Cathay Pacific Airways Limited

Cathay Pacific Airways Limited

Swire House
9 Connaught Road Central
Hong Kong
GPO Box 1
(5) 7475000
Fax: (5) 8680176

Public Company
Incorporated: 1946 as Cathay Pacific Airways
Employees: 12,747
Sales: HK$20.94 billion
Stock Exchanges: Hong Kong London

Based in Hong Kong, Cathay Pacific Airways has grown from a small regional airline to a prosperous international carrier greatly benefiting from the increase in trade between Asia and the rest of the world.

Cathay Pacific’s roots date back to 1946 when 34-year-old American businessman and pilot Roy Farrell teamed up with an adventurous 32-year-old Australian pilot, Sydney de Kantzow, who had been flying the “Hump” (the route from Calcutta over Burma to Chungking) during World War II. Originally operating out of Shanghai with a lone DC3, the two entrepreneurs soon moved their operations to Hong Kong, where they were required to officially register their company with the British colonial government. Together they registered Cathay Pacific Airways’ corporate papers on September 24 of that year, also forming the Roy Farrell Import-Export Company which, for tax purposes, would lease aircraft from Cathay Pacific. By the end of 1946 the airline had acquired a second DC3 and had carried 3000 passengers and 15,000 kilos of cargo between Australia and Asia.

In 1947 Cathay Pacific added five more DC 3s and two smaller aircraft known as Catalina “flying boats,” which allowed the airline to begin service to Macao, a nearby Portugese colony on the coast of China. In these years immediately following World War II, Farrell and de Kantzow had to contend with Asia’s shifting political boundaries, and their passengers enjoyed few of the comforts that today’s transcontinental passengers have come to expect. The Roy Farrell Import-Export Company proved to be a profitable enterprise, operating out of an office on Ice House Street in Hong Kong; at this time it was advertising Australian oysters (considered a delicacy in the British Crown Colony) available by air within 32 hours of their harvesting.

By 1948 Cathay Pacific had a passenger ticket office in the lobby of the Peninsula Hotel, among the colony’s most prestigious establishments.

While flight crews were recruited mostly from Australia and the United States, de Kantzow began staffing passenger flights with Portugese stewardesses from Macao and Hong Kong.

Early that year, Farrell and de Kantzow were informed by the British governor of Hong Kong that, as foreigners, they were barred from owning more than 20 percent of the airline; a British partner would have to be recruited. After negotiations with the British air transport company Skyways ended unsuccessfully, Cathay Pacific’s founders turned to John Kidston “Jock” Swire, head of Butterfield & Swire, a leading trading company in Hong Kong.

Farrell and de Kantzow believed that a British partner would be willing to pay a great deal to join their profitable business. The airline industry was at a crossroads, as “tramp” airlines running charter flights were giving way to increasingly competitive scheduled airline operations. Since 1946, the Bermuda agreement between the United States and the United Kingdom had regulated the routes airlines could service and the fares they could charge, marking a new era of government restrictions. Swire’s influence with the British government made him an advantageous partner. From Swire’s point of view, Cathay Pacific had a convenient competitor: Hong Kong Airways, run by Swire’s long-time business rival, Jardine Matheson. Negotiations with Swire were fruitful, and in July 1948 the new Cathay Pacific Airways was officially registered.

The first known incident of air piracy occurred that same month when a Cathay Pacific flight ten miles from Macao carrying 23 passengers was hijacked by a Chinese gunman who apparently believed the plane was carrying a cargo of gold bullion. The flight’s captain, Dale Cramer, was shot in the head, and the plane crashed into the Pearl River estuary; there was only one survivor. De Kantzow and Farrell decided to use metal detectors on all passengers and baggage on subsequent flights.

That same year, Farrell’s wife became ill and he decided to sell his stake in the airline and return to Texas, leaving Cathay Pacific a 90 percent British-owned company. The airline faced increasing competition from Hong Kong Airways, which had been purchased by the British Overseas Airways Corporation (BOAC—now British Airways). While the British government in London tended to give favorable treatment to BOAC, Hong Kong’s local government had grown more independent as the colony gained economic power, and gave its support to Cathay Pacific.

Cathay Pacific had an additional advantage. Hong Kong Airways was obliged to offer its European passengers all the luxury and personal service they had come to expect from BOAC. Cathay Pacific, on the other hand, as a regional airline increasingly catering to the small Chinese traders accustomed to traveling on Swire’s ships, did not have to offer expensive frills and consequently saved on overhead costs.

Under Swire’s tutelage, de Kantzow instituted a number of changes. Swire’s right-hand man Ian Grabowsky revamped Cathay Pacific’s lax accounting procedures. More pilots were hired and each flew fewer hours, to stave off fatigue and possible mishaps. Eventually de Kantzow tired of Swire’s control and announced his resignation from Cathay Pacific in April 1951. The parting appeared to be an amicable one.

