A relationship business

posted on 4th March 2021
A relationship business

Despite the extraordinary current pressures, Cathay Pacific’s new cargo director Tom Owen, formerly the group’s head of people, stresses the importance of long-term partnerships with customers over short-term opportunism, in an interview with Ian Putzger

Tom Owen took over the reins of Cathay Pacific’s cargo business last summer in a time of extreme disruption. With the continued almost complete collapse of most airlines’ passenger networks and businesses, including Cathay’s, and the increased focus on and importance of cargo operations, the Hong Kong-based airline re-established the position of director of cargo, requisitioning Owen from his group role as director for people, which he had held for the previous five years.

While there are many aspects to the current global crisis that airlines and their cargo divisions cannot attempt to control, there are plenty of areas where cargo carriers can seize the initiative, consolidate their business relationships, and make progress – for example, where they can maintain as much reliability and consistency as possible in a highly dynamic environment, and respond to customers’ requirements for further or different capacity and flexibility. And it has been possible to continue the drive towards digitisation and the development of new capabilities, despite the current tight financial situation that the pandemic has forced upon airlines, Owen notes.
For example, following multiple examples of creativity last year in response to the changing dynamics created by the crisis, Cathay Pacific Cargo started 2021 with a fresh wave of innovation. In mid-January it unveiled a special solution for the distribution of COVID-19 vaccines, having developed an offering that harnesses the carrier’s pharma capabilities alongside its priority service and its new-generation track-and-trace system, ‘Ultra Track’. Through this combination of capabilities, vaccine shipments can be monitored throughout their journey via Cathay’s 24/7 operations control centre.

Cathay has also formed a vaccine taskforce in tandem with the airport authorities in Hong Kong and others in the industry, with Owen noting that the carrier is “confident in our capabilities to help deliver a global vaccine solution. We are ready and determined to play our part in this unprecedented logistics challenge to help the world begin to return to ‘normal’.”

Augmented visibility in transit
Ultra Track is geared to high-end shipments that require augmented visibility in transit. Utilising Bluetooth readers that pick up the movements of ULDs fitted with Bluetooth tracking devices, it combines the capability to monitor ambient shipment conditions like temperature and humidity readings with GPS location and near-real time updates. The new tracking system is being rolled out across the airline’s network in the first quarter.

The cargo division is also burnishing its credentials in another speciality segment – live animal traffic. This year it is looking to take its service through the CEIV certification process, adding to its badges for pharmaceuticals and perishables. “It’s a small market, but we feel we have a competitive edge in it,” says Owen.

On the dangerous goods side, Cathay has introduced skid-sized fire containment bags as a solution to carry lithium battery shipments.

“We want to be a carrier that can carry everything and carry it well,” remarks Owen. “The special cargoes are a strategic focus for us that we’ve had for a number of years and we continue to put great store by increasing the share of that on our cargo carriage.”

In light of the capacity constraints that Cathay, like all other passenger carriers, has had to contend with, this might suggest a lessened interest in general cargo; but Owen emphatically dismisses this thought.

“We’re still very much focused on that (general cargo). It’s the bread and butter of the air freight world,” he comments. “We have commitments to forwarders in terms of block space agreements to help carry that, and we’ve continued to do so – just at higher rates.”

Elevated rates
Those elevated rates, due to constrained capacity meeting sustained demand, are not going to be around forever; but capacity is returning more slowly than had been anticipated before last autumn, when the second wave of COVID-19 infections hobbled the recovery in passenger flights. With lift in tight supply for some time to come, shippers of general cargo will have to pay high rates to secure capacity or look for alternative modes of transport.

For Cathay, the implosion of passenger traffic – in December, passenger numbers were down 98.7% from a year earlier – has meant the loss of most of its belly capacity. The airline’s overall cargo capacity dropped 35.5% last year, resulting in a 34.1% decline in tonnage and a 26.5% decrease in revenue freight tonne-kilometres. And the figures for December were little better than for the year as a whole: tonnages down 32.3% and RFTKs down 23.7%, year on year, with capacity (AFTKs) down by 36.9%.
But the significantly elevated cargo rates due to the dearth of global lift have allowed the deployment of passenger planes for cargo-only missions. Cathay was among the first carriers to embrace the concept; in December it operated 713 pairs of such flights; for the full year 2020, the tally was well in excess of 5,000 flight pairs.

Difficult economics of ‘preighters’
Taking this approach one step further, Cathay has converted four of its B777s into ‘preighters’, with seats removed in the Economy and Premium Economy cabins and modifications made to the seat track to enable cargo to be secured to the floor, as well as markings for the lashing points and bespoke, fire-retardant, cargo bags. Enabling the aircraft to carry 12 tonnes of additional cargo on the upper deck, the concept involves some extra efforts, such as getting the necessary approvals and training people to load and unload them – and far longer loading times.

For example, in the Cathay Pacific Cargo Terminal, the team loads AKE containers to replicate the bag positions in the cabin. These are towed aircraft side by ground-handling subsidiary HAS, and unloaded one box at a time into Cathay Pacific Catering Service trucks that rise up to the rear doors of the aircraft. Boxes are then wheeled into the cabin, loaded into cargo bags as per the load plan, and finally zipped and secured by another HAS team.

The costs of this additional handling complexity are obviously significant. “It’s not inexpensive doing the preighter,” acknowledges Owen. “There’s quite a challenge making sure we’re optimising the investment.”

Therefore, the preighters are deployed on trade lanes where Cathay has regular demand and knows it can charter a flight to individual customers. “Getting our heads around the use of passenger aircraft with no passengers on board has been a real lesson for us,” says Owen.

