CICC 2010 - Cathay Pacific Catering Services - UBC


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CICC 2010 - Cathay Pacific Catering Services - UBC

  1. 1. Cathay Pacific Catering Services Cappellacci Han Lemanowicz Ng
  2. 2. Half of the world’s population lives within 5 hours of Hong Kong Seoul Beijing Tokyo Shanghai Delhi Hong Kong Taipei Manila Mumbai Bangkok Ho Chi Minh Kuala Lumpur Singapore2 | Source: HKCBA Forum
  3. 3. Airline Catering Industry Trends What does How does How is the it take to the industry CPCS win in the function? performing? industry? 200 MM/annum 405 MM /annum 21 MM/annum3|
  4. 4. CPCS has 4.4% of the Asia-Pacific Airline Catering Market Asia-Pacific Aviation Catering by Company CPCS, 4.4% SATS, 4.9% Quantas Catering, 7.7% All Others, 33.9% TFK Corp (Japan Airlines), 8.6% Gategroup, 13.9% LSG Sky Chefs, 26.6% Sources: SATS filings, Gategroup, LSG Press Release, Deutsche Bank •  Major competitors have a large market share with considerable global reach and a desire for expansion4|
  5. 5. Presentation Agenda Identifying contributing Issues Issues Analysis Market and Competitor Analysis Solution Summary Joint Ventures A New Plan for Growth Acquisitions Mentorship program Bringing Workforce CPCS Ambassadors on Board Social Calendar Communicating Key messages Communicating the Vision to Customers Targeting Clients Timeline Conclusion Solution Summary5|
  6. 6. Strategy Alignment Difficulties Competitors increasing global efficiencies by Challenges consolidating smaller companies appropriately Cost pressures addressing have developed global market more demands on product and forces is not service allowing CPCS to realize growth Stresses in transitioning from opportunities operations focus to customer focus6|
  7. 7. 77% of CPCS’ Meals Are Served to Cathay Pacific Flights Interlines Projected to Constitute Only 23% of Meals Served in 2010 100.0% •  CPCS wants to be more 90.0% 80.0% 30.7% 29.2% 23.3% 21.8% 23.2% than an internal Cathay 70.0% Pacific supplier 60.0% 50.0% 40.0% 78.2% •  Recent trends have shown 76.7% 76.8% 30.0% 69.3% 70.8% that CPCS is increasingly 20.0% 10.0% reliant on Cathay Pacific 0.0% 2006 2007 2008 2009 2010F Cathay Pacific Interlines •  Loss of British Airways and other major customers in recent years to competitors7|
  8. 8. Interlines Are a More Lucrative Market Average Revenue per Meal by Segment $90 $80 $70 HK$76 $60 $50 average for Interlines $40 $30 HK$35 $20 $10 $- 2006 2007 2008 2009 2010F average for Cathay Pacific Cathay Pacific Interlines Consolidated •  In a low margin industry, having pricing power as CPCS does over non-Cathay Pacific customers is significant8|
  9. 9. LSG Sky Chefs is the Largest Aviation Catering Services Company in the Asia-Pacific and Globally •  Serves 405mm meals a year (128mm in Asia-Pacific) in 193 airports •  Vision: “To be the preferred global provider of quality catering and integrated in-flight services” 1942 1986 2001 2010 American Airlines creates Sky Chefs Onex Corp., a Canadian Lufthansa acquires Sky LSG Sky Chefs is the catering service private equity firm, Chefs – now a global leading global player purchases Sky Chefs company with around 30% market share Source: LSG Sky Chefs •  A long standing company with a global reach and reputation for robust business9|
  10. 10. Gategroup is the Leading Independent Company And Looking to Acquire in the Asia-Pacific •  Serves 200 million meals a year in 100 kitchens 1992 1997 2009 Gate Gourmet formed from Acquisition of Gategroup listed Swissair Catering British Airways on SIX Swiss Kitchens Stock Exchange “It’s a logical step that the suppliers will consolidate and grow together with the airlines, and Gategroup plans to be a player in this game. It’s a large market, with the biggest opportunities in the Asia-Pacific. And we have one global, ‘galactic’ competitor in Lufthansa.” – Guy Dubois, Gategroup CEO Source: Gategroup, Bloomberg Business Week (October 13th, 2010) •  Gategroup is a young company with a great deal of potential and momentum to enter the Asian Market10 |
  11. 11. Cathay Pacific Catering Services is at an impasse Focus on current company operations losing market share CPCS in 2010 Grow to become dominant Player in Asia market11 |
