and London. It is also continuing to negotiate with suppliers for more concessions and has supported the Board of Airline Representatives in urging the Airport Authority Hong Kong to reduce landing and parking charges at Hong Kong International Airport.

Other cost-reduction measures include redeploying flights to more profitable routes, making ad hoc cancellations to align with market demand, reducing advertising and marketing spend, implementing a hiring freeze and offering voluntary unpaid leave for operating crew.

ENDS

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