ATW's 32nd Annual Industry Awards

Air Transport World, February 2006, p.38 Buy this issue

Airline of the Year
Cathay Pacific Airways

Sixty years ago this September, Roy Farrell and Syd de Kantzow, the one an American, the other an Australian, created an airline in Hong Kong. Pilots both, they had become acquainted during World War II while flying the famous "Hump Route" between India and China. Perhaps after surviving that experience, the thought of trying to make a living by transporting people and cargo for money didn't seem so crazy.

The little airline they launched with a converted C-47 named Betsy represents one of aviation's greatest success stories. From its beginnings in what was then a war-ravaged colonial outpost, Cathay Pacific Airways today reigns as one of the world's largest and most profitable airlines, operating approximately 1,250 weekly departures serving 92 destinations worldwide with an all-widebody fleet of 95 aircraft. It is respected and admired among peers for its unwavering commitment to safety, technical excellence and customer service.

It hasn't been an easy flight to the top. In an era dominated by state-owned and -supported airlines, Cathay had to battle for a place at the international table against heavyweights like BOAC and its successor British Airways while remaining mindful of shifting geopolitical and cultural currents in Hong Kong and China.

More recently, its history reads like an aviation version of "The Perils of Pauline," encompassing the 1997-98 Asian currency crisis, avian flu, the 1997 handover of Hong Kong to China, the bumpy transition in 1998 to the new Hong Kong International Airport from legendary Kai Tak, and 2003's devastating SARS outbreak during which some of its flights operated with more cabin crew than passengers.

Yet through it all Cathay has soared, losing money only once in the past decade while paying stock dividends every year. From 2001 through 2004 it earned HK$10.36 billion ($1.34 billion) while growing revenues from HK$34.52 billion to HK$39.07 billion. And it stayed in the black over all four years in spite of the impact of 9/11 and SARS, which led to year-to-year revenue declines of 12% between 2000 and 2001 and 11% between 2002 and 2003. For 2004, the most recent year for which annual results are available, Cathay turned in its second-best performance ever as earnings surged 239% to HK$4.42 billion on a 32% rise in turnover.

Results would have been even better save for the sharp jump in fuel cost during the second half of the year, a trend that has continued through today. But Cathay is weathering this storm as well. Earnings for the first half of 2005 declined just 5.7% to HK$1.67 billion in spite of a 28% hike in fuel expense. Excluding fuel purchases, cost per ATK continued to fall, a trend that the airline has maintained for a decade.

Cathay's consistent financial success translates into one of the strongest balance sheets in the industry. At June 30, shareholders' funds totaled HK$33.8 billion while net borrowings amounted to HK$11.3 billion for a net debt/equity ratio of 0.33.

The carrier's ability to overcome extreme adversity is a tribute to its hardworking and highly efficient staff, which numbers more than 15,000. In 2004, staff productivity jumped 8.5% while daily aircraft utilization increased 5.3% to 12 hr. Over the past 10 years, staff productivity has risen 72%.

In return, management recognizes the loyalty of employees. At the height of the SARS crisis, with 22 aircraft parked and others flying nearly empty, Cathay asked its workers to take a month's unpaid leavesubsequently cut to three weeks. By year end traffic had recovered and the airline was able to pay them all for the "extra holiday."

Satisfied employees usually mean satisfied customers and Cathay is no exception. Passengers in its long-haul first class cabins are cocooned in fully lie-flat seatbeds with a pitch of 79 in. Width is 22 in. between the armrests with a bed width of 25 in. Audio/video on demand is presented through 10.4-in. TV screens with noise-canceling headphones. Seats have in-seat PC power.

Long-haul business class offers 60-in. pitch and near lie-flat comfort. Seats are 20. in. wide and just over 75 in. long. Business class travelers have the same size PTVs as in first class. Economy class passengers enjoy a 34-in. seat pitch, in-seat power, seatback videos and additional seat edge cushioning to support the knees. Last year the carrier completed installation of its Netvigator inflight e-mail service across the fleet for first and business classes and the first 10 rows of economy.

