Monday 22 April 2013

A cameo,- Cathay Pacific's London Route,competition and the A 380.

Cathay Pacific's move up from 4 to 5 daily flights on the Hong Kong-London route further increases its dominance of this once hotly contested city pair from which they were excluded until the 1970s since  when it has built  a solid base culminating in market dominance. Qantas and Air New Zealand have both withdrawn their daily 747s , BA has slimmed down from 3 to 2 services and Virgin Atlantic jogs along with a single daily A340-600 calling in on its Australian route.

The traditional pattern of operation and , because of it demand ,on this 12/13 hour nonstop sector has been overnight in each direction, leaving a long layover at both ends. Brought up on that and reinforced by "mustn't waste a minute of the day" cultures,  the market has shown a reluctance to spread across into daylight flights  although once they are launched and persisted with they do take root. A number of airlines including BA, Lufthansa and SAS have dabbled at various times since the 1970s with westbound daylights but have none now. On European routes ,other than Cathay only Air France now offers a  5 days a week daylight westbound  in addition to its daily overnight schedules.

In recent years Cathay Pacific has been the most adventurous on the London route, giving the widest spread of departures in both directions. It has  moved up to from  2 to 3 to 4 and now 5 daily frequencies. By not throwing all its capacity into the proven overnight market it will have lost a few percentage points of pure profitability and started to spill overnight business onto its competitors, notably One-World  "partner" and historical enemy number 1,-BA. Despite that however it has relentlessly expanded its market dominance in terms of sheer numbers carried . It has also increased its appeal to the thriving high yield business market by being able to offer the traveller the ability to be on an aircraft  home at the earliest possible moment after meetings have ended rather than waiting for the next evening. Being able to save another "red eye" flight and its resultant under par following day in the office (whatever the ads say about perfect nights sleep in First and Business flat beds) can be very valuable to savvy frequent flyers. Whose ticket would you rather have in your pocket if your time of return was uncertain?

Aquistion of Heathrow slots for the 5th service now enables Cathay to tighten the garotte on its competitors and regain from them any business it has had to let spill. That will put more pressure on BA who are responding not by increasing frequencies or widening their very tight time span but by introducing the A380 on one of their two departures from 15th November. Regardless of that and the small increase of capacity it brings, Cathay's overall dominance on the route will increase. The 5th service is a clever and well thought out move.

Cathay's next steps to maintain and profitably increase that dominance has to lie in a bigger aircraft, a decision that seem to be getting nowhere at Chep Lap Kok at the moment. There have long been talks around the 787-8i and the A380 but no decisions. Neither is perfect. The 747-8i , the ultimate stretch for the 1960s 747 design, is at the end of its development life and looks like a blind alley. It has very few customers and the passenger version is unlikely to see more than 100 orders at best. That means any purchaser will be faced with having to operate it for most of its useful life (which actually is Cathay's policy for most of its aircraft) as its residual value will be low. That leaves the A380 ,like it or not, as the only real game in town.

What then is the problem with the A380, not just for Cathay but for others?

The answer is simply that the only model currently on offer, the -800 is too small for many. It is the SP of the A380 series, with the wing and basic structure for the bigger -900 and -1000.  The need to maximise the number of seats per slot at the world's most constrained airports and to extract the lowest seat mile costs from the design point to the need for Airbus to dust off the plans, spend the money and offer these two stretches as soon as possible. Cathay and Emirates have been telling them that for some time but preoccupations with production problems and fixing the wings once and for all have mopped up all the available 380 brains and funds. As result the -800, broadly offering 460-550 seats in most configurations currently remains the only model available to order.

That may soon change. Airbus look faced with a double or quits option. If they stick with just the -800 there are probably about 70-90 more orders to trickle in, maybe less. That way the line, which is now producing faster than new orders are coming in, will close towards the end of the decade. The prospect of that will simply hasten the process as, apart from topping up existing fleets, airlines don't like being end of the line buyers. It's not good for further expansion or residual values in particular. By offering the -900 and -1000 Airbus would be likely to sell more -800s as well , thereby ensuring that the long term value of the 380 project is maximised. There is no alternative very large airliner in sight and once the A380 is deeply entrenched the barriers to the launch of a competitor become very high indeed.

All this ties back into the cameo of Cathay Pacific and the Hong Kong-London route. If you have the most frequencies with the widest spread of departure and arrival times and aircraft large enough to ensure that even at the strongest time of day you are not spilling passengers over to your competitors (regardless of whether they are in the same alliance group or not) you are king of the castle and can call the shots on everything else including pricing. Having a service advantage, or at least no disadvantage , helps too. That's Cathay Pacific. All to play for with a bigger aircraft.

 For Airbus, the opportunities are staring them in the face too. All to play for with a bigger aircraft.


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