By Jamie Freed
SINGAPORE (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.
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 (£381.61 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.
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.
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.
(Reporting by Jamie Freed, with additional reporting by Anne Marie Roantree, Matthew Miller and Brenda Goh; Editing by Ian Geoghegan)