A deep pool of management talent and stability at the top have played a key role in Cathay's success. Philip Chen, who was named CEO at the end of 2004, and Tony Tyler, who became COO at the same time, had been with Cathay or one of its affiliates for a decade when the carrier first received ATW's top honor in 1987.

Perhaps because it never has had a deep-pocket state owner, Cathay always has tended to be frugal about spending money on unproven technology or that which could not be cost-justified, and for many years it was the master of buying and operating secondhand aircraft. Most of its CV880s and TriStars and all of its 707s were purchased from other airlines. Its aggressive growth path makes such a strategy impractical today and last fall it placed its largest commitment ever, ordering up to 36 777-300ERs. It still has a frugal side, howeverwitness the purchase of eight used 747-400s and the decision to build its future freighter fleet around the 747-400 Boeing Converted Freighter, a program it launched.

As with many Asian airlines, Cathay views the cargo business as a key contributor to growth and stability, a stance emphasized during the SARS crisis, when bellies were full even if cabins were empty. Cargo activities represent more than 30% of turnover and it is the controlling shareholder in Air Hong Kong, which operates primarily within the region with five A300-600GFs supporting DHL.

Cathay's remarkable story is all the more so given that until recently it was prevented from participating in the stunning growth occurring in China proper. Even after the handover of the former British colony to the PRC, it had little success in persuading Beijing to permit it broad access. In 2004 it finally was able to launch daily service to Beijing and this year it added Xiamen. A 10% stake in Air China acquired at the end of 2004 may help to open doors further.

Possibly one day it even will be permitted to fly to Shanghai, which would be very fitting. Before he flew his beloved Betsy past Lion Rock, over the Walled City and down onto the Kai Tak runway, Roy Farrell wanted to start an airline there.

Regional Airline of the Year
VLM Airlines

The old saying that good things come in small packages is certainly demonstrated by ATW's 2006 Regional Airline of the Year, VLM Airlines. A true model for the new Europe, it is based in Belgium, owned by a Dutch financier and maintains its biggest operation at London City Airport in the Docklands. It is also a bit of a rarity: An independently owned Regional that flies in its own livery and is not linked to a larger carrier.

Since beginning service in May 1993, Antwerp-based VLM has carved a niche by offering business travelers an extensive network of point-to-point destinations typically served from small and uncongested airports. Operating a fleet of 14 F50s, it provides more frequencies to London City220 per weekthan any other carrier. In addition to London and Antwerp, it flies to nine business centers: Amsterdam, Rotterdam, Brussels, Luxembourg, Hamburg, Southampton, Manchester, Liverpool and Jersey. It carried 603,500 scheduled passengers last year, up 13% over 2004.

VLM's success is owing to an understanding of its market niche. "The main advantage people find with us is time savings," MD Johan Vanneste tells ATW. "I sometimes call us a time machine. We sell time and we save people time." In fact, the carrier ranked No. 1 in ontime performance for airlines operating to and from the UK in 2004 (2005 results were not available at press time) and its overall ontime performance rate was 89%. It improved on that last year, achieving 91.7%.

Although the decision to build its operation around the F50, an aircraft that has been out of production for at least a decade, may raise eyebrows, Vanneste is convinced of the virtues of the P&WC-powered turboprop. At least for the foreseeable future, growth is based on acquiring more of them on the secondhand market. "It's a very reliable plane. We make sure they look nice and shiny; they have leather seats, lots of legroom. Our passengers like them very much," he says.

In truth, the high-winged plane is among the more comfortable in its class, and VLM makes it more so by providing 32-in. pitch and complimentary onboard food service despite the fact that flights average only 50-70 min. Breakfast includes yogurt, fruit and a sandwich; snacks and fruit are served during the day and light snacks on midday and late evening flights. Coffee is poured in real china cups.

On the ground, VLM offers short check-in timesan average of 20 min.at its key destinations and access to airport lounges. It works closely with airport operators to design and achieve faster airport throughput.

