Cathay Pacific’s Fleet Puzzle: Swap 777X For 787 Dreamliners?

After Delta Air Lines
DAL
and Aeroflot, Cathay Pacific Airways is the largest intercontinental airline without 787 Dreamliners.

Boeing
BA
hoped to change that last year as Cathay was favouring the 787-10 over the A330neo when assessing how to replace its intra-Asia regional aircraft. The order was not made. Cathay entered a management crisis when its two top executives, and later chairman, left the airline in the wake of protests in Hong Kong.

A second crisis – the current COVID-19 pandemic – is seeing airlines preserve cash by deferring or cancelling aircraft orders. Cathay Pacific unofficially won’t “take” its 777Xs, the Seattle Times said without specifying a deferral or cancellation. A Cathay spokesperson declined to comment.

Boeing generally prefers distressed aircraft orders be modified or swapped rather than cancelled entirely. For Cathay, the 777-9 could be losing immediacy also due to pre-COVID infrastructure and competitive changes. Those same dynamics could make re-fleeting more pressing for regional than long-haul. Would Cathay swap 777Xs for 787s?

-300ERs always had strong future

Cathay’s order for 21 777-9s is large but does not cover half of its existing 51 777-300ERs, the largest -300ER fleet after Emirates. Cathay was always going to operate a strong -300ER fleet alongside the newer -9s, and A350s it has mostly finished taking delivery of.

Cathay has been retrofitting its -300ER fleet, which it would not do if it planned to dispose of them in a few years. So there is exaggeration that signing recently extended leases for -300ERs is definitive proof that Cathay will not operate -9s.

At its last update in March, Cathay said it was discussing deferrals with Airbus and Boeing, but still planned to take delivery of all 70 aircraft it has on order. When Singapore’s state-owned Temasek invested in Singapore Airlines last month, it noted SIA is “committed to fleet renewal.”

Cathay’s -300ER portfolio is a mixture of owned and leased units, designed to let Cathay participate in different market scenarios and lessor opportunities.

If -300ER residual values are strong, Cathay can sell units it owns while continuing to lease. If values weaken, Cathay could return leased aircraft and continue to operate the units it owns and prevent a write-down from an early exit. Pre-COVID, -300ER lease rates were lucrative for airlines, although Cathay has returned two units from its peak -300ER operation of 53.

Old fleet, new efficiency

Retrofits are narrowing the gap between the -300ER and -9. When Cathay ordered the -9s, its -300ERs were nine-abreast in economy.

The 777X makes 10-abreast more palatable. While the 777X has the same fuselage width as the classic 777, new materials allow for thinner sidewall insulation. That creates a bigger interior cabin and allows for slightly wider seats. Even Singapore Airlines will be tempted to have 10-abreast on its 777-9s.

But now Cathay’s -300ERs are 10-abreast, reducing some of the -9’s initial advantage. Cathay considers its retrofitted -300ERs comparable to the A350-1000, which is much newer and comes with higher ownership cost. Cathay in 2017 converted six A350-1000 orders to the smaller -900 that fulfils different segments than the A350-1000 and 777-300ER.

Dreamliner fits regional shortfall

Cathay has been confronting how to replace its regional fleet. The 787 offered Cathay better delivery times as Boeing sought to fill production slots mainland Chinese airlines did not take up during the U.S.-China trade war. Now delivery slots at most aircraft programs are not a problem.

The upper end of Cathay’s regional fleet is the original 777-300 (non-ER) variant. “We’ve got 438 seats in them,” then-chairman John Slosar told the Wings Club last May. “They’re fantastic people movers on big, thick Asia routes.”

Boeing no longer sells the -300. Cathay recently obtained more by taking five ex-Emirates units. They replaced Cathay’s 777-200s, providing seat and cargo growth at constrained Asian airports.

“There were only about 50 of them built, and if we could we would probably buy all 50,” Slosar said of the -300.

Cathay’s 17 777-300s average 18 years old and need replacement this decade. There had been a thought to use 777-300ERs regionally, but it proved an ill-fit, too much weight – and premium seats – for dedicated regional flying. In their long-haul configuration, they seat 294-368.

Singapore’s 787-10 seats 337 and EVA’s 342, comparable to Cathay’s long-haul -300ER but with the advantages of a smaller plane, composite fuselage and more efficient engines.

The 787-10 is most prolific in Asia, and many of Cathay’s peers operate the variant (ANA, EVA, Singapore, Vietnam) or have it on order (Korean Air). Outside of Asia, United Airlines uses it -10s long-haul, and Air New Zealand plans to do the same.