Cathay Pacific suffered losses in 1951 approaching HKS1.5 million, a figure which increased over the next few years. Swire recognized the need to replace the airline’s aging fleet with new aircraft, and began to look for a new partner for the company. In 1953 the London-based P&O shipping company paid HK$2.5 million for a 31.2 percent stake in the airline.

At this time, two important executives joined Cathay Pacific’s management team: Captain Kenneth Steele became flight superintendent in charge of training flight crews, and senior engineer Jack Gething took over the Hong Kong Aviation Engineering Company, a division of Cathay Pacific responsible for airplane maintenance.

In September 1958, a new 8350-foot runway was opened at Hong Kong’s Kai Tak airport, in time for the arrival of Cathay Pacific’s new DC6 aircraft. That same year, Captain Bob Howell took the first DC6 from Hong Kong to London. The larger, more modern airplane also pioneered the Hong Kong-Taipei-Tokyo route.

In 1959 BOAC, having endured heavy losses throughout the decade, agreed to merge Hong Kong Airways with Cathay Pacific. Swire’s organization gained control of the airline, while BOAC received a seat on its board of directors. By the following year, Cathay Pacific’s fleet of new aircraft included a DC3, a DC4, a DC6, a DC6B, and, notably, two Electra jets. At this time, Bill Knowles became the airline’s chairman and Duncan Bluck its commercial manager.

Hong Kong’s growing importance as an economic power resulted in an increasing number of routes serviced by Cathay Pacific. Late in 1959 the airline began flights to Sydney, prompting Qantas, Australia’s national airline, to retaliate by announcing its own Sydney-Hong Kong jet service. The British government urged Swire to aggressively compete with Qantas to prevent an Australian concern from gaming an economic foothold in Hong Kong. This scenario proved typical in years to come: Swire saw his company simply as a regional airline flying to regional destinations such as Manila and Singapore, but to the British government Cathay Pacific was a British-owned company playing a major role in advancing Hong Kong to a position of economic prosperity and leadership in the region. In this instance, the matter was settled in August 1961 when Qantas, with the help of government subsidies, began flying newer, more expensive Boeing 707s to Hong Kong, forcing Cathay Pacific out of that particular market.

The loss of the Sydney-Hong Kong route to Qantas convinced Swire not to attempt to compete with governmentbacked intercontinental carriers; to his thinking, the objective was to offer the best service in the Asian market, not necessarily the best in the world. But Swire’s regional view was opposed by commercial manager Bluck. Throughout the early 1960s, Bluck argued for more flights to Japan, which had experienced tremendous economic growth in the postwar years, and for flights to Canada and the United States, which were doing an increasing amount of business with Asian nations. Bluck also urged the purchase of better, more expensive planes for Cathay Pacific’s fleet.

Bluck’s boardroom arguments succeeded. In January 1962, Cathay Pacific announced that it would purchase new Convair 880 jets manufactured by General Dynamics in the United States. The first Convair 880 arrived in Hong Kong in November 1964. By 1968, Cathay Pacific had five of the jets in its fleet, having retired or sold its other aircraft.

During this time there had been changes in management as well: in 1963 Gething and Steele retired and were succeeded by Don Delaney as engineering director and Dave Smith as flight superintendent. A year later, Bill Knowles retired from his position as chairman and was replaced by H. J. C. (John) Browne.

Early in 1965 Browne informed Cathay Pacific’s board that the expansion into the Japanese market was a success, with passenger traffic for the airline up 26 percent over the previous year and well over half a million passengers carried into and out of Kai Tak airport in 1964. Three ticket offices had opened in Japan, which, along with Taiwan, now accounted for 90 percent of the airline’s passenger capacity. In 1965, Jock Swire retired, leaving Cathay Pacific in the hands of his two sons, John and Adrian.

On June 15, 1972, one of Cathay Pacific’s Convair jets was involved in what seemed at first to have been a midair collision over Vietnam. After initial speculation regarding the identity of the other aircraft, investigators turned to the possibility of a bomb having been placed on board. British and Hong Kong police identified their prime suspect: a Thai policeman whose recently insured wife and child had been on board the flight. Charged with sabotage and murder, in May 1974 the policeman was found not guilty; no further suspects were ever brought to trial.

The tragedy did not dissuade Cathay’s directors from expansion. By 1974, 11 707s had been added to the airline’s fleet. That same year, Cathay renewed its Hong Kong-Sydney service with 707s, putting its earlier defeat by Qantas behind it. The success of the Australian run was followed in 1976 by thrice-weekly flights to the Arabian Gulf, first to Bahrain, and later to Dubai in the United Arab Emirates. Asian laborers were increasingly in demand throughout the Gulf following the 1973 oil crisis and newly wealthy Arab sheiks were eager to purchase the high-tech electronic products then available in Hong Kong.