Recognizing that business travelers require flexibility, VLM has responded by offering one-way pricing. Last year it launched a new website and online booking engine that yielded almost immediate results; in the first month, the number of passengers making Internet reservations jumped by 30%.

Commercial success has translated into superior financial performance. VLM has been profitable in each of the past seven years. In 2004, the most recent year for which results are available, it reported a net profit of E948,000 ($1.22 million), up sharply from E327,000 in 2003. Operating result totaled E1.8 million, a 29.9% increase, on a 24.6% rise in revenue to E75.6 million.

"Most Regionals are owned or affiliated with a major airline and serve feeder rather than point-to-point," Vanneste observes. "We bring people from point A to point B. That, along with quality options, makes people want to pay a little more for quality service. The market isn't always about low fares."

Aviation Technology Achievement
Embraer

Embraer may not have authored the RJ revolution, but the Brazilian aircraft manufacturer has written a revolutionary chapter with the 170/190 family of large regional jets.

In initiating the program in June 1999, Embraer set out to tap an emerging market for aircraft in the 70/110-seat range with an all-new product offering technology and standards of passenger comfort previously available only in larger aircraft. It argued that the jet would fill the gap between mainline and Regional operators, allowing both to maximize profits while right-sizing their fleets.

The launch was greeted with doubts that a new aircraft would be able to gain a foothold in a highly competitive industry, given the development time to market and the ability of its chief rival to stretch its own offering, plus threats from above with Boeing and Airbus offerings. Now, less than seven years after launch, the program is a clear success with firm orders for 427 170s/190s and options on 383 more.

The Embraer 170/190 family is a highly versatile series of aircraft seating between 70 and 118 passengers and capable of flying up to 2,300 nm. They can serve 500-nm. routes from runways as short as 3,840 ft. (1,170 m.) or they can go long, flying segments such as Tehran-Paris. Designed for 20-min. turn times, they have four main cabin doors and two under-floor cargo compartments totaling nearly 1,400 sq. ft. of capacity for passenger baggage and freight.

The 170/190 is a true world-class project, begun using the CATIA computer design programa former Aviation Technology Award winnerto design the aircraft precisely with partners around the globe. The result is a family of airframes providing up to 30% more payload per unit of structural weight than competing types.

The cockpit features fly-by-wire technology, the first in a transport of this size, providing automatic structural load protection and compensation for engine power asymmetry and configuration changes. Honeywell integrated the all-digital cockpit that incorporates a Primus Epic electronic flight and information system with five large-format LCD screens. A Central Maintenance Computer collects fault reports and maintenance messages that can be accessed via laptop computers for fast downloading and analysis.

A family commonality as high as 95% produces cost efficiencies and savings through reduced maintenance stores and procedures. A common cockpit for pilot qualification makes the differences training between types one of the easiest in the industry. Direct hourly maintenance costs are said to be 10%-20% lower than similar aircraft.

Embraer argued that its new family represented a break from existing RJs. Starting with a blank sheet of paper allowed it to design an airplane with a 2-2 cabin that provides more room per person than is found on larger Airbus and Boeing narrowbodies. A double-bubble fuselage stretches the ceiling height to 6 ft. 5 in. and permits more vertical sidewalls at shoulder level for added comfort in window seats. The full-sized overhead luggage bins accommodate large roll-on bags, speeding the boarding process compared with previous-generation RJs, and pairs of doors forward and aft enable simultaneous cabin servicing. The airframer has allowed for a range of cabin options that can equal the standards of mainline aircraft, including full galleys and numerous seat options such as multiple classes, multiple lavatories, entertainment systems and in-seat communications.

The innovation and engineering found in the 170/190 family, in conjunction with its strong commercial success, represent the highest standards of technology achievement brought to a new market. With its development, Embraer has managed to erase the dividing line between regional and mainline aircraft in terms of technology and passenger comfort, as well as to fill a gap in the marketplace.