A 787-10 would provide a capacity bump compared to Cathay’s other main regional aircraft, the A330-300 with 317 seats. The A330’s successor, the A330neo, has the same cabin floorspace, limiting seat and cargo growth.

The 787-10 holds 13 pallets compared to the A330’s 10. Bellyhold space provides cheaper and lower-risk cargo growth than buying dedicated freighters.

Manufacturing’s diversification away from Hong Kong and Southern China has seen Cathay carry more transfer cargo.

Companies expected in the long-term to re-locate their Chinese factories to cheaper countries like Cambodia and Bangladesh. COVID-19’s production pause and subsequent slowing orders for manufactured goods can prompt companies to accelerate factory re-location. More flying needs to be done to move the same amount of goods as before, plus there is long-term manufacturing growth.

If there is an all-out capital expenditure reduction, Cathay has leverage from the 777X’s delay. As for future regional flying, A330-300s are being freed up from medium-haul flying. Less than a quarter are approximately 20 years old, and half have been delivered since 2010.

Excess capacity pre-COVID

Cathay’s aircraft expenditure over the last decade prepared it for a war that never arrived. Pre-COVID it was facing excess but tolerable capacity. It is one of the few airlines to undertake a significant restructuring while growing.

Cathay’s 2013 order for the 777X was to ensure prompt re-fleeting after being slow to retire A340s and 747s.

The inefficiency of those aircraft came to a head a year prior when Cathay cut long-haul flights as it accelerated A340 and 747 retirements but did not have enough 777s.

Cathay started 2012 with 24 -300ERs, and by the end of 2014 nearly doubled the sub-fleet to 47. Now there is lower imperative to replace a -300ER with a -9 compared to swapping a four-engined aircraft with a twin-engine.

Cathay was Boeing’s first 777X customer in Asia and was expected to kickstart regional sales. Only All Nippon Airways and Singapore Airlines have since ordered the 777X.

Operating the newer and more efficient 777-9 would give Cathay a competitive advantage, but it will not be disadvantaged by forgoing it in the medium-term. Many of Cathay’s competitors will not be making aircraft unit cost improvements since they took -300ERs in the mid/late-2010s and will not be replacing them soon.

Potential fuel savings are diminished given the fall in prices, although a degree of volatility is always present. Cathay last decade miserably mis-judged and incurred over $3 billion of fuel hedging losses.

Hong Kong Airlines fades

Home-grown Hong Kong Airlines threatened the largest overlap with Cathay. In North America it grew to Los Angeles, San Francisco and Vancouver. It took on a high profile and at an event with Hong Kong’s then-Chief Executive CY Leung, the airline said it would fly to New York.

Cathay was especially worried when Hong Kong Airlines was planning European expansion and talking to Virgin Atlantic for a partnership between Hong Kong and London, Cathay’s most profitable European route.

Cathay accelerated European growth to take marketshare, slots, traffic rights and Russian over-flight permits to stymie Hong Kong Airlines’ opportunities. Cathay launched new destinations, including Barcelona, Brussels, Dublin and Madrid.

Hong Kong Airlines started ending long-haul last year and scaled back regional flights. Its most optimistic future was as a regional carrier with possible select long-haul supplements later. Cathay no longer needs the latest long-haul aircraft to boost its efficiency over Hong Kong Airlines, which as a younger operator had some natural cost advantages.

Hong Kong Airlines was further weakened when its sister carrier HK Express was bought by Cathay. That grew Cathay’s marketshare and ended the chance for Hong Kong Airlines and HK Express to have closer cooperation under their common HNA ownership.

Third runway is near

Cathay’s HK Express acquisition partially addresses the question how it can preserve marketshare when Hong Kong International Airport opens its third runway and significantly increases slots.

The opening had been pegged for some point before the end of 2024, but COVID-19 is allowing construction to accelerate. That provides buffer if there is a delay elsewhere in the large land reclamation project, or slightly brings forward the opening.

Slot demand will be greatest from regional airlines, which may have been unable to secure any Hong Kong slots, want more flights or plan to use new slots to replace current late-night or off-peak operations.

Regional aircraft fly multiple sectors a day, utilizing more Hong Kong slots than long-haul aircraft. At the smaller end of the scale, new A321neo aircraft were to provide a mix of replacement and net growth for Cathay Dragon and HK Express. Cathay’s first A321neo is built (see above photos) but yet to be delivered. Bigger aircraft for trunk regional flights would also help.

Hong Kong has long been constrained. If post-COVID sees existing flights reduced, there is a strong backlog of new entrants. Even the most pessimistic airlines do not envision a downturn past 2023.