CNBC Transcript: Rupert Hogg, CEO Cathay Pacific

Following is the transcript of a First On CNBC interview with Rupert Hogg, CEO, Cathay Pacific Airways. The interview was broadcast on CNBC's Squawk Box on 4 June 2018.

All references must be sourced to a "CNBC Interview'.

Interviewed by CNBC's Matthew Taylor.

MATT TAYLOR: What is the biggest challenge from where you sit when it comes to aviation at the moment? Is it the rising fuel costs because these things go in ebbs and flows? Is it trade protectionism or is it something else?

RUPERT HOGG: Obviously each airline has a different market and a different set of circumstances. Just talking about rising fuel prices, we have a very young long-haul fleet. The average age of our long-haul fleet, which is about nearly a hundred aircrafts, is five and a half years old. We've taken 22 new A350-900s over the last two years and that is the latest composite aircraft design as you know. And we take a new aircraft a month for the next four years. So what that means in sum is that, although the price of fuel is rising, our consumption is not growing as fast as the units of production we're putting into the air. So I think that's the issue with fuel. On the issue with trade and trade protection if you like or trade wars, we're a very big cargo carrier. We are probably the largest or one of the largest combination cargo carriers in the world. We've got 20 747 freighters. And unusually 85% of our fleet is twin aisle so we can carry a lot of freight in the belly of our aircraft, about 50-50 as it happens. So a trade war would be bad for us. But having said that, what we carry is consumer electronics effectively. They are sort of a barometer of what people want to buy and if they feel like spending their disposable income and so far we haven't seen any let up in volumes. So I think the bigger tariffs disputes on aluminium and other things probably won't affect air freight in that way.

M: You've said that you expect the core airline business to return to profit next year. But you have been pressured by some of your Chinese and Middle East rivals. Is that expectation still on track for a return to profitability in 2019?

R: I take you back a year and a bit into our transformation programme. We always said that would be a 3-year programme. I guess the principle reason we launched that programme is although the markets that we serve are growing, and this year I think we are talking about 150 million international trips from China alone, the capacity is growing faster. So it is true that lots of airlines are competing for that business. At the end of the day, capacity is growing in front of demand. So when that happens, the yields drop and the net result for us particularly on the passenger side is that we have two years of negative revenue growth, topline growth. Last year, the same thing happened. And so we said we need to transform our business to make sure we are fit for purpose and we can compete and win going forward. We're on track to do that, we did what we said we would do last year which is to keep our unit cost flat. We said we would return above our cost of capital at the end of that programme in 2019 and that implies profitability. So I am not going to make any forecast for the future but that's our target. At the moment, we are on track to do that.

M: We saw a particularly strong second half of the year when you look at the two halves. I know that there was a full year loss but there was a strong turnaround in the second half. What was driving that?

H: The cargo business is being very strong. We've invested a lot in addition to these aircrafts I was talking about. We have the state of the art terminal. It takes two and a half million tonnes in Hong Kong. So we are well set-up to serve that market. I think that the world economy is generally being quite benign and that is good for front-end traffic. Hong Kong is a huge tourist destination, tourist numbers inbound and tourist numbers are up. So, a combination of these factors plus a lot of the things we've been doing in our transformation programme. Some of those things are to have an impact too so the trend in the second half of the year are much healthier than in the first half of the year.

M: I mentioned four billion HKD in cost out, is there any more work to do on that front? Can you get any more cost out or do you think four billion dollars is essentially the sweet spot number?

H: We have seven hundred initiatives and we have lots of things going on in lots of different areas. We have always been of the view that there is no silver bullet and that we just have to make ourselves more productive. Our plan is based around three basic objectives. The first is to find new sources of revenue. The second is to really understand our customers and deliver what they value and the third is to make ourselves more productive. I know all of those fronts we are making good progress so if I took the value to our customers for instance; we are launching a new dining concept in our long-haul business class starting next month. By the end of the year, we would have rolled that out to 12 new routes and by the middle of next year, we would have rolled out that new concept across all of our long-haul business class. We're looking at food in the other classes as well, same approach. We are doing a lot in the digital environment to make it easier for people to serve themselves, to check-in and things like that. In terms of new sources of revenue, one of the things you would've seen this year is that we are launching 9 new destinations. Hong Kong is a super connected city, super connected hub, we are trying to join points that haven't been joined to Hong Kong before or have been in our view underserved or the market merits it. So we have done 5 long hauls - three in Europe alone. I've just come from Dublin where we launched the inaugural Dublin to Hong Kong service which is also the first Ireland to Asian non-stop service. We've launched Brussels and Copenhagen this year. In September, we start services to Washington and that's a big move for us. At the back end of the year, we are going to launch a service to Cape Town as well which will be rather like what we did with Christchurch last year, it will be a seasonal service. I think from Cathay Pacific, you will see an expansion of our hub, which is the largest international hub in Asia. You'll see new destinations coming online, which is good for the strength of that hub and for connectivity and you'll see more seasonal flying.

M: Like many other airlines, these ultra-long haul services are definitely something that you are looking at. Just one final question before we let you go. Back to competition, geographically, where I am in Australia, Cathay has been very dominant on that Hong Kong to Australia route, but we do have increased competition coming in the likes of Virgin starting Melbourne to Hong Kong, and starting next month even Sydney to Hong Kong. Is that a concern? I mean, they are only going to be doing one flight a day and Sydney to Hong Kong, you guys do like three services right?

H: Yes, so Sydney to Hong Kong, we are four services a day and to Australia, we are 79 services a week. Competition is good for the market and one of the ironies of Asia is that this is where the centre of aviation is heading and this is where the growth is. The traffic is quite condensed onto the big cities pairs and there is a lot more competition on those city pairs in Asia than in this part of the world, as it is in in other parts of the world. That's going to be good for the customers I think and we are all about competing and winning and that is exactly what we intend to do with this transformation programme.

END

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