Passenger Service
JetBlue Airways

Highly successful companies come in two varieties: Those that rise to the top by playing the game better than their competitors and those that rewrite the rules of the game to their own advantage. JetBlue is among the latter group. Since beginning service on Feb. 11, 2000, it has taken the low-fare airline model and turned it on its head. From the stylish designer uniforms worn by cabin staff to the mix of automation (e-tickets, Internet distribution, airport kiosks) and friendly and efficient staff, it has changed passenger perceptions and raised expectations of what a "budget" airline can and should be. In doing so, it has banished the phrase "no-frills" from the lexicon and given a facelift to the US domestic air travel experience, making it if not luxurious then certainly hip, fashionable and entertaining to boot.

Begin with the physical product. Aircraft are young and getting younger as the carrier continues to add new A320s and Embraer 190s. In mid-January, the fleet numbered nearly 85 of the former and eight of the latter. Seats on both types are leather. The A320s are configured for 156 seats with pitch varying between 32 in. and 34 in. and a width of 17.7 in. The 190s seat 100 with pitch of 32-33 in. and a seat width of 18.25 in. Seats are assigned and can be selected via the Internet.

Of course JetBlue is best known for being the airline that introduced live television to air traveland rightly so. Every A320 and 190 offers 36 channels of free TV programming including news and entertainment options such as CNN, BBC America, ESPN, MSNBC, the History Channel, VH1 and MTV. Passengers can catch up on the news, watch a sports event or relax with a sitcom. Most recently it has rolled out pay-per-view movies on longer flights and is installing satellite radio across its fleet to keep it fully competitive with other low-fare carriers.

The availability of free live television changes the air travel experience immeasurably, taking customers out of the aircraft and putting them back in their living rooms. Parents traveling with small children are particularly appreciative of the entertainment that TV providesas is anyone who ever has had the experience of sitting directly in front of a bored child.

JetBlue does not offer meals, but fewer and fewer airlines do. Its snack baskets feature complimentary potato chips, biscotti, cookies and pretzels. Soft drinks and bottled water also are complimentary. Service is fast, efficient and friendly, and the carrier even has appointed what it calls the industry's first "low-fare sommelier" to select low-priced, high-quality wines for sale.

JetBlue's popularity with the traveling public is reflected in its phenomenal growth rate over the past six years. For most of that period it has been among the industry's best earners as well. Despite operating with the highest load factor in the industry, it draws among the fewest complaints of any carrier, according to data from the US Dept. of Transportation. It does not oversell flights so it almost never has to bump a passenger, and it has among the fewest mishandled bags. It is usually at the top of the industry in terms of fewest cancelled flightsit slipped in October but recovered strongly in November to post a 100% completion factor. Preliminary numbers for December show a 99.6% completion factor.

When David Neeleman announced plans for his new airline back in 1999, he said he intended to "bring humanity back to air travel." We're not exactly sure what he meant, but we do know that JetBlue has given airline customers something they never had, forced competitors to improve their own products and raised the bar for anyone contemplating launching a new carrier. And the biggest winner has been that part of humanity that has to board an airplane.

Phoenix Award
Korean Air

Fast growth in any business can bring trouble. At Korean Air, the challenges were compounded by underlying cultural traditions that valued gradual change and distrusted outside influences, aggravated by the operations department's legacy military attitude that was slow to appreciate the demands of modern airline service.

Korean Air has been blessed with a prime location from which it can capitalize on the booming growth of Asian economies, especially in North American trade. Between 1990 and 1996, the airline nearly doubled all key business categories, according to ATW's World Airline Reports. The passenger count ballooned from 12.3 million to 23.7 million, RPKs rose from 19.3 billion to 38.1 billion and FTKs increased from 2.5 billion to 5 billion.

But this commercial success overmatched a corporate culture that failed to keep pace with the carrier's size, evolving operations and, most painfully, safety standards.

As the flying increased, so did the number of accidents. In the 1997-99 period the airline suffered five hull-loss accidents. As accidents and incidents piled up, the international community began to respond, partners suspending interline arrangements, the US Dept. of Defense prohibiting staff travel on Korean Air, US FAA downgrading the Korean aviation regulator's safety rating and the Korean government suspending the carrier's right to expand and awarding new routes to its competitor, with the president of South Korea calling the airline "an embarrassment."

