Cathay Pacific CEO: Suppliers need to drop prices

Cathay Pacific CEO: Suppliers need to drop prices    Cathay Pacific's chief executive on Tuesday said airplane parts suppliers are not sharing the burden of decreased passenger and cargo demand with airlines.
   With the airline industry projected to lose close to $10 billion in 2009, Cathay CEO Tony Tyler said airlines cannot continue to be squeezed with passengers and shippers on one side and suppliers on the other.
   'A constant source of disappointment for airline owners and managers around the world is the poor profitability of our industry,' Tyler said at the Asian Aerospace Congress in Hong Kong. 'This disappointment turns to frustration — and even stronger emotions than that — when we see that everyone else along the value chain is doing very well at our expense. At one end of the chain, passengers and shippers are enjoying fantastic fares and cheap rates.

Tyler

   'And at the other, suppliers of all kinds — hard products and services alike — are making good profits even in these dark recessionary days. It's the airlines, stuck in the middle, who suffer chronic financial underperformance. We are all in this crisis together but you wouldn't believe that from the way many of the suppliers to the airlines conduct business with us.'
   Tyler said suppliers must bring their rates for airplane parts down.
   'I have two related complaints about the way airlines are treated by suppliers,' Tyler said. 'The first is very simple. Things cost too much. That's a very general statement, so let me qualify it. I'm not going to talk today about excessive costs from airport charges, air traffic control services and other monopoly providers. There's plenty to say on that but I'll save it for another day. More appropriate targets today are airframe, engine, parts, component and interiors suppliers. I am always astonished when I hear how much what you sell us costs. Big things, small things, seats, engines, parts of all kinds — how can they be so expensive?'
   He also bemoaned the existence of price escalation clauses in an environment where rates that airlines can charge its customers continue to worsen.
   'What airlines pay for the tools of our trade gets more and more expensive over time because of the insidious effects of so-called 'price escalation' clauses,' Tyler said. 'Now at Cathay Pacific we've been working hard to educate our supply market that automatic price increases are simply not possible in the modern airline environment. How can suppliers charge more and more for the same thing, while the forces of competition mean that airlines can only collect less and less from our customers?'
   Tyler said some suppliers understand the situation in which airlines find themselves, but those suppliers are too few. 'It should be the aim of all suppliers to the airline industry to provide year-on-year decreases in price while still maintaining reasonable profit margins. It particularly irks me when I know a supplier has reduced its costs through continuous improvement, quality programs, high volume production or coming down the experience curve, and still insists on an escalation clause instead of sharing some of the benefit.'
   Tyler also bemoaned that service doesn't always come with the higher prices. 'I'd have more sympathy for suppliers if they provided the sort of on-time performance our customers expect from us. But they don't even do that. I'll try to be even-handed. The world's two leading aircraft manufacturers have had well-publicized problems with aircraft delays.
   'Fortunately neither of these has affected Cathay Pacific. But I can tell you that we have had all sorts of unpublicized problems with delays from suppliers of all kinds over the years. I know that other airlines have too. It's time the supply market lifted its game, and we need more risk sharing and alignment of interests in this business between the buyers and sellers.'
   Tyler also spelled out the extent to which Cathay, and the industry as a whole, has been affected by the demand downturn.
   'This is a truly global downturn in the industry — unlike anything else we've seen in terms of its impact. I've been in the business for 30 years and seen many highs and lows, but the past year and a half is as bad as it's ever been,' he said.
   He said the coincidental drop in passenger and cargo demand is unprecedented.
   'The fact is that both our passenger and cargo business have been hammered at the same time, and that makes this a downturn like no other — and the worst thing of all is there is still no end in sight,' he said. 'We keep waiting for signs of the green shoots of recovery. We're in Asia so I'll use an appropriate analogy. When we look at the rice paddy we see only one or two green shoots rising out of the watery mud. Certainly not enough to fill a rice bowl. The very best we can say is that things have stopped getting worse, but a real and sustained business upswing still seems like a distant dream.'