Continuing passenger cargo flights
The combination of elevated cargo rates and the prospect of a slow return to pre-pandemic passenger numbers means that Cathay is poised to keep running quite large numbers of cargo flights with passenger planes all over the world. The transpacific sector has been a major arena for them and Owen expects this to continue in 2021. “We’re also looking to our European operations and, indeed, regionally,” he says.

With passenger aircrafts operating on cargo missions, Cathay has been able to mount new freighter routes, or resume some of those that had been suspended. For example, on 4 January it started a weekly freighter run to Riyadh, a destination that dropped off its network with the cuts in passenger flights last year.

Maintaining the freighter schedule
The airline has also been able to utilise spare capacity on Air Hong Kong, its joint venture with DHL. In the main, this serves the integrator’s intra-Asian network, but Cathay has access to the planes to use them on intra-Asian sectors during windows when they are not hauling traffic for DHL.

For the most part, Cathay’s 20-strong Boeing 747 freighter fleet has maintained its schedule. Arguably the airline could have made more money deploying some of them more on charter work as those rates went through the roof, but Owen and his team have resisted that temptation of short-term gains.

“We remain a scheduled operator,” he notes. “We want to make sure we can offer reliability to our key customers around the world. We have not been chopping out large parts of our schedule to take opportunistic advantage of an improved market.”
While short-term shifts have occurred to optimise operations, redeployment of freighters has not been done at the expense of long-term commitments to Cathay’s forwarder clientele, he emphasises.

“We built long-term relationships with them, and we’re not going to ruin these for short-term gains,” he stresses.

Instead of shifting freighters around aggressively, the idle bellyhold capacity of Cathay’s grounded passenger planes has been the main tool to respond to opportunities in the cargo market.

These have included seasonal opportunities. For example, Cathay has fielded a preighter to start a seasonal service to Hobart since December to haul fresh produce to Asian markets, and it mounted preighter flights to Pittsburgh between September and November to connect the US city with Ho Chi Minh City.

Greater responsiveness
This mix of schedule integrity and responsiveness to market opportunities characterises the airline’s progress through the turmoil caused by the pandemic. It forced it to be more agile so it could change plans quickly and respond to unprecedented demand to fly to new points where regular capacity was no longer available. Setting up service to new points, which used to take months, can now be done in about six weeks, according to Owen.

This agility requires closer collaboration across different teams – pilots, commercial and operations teams, for example – that historically functioned in separate silos. They had been co-operating, but were on slightly different cadences, Owen said.

It also helped that Cathay reinstated the position of a dedicated director of cargo last year, which had been subsumed in the portfolio of its chief customer and commercial officer a few years ago.

But Owen says the airline has had to plan for the passenger business environment being very different to how it was before the pandemic, which has meant significant restructuring – including the closure of the ‘Cathay Dragon’ brand, although it has been “replacing Cathay Dragon metal with Cathay Pacific aircraft on most affected routes”.

Strategic objectives
While it has honed its flexibility, the cargo division has also continued to pursue long-term strategic objectives. One of these is to move the booking process closer to the set-up on the passenger side. The first step in this direction is the development of an effective booking engine. Cathay has some online booking capability in place today, but it is not universal for all agents to use. By the end of this year, Owen wants to have a fully functioning engine up and running that can be accessed 24/7.

The preliminary step of digitising all pricing should be completed by the end of the second quarter to lay the ground for the launch of the booking engine.

This still will be some way off dynamic pricing capability, Owen admits. Getting to a set-up that is comparable to the passenger side, the ultimate goal, will take several years, he reckons.

Another target is the creation of an integrated data hub, a database that pools all cargo-related data in one place to allow cross-referencing of them – from service and revenue data to operational and customer information. It will allow insights into many things that will improve the operating and service and revenue efficiency of the airline, Owen says.

This is going to be a multi-year project, which is currently being developed into a business case to present to top management. He hopes that this project can kick off this year.

Blockchain technology for ULD chain of custody
Cathay also wants to use digital systems around more mundane things like claims and day-to-day issues, he adds. Last year, the airline blazed a trail with the adoption of blockchain technology for its ULD management system, which essentially makes sure that when ULDs are handed over to other parties, Cathay can still keep that chain of custody. The technology is in place and is working. It has reduced cost and some of the complications of managing that inventory, Owen says, adding that Cathay will be working on taking this further in 2021.

These initiatives are playing out before the background of a dire financial situation. Cathay reported an after-tax loss of HK$7.361 billion (US$950 million) for the first half of 2020. It went through a refinancing exercise and a restructure that included the demise of the ‘Cathay Dragon’ brand and the loss of 5,900 jobs. Cargo has been less affected by the workforce reductions but it is feeling the pinch on budgets.

“We are obviously constrained in the shorter term by the cash preservation initiatives underway,” Owen remarks. “It’s an intense and challenging time for everybody, but there are projects we will keep moving forward that we think have strategic value for cargo, because cargo remains a core part of our group.” Although benefiting from higher freight rates from the capacity restrictions in the short term is some compensation for the loss of that capacity, “we also remain very optimistic over the long term for the ongoing success of the business”, he notes.

Given Owen’s previous group role as director for people, it’s perhaps not surprising he values and highlights the contribution of staff in the cargo division’s past and future potential successes.

“Although all these initiatives will deliver long-term value, the real secret to our success over the years remains firmly in the commitment and passion of our people in Hong Kong and around the world,” he notes. “They have been tested during these unprecedented times like never before and our results are due to the great teamwork and agile responses they have shown. It has been humbling for me how they have all stepped up to whatever has been thrown at them, time after time.”