But getting acceptance from London for Cathay Pacific, sporting a union jack on its tail, to fly the “Golden Route” from Hong Kong to London proved a surprisingly drawn-out process. In December 1979, the Hong Kong airline applied to the United Kingdom’s Civil Aviation Authority for a license to land in London. But British Airways, enjoying a monopoly on the Hong Kong-London route, fought Cathay Pacific’s application at Civil Aviation Authority hearings. To complicate matters still further, British Airways’ rival British Caledonian joined with Laker Airways to compete with Cathay Pacific for the run to Hong Kong. Finally, in March 1980, London authorities ruled against Cathay’s application, choosing British Caledonian instead. The news was difficult to accept in the Cathay boardroom. The Hong Kong airline appealed, and was finally granted a license in June of that year to land in London. Cathay Pacific joined other deluxe international carriers by taking two jumbo 747s into its fleet.

In 1981, Cathay Pacific carried over 3 million passengers and 97 million kilos of cargo to 23 destinations. A year later, six 747s were employed on its routes, some flying to London non-stop in 14 hours. Another international destination added in 1983 was Vancouver, which had one of the largest Chinese communities abroad.

In 1984 Bluck, who had become chairman of Cathay Pacific, answered charges that Asian airlines were prospering because of the low wages paid to their workers and lower overheads than faced by Western airline carriers. Bluck, quoted in Gavin Young’s Beyond Lion Rock, responded, “Japanese cars, VTRs and TV sets have been able to penetrate western markets because of quality, reliability, the application of modern technology and price. So too will Asia-Pacific airlines continue to win customer support, not by low prices but by quality of service.”

In 1986 Cathay Pacific carried nearly 4.2 million passengers and 182 million kilos of cargo on its way to becoming a beneficiary of the economic boom then developing in the Asian Pacific region. Hong Kong’s proximity to burgeoning centers of growth in southern China were expected to further benefit Cathay Pacific. The impending takeover of the colony in 1997 by the Chinese government, however, could result in problems. The political change is expected to hinder the airline’s attempts to win crucial air service rights through bilateral agreements with other countries.

In anticipation of the change in government, the Swire group announced in January 1987 that it was reducing its share of ownership in Cathay Pacific. This was followed by an announcement that the China International Trade and Investment Corporation (CITIC), China’s principal commercial arm in Hong Kong, was taking a 12.5 percent shareholding in the airline. The Chinese government stake, coupled with the airline’s welcoming a new director onto its board—Larry Yung, son of the CITIC’s chairman—was seen by observers as proof that China was sincerely interested in the future prosperity of Cathay Pacific and Hong Kong in general.

In 1991, the airline posted profits of HK$2.95 billion, just slightly below 1990 profits of HK$2.99 billion. Maintaining its profitability was an impressive achievement at a time when many U.S. and European airlines were floundering amid recessionary and Gulf War woes. Also at that time, long-drawn-out negotiations between London and Peking appeared close to finalizing an agreement on a new international airport to be built on Hong Kong’s Chek Lap Kok Island at an estimated cost of $13 billion. Scheduled to open in 1997, the new airport is expected to face increasing competition from low-cost airports in neighboring Macao and Shenzen, China.

Cathay’s forecasts predict its cargo business growing by eight percent per year throughout the 1990s. Transporting freight had contributed approximately 20 percent of overall airline revenue in the first six months of 1991. Richard Cater, Cathay Pacific’s cargo marketing manager, stated in the February 24, 1992 issue of Aviation Week & Space Technology, “We see ourselves as a passenger airline with a very important cargo element.” The growing cargo business was welcome at a time of recessionary gloom in much of the Western world, and falling airline passenger traffic due to the Persian Gulf war.

Although Cathay Pacific remains profitable under the Swire Group’s control, lingering uncertainties over the outlook for Hong Kong under Chinese rule clouds the company’s business strategy. Despite the instability of the world economy, Cathay Pacific is counting on its reputation as a premier Asian carrier and on a continuation of the Asian-Pacific economic boom to maintain its place in the global airline trade into the next century.

Principal Subsidiaries

Cathay Holidays Limited; Cathay Pacific Finance Limited (Bermuda); Hong Kong Airways Limited; Hong Kong Aviation Services Limited; Prestwick Aviation Limited (Bermuda); Swire Air Caterers Limited (75%); Troon Limited (Bermuda); VR Limited (England); Hong Kong Aircraft Engineering Limited.

Further Reading

Young, Gavin, Beyond Lion Rock: The Story of Cathay Pacific Airways, Hutchinson, 1988; Cathay Pacific Airways: An Illustrated History, Cathay Pacific Public Relations, 1990; “Second Half Turnaround at Cathay Pacific,” Financial Times of London, March 25, 1992; “Towards Open Skies,” Flight International, February 19-25, 1992; “Thriving Regional Economies, Automation Spark Growth of Asian Cargo Carriers,” Aviation Week & Space Technology, February 24, 1992; “Cathay’s Mix of 7775 Confirms Interest in Stretched Version,” Aviation Week & Space Technology, April 20, 1992.

—Etan Vlessing