Analysis: As Cathay Pacific wields jobs axe, 'Swire prince' culture survives

Swire Properties

05/12/2017 23:00

* Cathay hired McKinsey to aid with transformation plan 
    * More than 740 initiatives identified: Cathay exec 
    * Cathay says Swire executive rotational system to stay 
 
    By Jamie Freed 
    SINGAPORE, Dec 6 (Reuters) - Loss-making Cathay Pacific 
Airways Ltd  0293.HK  hired McKinsey & Co consultants earlier 
this year to advise on a transformation plan, drawing on 
turnarounds at regional rivals such as Qantas Airways Ltd 
 QAN.AX  and Japan Airlines Co Ltd  9201.T . 
    Battered by competition from Chinese and Middle East 
airlines and hobbled by missteps in fuel hedging, Cathay in 
January completed a strategic review, and later announced its 
biggest job cuts in almost two decades.  urn:newsml:reuters.com:*:nL4N1IO06E 
    Following McKinsey's subsequent input - which has not been 
previously reported - Greg Hughes, Cathay's Chief Operations and 
Service Delivery Officer, said more than 740 initiatives had so 
far been identified to cut costs, boost productivity and improve 
customer service - including easier access to higher 'frequent 
flyer' status, more economy-class seats on Boeing  BA.N  777 
airliners, and on-demand dining for business-class fliers. 
    "We were very keen on learning from them the best way to go 
about a transformation," Hughes told Reuters. "They have done 
thousands of them, and we haven't." 
    Steve Saxon, McKinsey's aviation expert partner in Shanghai, 
said the firm's policy is to decline comment on client work. 
    Hughes said McKinsey's involvement ended after its 
consultants helped structure the three-year transformation 
programme, which is being carried out by Cathay Pacific staff 
and aims for HK$4 billion ($512 million) of savings from 
lowering costs and boosting productivity. "We have always wanted 
our transformation programme to be something that our people own 
and can deliver upon," he said. 
     
    "COLONIAL CULTURE" 
    But, as Cathay chases a return to profitability, it looks 
set to continue a practice that some current and former 
employees say may be the biggest obstacle to a real change of 
culture: the airline's unusual executive rotation system. 
    Under this system, so-called "house staff" at unlisted 
British conglomerate John Swire & Sons Ltd - which owns a 
majority stake in Hong Kong-listed Swire Pacific  0019.HK , 
which, in turn, owns 45 percent of Cathay - rotate positions at 
group companies every few years. 
    This could, in theory, see a Coca-Cola refrigeration manager 
at a Swire-owned plant in China take charge of Cathay's 
operations in France. 
    Supporters of the scheme say it brings a fresh eye and 
diverse experience to the job, and helps succession planning. 
    "If they go through all these different areas they learn to 
look at things from different perspectives," said Achim Czerny, 
associate professor of aviation management at The Hong Kong 
Polytechnic University. 
    Critics, though, say it's a costly, two-tiered relic that 
leads to short-term and conservative thinking and can demotivate 
talented middle-managers, who feel excluded from the scheme. 
Some blame it for Cathay being slow to spot the strategic threat 
from rival airlines. 
    "It's a bit of a colonial culture," said Terence Fan, an 
assistant professor specialising in transport at Singapore 
Management University. "There's certainly a lot of complacency." 
    Cathay declined to say whether McKinsey had examined its 
rotation system, but said it planned to keep it in place as part 
of its transformation programme. 
     
    'SWIRE PRINCES' 
    Founded as an import-export business in Liverpool in 1816, 
John Swire & Sons opened its first China office 70 years later. 
Still family-controlled, it also owns majority stakes in 
maintenance group Hong Kong Aircraft Engineering Co Ltd (HAECO) 
 0044.HK  and Swire Properties Ltd  1972.HK . 
    As a management service fee, the companies pay John Swire & 
Sons 2.5 percent of their profit before tax and non-controlling 
interests. 
    The arrangement doesn't give Cathay much incentive to hire 
top executives from outside as it pays Swire regardless. Air 
China Ltd  601111.SS  and Qatar Airways are major Cathay 
shareholders, though Swire gives them little say in the 
airline's day-to-day operations. 
    Former Cathay CEO John Slosar is chairman of Swire Pacific, 
Cathay, HAECO and Swire Properties. Like many senior managers - 
including Cathay's current CEO Rupert Hogg - Slosar started out 
on Swire's "house staff" programme - once an all-male and 
predominantly 'Oxbridge' preserve, with members dubbed by 
outsiders as 'Swire princes'. 
    There is a separate stream of management trainees, more 
usually Hong Kong locals with Chinese language skills, who stay 
at a Swire company throughout their careers but move around 
within that company. Hogg's predecessor, Ivan Chu, began as a 
management trainee at Cathay. 
    Many airlines have graduate programmes and employees 
rotating between management posts, but at Cathay managers could 
be rotated in with no knowledge of the aviation industry. Cathay 
rarely brings in top outside talent from rival airlines. 
    "It's a very traditional, fairly conservative company and 
its policy has always been to grow its own management talent," 
said a person who previously worked with Swire, and didn't want 
to be named so as not to jeopardise relations with the company. 
    A former Cathay employee, who asked not to be named, said 
the rotation system at the top was frustrating for middle 
managers. "These weren't glass ceilings, but brutally hard 
concrete ceilings. If you were in middle-management, there was 
no way you were going to get into the cadre of top management." 
    One current employee said the Swire culture held up decision 
making as approvals were needed to react to sometimes 
fast-changing situations, and another said it hampered the 
airline's long-term strategy as CEOs commonly moved on after 2-3 
years, with a new manager coming in "changing things again". 
    However, a second former Cathay middle manager, who didn't 
want to be named as he is still in the aviation industry, said 
Swire's two-tiered management system worked well. While senior 
country and regional managers sometimes brought no aviation 
knowledge, "they were there for their corporate knowledge, for 
their business acumen." 
    "The culture is a fabulous thing," said a former 'house 
staff' member. "If there's one small weakness, you might argue 
that if you grow up with people, it's sometimes quite hard to 
look them in the eye and call them out when they are wrong, and 
have a really robust conversation." 
    Slosar declined an interview request, but told The Wall 
Street Journal in 2014 that a benefit of the rotation system was 
that managers were all on the same page with the corporate 
culture. The downside, he acknowledged, was Swire had to ensure 
it assimilated new ideas from outside and kept pace with trends. 
    Singapore Management University's Fan said that hiring 
McKinsey showed Cathay was serious about change, but it was a 
mistake not to consider adjusting the rotation system. 
    "If you're thinking about drastic change, I'm not sure 
whether hiring people who have been steeped in the same culture 
will be sufficient to bring in the more fundamental changes that 
might be required," he said. 
    ($1 = 7.8171 Hong Kong dollars) 
 
 (Reporting by Jamie Freed, with additional reporting by Anne 
Marie Roantree, Matthew Miller and Brenda Goh; Editing by Ian 
Geoghegan) 
 ((Jamie.Freed@thomsonreuters.com; +65 6318 4789;)) 
 
Keywords: CATHAY PACIFIC STRATEGY/