On top of that, Korean Air's markets were hit by a succession of commercial setbacks starting with the Asian financial crisis, then the traffic downturn after the 9/11 terror attacks, followed by the SARS crisis. In short, its ability to capitalize on its commercial potential was severely threatened.

Airline management, led by Chairman Yang-Ho Cho, in the late 1990s decided that a complete overhaul was needed and the company began to do things right. Methodically, it started to move in the right direction.

Delta Air Lines, one of Korean's disaffected partners, was asked in to look over operations; eventually, executives from Delta and US Airways were named to key operations and safety positions. Korean's flight operations division was restructured, instituting new rules and regulations with adherence rigidly mandated.

The airline brought in FlightSafetyBoeing, now Alteon, in a revolutionary outsourcing of flight training. Simulator time for every pilot was increased and a stronger crew resource management program created a cooperative cockpit environment. The "training to proficiency" concept of Western airlines was adopted and the flight time and in-service experience levels required for cockpit promotion were increased. Berlitz was enlisted to bring pilot English to international standards and the focus of pilot hiring went away from the military and toward the international community and products of KA's own Cheju ab initio training academy.

The carrier also implemented a $6 million integrated flight operations management system to alert flight crews quickly to developments in airport and flight conditions and restrictions.

Korean began to win awards for reliability and operational excellence, and last year it passed the IATA Operational Safety Audit with flying colors. With the operations side lifted to international standards, it turned its attention to the service part, in 2004 announcing the Excellence in Flight program and investing billions of dollars in new aircraft, onboard service upgrades and terminal improvements.

Chairman Cho clearly defines the program's end-of-decade goal: "It is no longer good enough to be the best airline in Koreawe want to be one of the world's ten best airlines. We have proven our ability to adapt to external changes while at the same time refining our services to attract customers, enhancing the travel experience and increasing customer perceived value." Korean Air's recent achievements make that goal highly credible.

Market Leadership
Gol Linhas Aereas Inteligentes

It can't happen here. That has been the standard response from skeptics of the low-fare revolution since Southwest Airlines started flying outside Texas in 1979. A few years ago, Constantino de Oliveira decided it was time to prove them wrong in Brazil.

Because the vast country lacked an intercity rail network, air travel was considered too expensive and car ownership was limited, the majority of long-distance journeys took place on buses, many of them owned by the de Oliveira family. For example, in 2002 Brazil's domestic airlines transported some 30 million passengers out of a population of 175 million while bus companies carried at least four times that number. Figuring he'd better do it before someone else thought of it, de Oliveira invested $26 million to launch an airline that would take people off his buses and put them in the sky.

That airline, Gol Linhas Aereas Inteligentes (Gol The Intelligent Airline), is transforming the way people travel in Brazil. In fact, since it began operations in 2001, Gol estimates that up to 15% of the 35 million passengers it has carried were first-time fliers.

Today, new and veteran fliers can take advantage of a route network that encompasses 47 destinations served by more than 430 daily flights with a fleet of 42 737s. The average fare in the third quarter of 2005: R$195 ($85).

Service is clean, safe and reliable. Gol's ontime arrival rate for the quarter was 93% and it led Brazil's airlines in punctuality in October and November, the latest months for which data are available. Passenger complaints and lost baggage per 1,000 passengers averaged 0.87 and 0.31 respectively. Moreover, surveys by a third-party firm show that nine out of every 10 passengers would recommend Gol to others and 94% of customers say they are "highly satisfied."

Not surprisingly, Gol is taking business away from its competitors. In fact, its share of the domestic market rose from 4% in 2001 to 29% in the third quarter of 2005. And it is carrying more than leisure traffic: 60% of its passengers in 2004 were traveling for business reasons. Air travelers are not the only ones who have benefited from the carrier's successin 2004 each employee received an average of 3.7 additional months' salary related to 2003 results, while for 2005 the average payout exceeded four months' salary.

Gol's strong performance also is good news for shareholders. In 2004 it earned R$384.7 million (US GAAP), up 119% over 2003, on sales of R$1.96 billion and paid out R$60.7 million in dividends. For the 2005 third quarter, net income was a record R$138.2 million, up 42.6%, on a 35% rise in revenue to R$696.7 million. Operating margin was 26.3%.

These results are owing to a firm grasp of the fundamentals. Gol achieves an average daily aircraft utilization of 13.9 hr. and has the lowest unit costs of any Brazilian carrier. Service is single-class with assigned seats, and more than 80% of ticket sales are booked through its website. To keep things simple, it operates a young all-737 fleet and has orders, options and purchase rights for more than 100 aircraft.

With Gol firmly established in Brazil, CEO Constantino de Oliveira Junior is exporting the low-fare revolution with service to cities in Argentina, Bolivia, Paraguay and Uruguay. The airline is also a partner in a joint venture that is adapting its low-fare model to the Mexican market, with startup expected by mid-year. Who knows: In a few more years, Gol may be bumping into Southwest Airlines in Texas.

The challenges of safely transporting people and cargo in skinny metal tubes at high speeds and altitudes are made vastly more difficult by the conflicting economic rules, technical regulations and financial penalties that appear at national borders. No one airline or small grouping of airlines in an industry kept fragmented by archaic business restrictions has the clout to fight for a harmonized and efficient global system. However, there is the International Air Transport Assn.

Even in its early fare- and capacity-setting days, IATA had a technical role, improving operations, safety and reliability. This role has grown in importance and scope over the years. Facilitation was, and unfortunately is once again, one of the organization's key jobs. And then there is IATA's world role as the honest broker for the interests of airlines in general, fighting unreasonable rules, fees and taxes.

It is IATA's achievements in these and other roles that have earned it ATW's 2006 Joseph S. Murphy Industry Service Award. Over recent years, a reorganized IATA has stepped up its presence, filling leading roles in many areas that lacked coordinated airline leadership.

Its landmark Simplifying the Business effort to streamline ticket distribution and passenger and cargo processing will save the industry $6.5 billion annually, $3 billion coming when e-ticketing blankets the globe by the end of 2007 followed by e-freight in 2010. Also involved are establishment of standards for common-use self-service kiosks, ticket barcoding and soon, RFID for baggage tracking and security.

Demands for improved safety created a need for international safety audits, yet early efforts sometimes penalized safe airlines. The IATA Operational Safety Audit was developed in 2003 to focus attention on the airline as well as to set a standard by which carriers could prove alliance partners' competence. Applied to more than 140 airlines and accepted around the world, IOSA has become a mark of quality. It is a key tool in IATA's quest for a self-imposed safety improvement goal: Cutting the global hull loss rate to 0.65 per million sectors by the end of this year.

Tackling a crucial nexus where expenses collide with environmental standards and aviation system capacity, IATA plays a leading role in opening more direct air routes and improving airport acceptance rates, thereby reducing fuel wastage and pollution. Its Save a Minute effort to fine-tune local air routes, along with Go Teams that help airlines cut fuel burn, are chipping away at the problem. But there are bigger projects: IATA has been instrumental in developing pre-war Iraq airspace contingency plans; opening Russian airspace and cross-polar routes; opening routes across North Korea, including financing ATC equipment; opening and maintaining Afghanistan airspace; developing a new South China Sea route structure; developing solutions to nightly traffic jams on routes over the Bay of Bengal, and producing a Tokyo Narita noise and facility use study that the airport used to increase capacity while improving community relations. IATA also provided persuasive airline input into Future Air Navigation System development.

There are many more IATA roles, such as its leading advocacy for rational user charges and taxes. In 2005 its actions helped airlines save more than $2 billion in fees. Its newest challenge is shaping up in Europe, where the French-led move to fund global social programs from ticket taxes raises a new, unexpected source of suction on airline finances.

For the past three years, IATA has been led by the dynamic Giovanni Bisignani, DG and CEO, a forceful advocate of airline interests around the world. Already an effective organization before Bisignani's arrival, it since has reached new levels of achievement. The world's airlines are much better off thanks to IATA.

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