  12. 12. Presenting a solution for CPCS Competitors increasing global Align company activities to the efficiencies by move company toward the top consolidating position in catering services smaller companies in Asia companies Align company Cost pressures activities to the have developed move company more demands on toward a top Investigate joint ventures and outright product and position of acquisitions service catering services company in Asia Stresses in Engage existing Focus on core transitioning from competencies and workforce into operations focus to increase existing growth strategies customer focus demand12 |
  13. 13. Investigate joint ventures and outright acquisitions Focus on core Engage existing competencies and workforce into increase existing growth strategies demand INVESTIGATE JOINT VENTURES AND OUTRIGHT ACQUISITIONS13 |
  14. 14. Using partnerships as an efficient means of expansion Criteria Airport Volume Existing Airline partnership Airline Market Share Culture Compatibility •  Using synergies of supply in the Asia area focuses on the vision of the company and ensures that there is a strong network of support in the region à Strong service for customers going forward.14 |
  15. 15. Chinese Airport Developments Shenzhen Chengdu Kunming Airport Volume 24,486,406 22,637,762 15,877,814 Existing Airline Shenzhen Airlines Air China Air China partnership Hainan Others China   Airline Market Airlines 2% 11% Sichuan   Southern   15%   China Share Shenzhen Southern Airlines 28% China Airlines   4%   Others   17%   29% Southern Air China 13% Air  China   37% Other 8%   14% Air China China China   12% Eastern Eastern   Hainan China 13% Lucky  air   47%   Airlines Eastern Sichuan 9%   8% 9% Airlines 24% Culture Chinese and close Similar region in China Furthest away from proximity to Hong Kong to Shenzhen Hong Kong Compatibility15 |
  16. 16. Malaysia and Thailand Developments Kuala Lumpur Suvarnabhumi Airport Volume 14,732,876 40,499,409 Existing Airline Malaysia Airlines + Thai Airways + partnership Cathay Pacific Cathay Pacific Airline Market Share Cathay AirAsia Other 20% Other 36% Thai Airways Malaysia 40% Pacific 0% Airlines 2% China 38% Airlines 3% Indonesia Air Asia AirAsia 37% CathayBangkok Pacific Airways Thai 3% Airasia 4% 6% 11% Culture Malaysian requirements Thailand is close to for Halal is compatible Vietnam though culturally Compatibility different16 |
  17. 17. Engaging partnership programs Negotiate Determine Engage in Determine Initiate Change Individual Assets and conversations Needs and Management Terms and Resources with partners priorities Strategy contracts Establish a partnership Certain partners will be Partners may be Protecting CPCS Ensuring that the strategic team from within the more ready than others to interested in redeveloping intellectual and advantage of the Detail Commercial Department work together and most existing facilities, revising investment property are company is shared. to determine company therefore relationships staff or even building new important parts of the Deployment of CPCS priorities must be built facilities process Change Management Ambassadors •  A plan that the •  A clear idea of which •  Legal protection and •  Ensures there isKey outcomes •  An idea of the financial company is capable of partners are ready to and development an agreement that will consistency of practice handling develop partnerships commitment going benefit both parties in amongst areas •  Determining if capital forward the long term •  Includes Hong Kong and human resources staff in development are adequate process •  The partner development cycle will take approximately two years to see the first results of a collaboration •  The greatest amount of time will be in developing and negotiating terms of the business partnership17 |
  18. 18. Sample Cost Model for Partnership Cost Item Detail Amount Partnership Building Annual Expenses for travel, $240,000 entertainment and administration Purchase of partnership Based on a 40% stake at a 23,000 $266,000,000 to meal evaluation stake $399,000,000 Legal Fees Legal fees associated with high $15,000,0000 level partnerships Change Management Ambassadors and administration $8,000,000 costs •  Costs are estimate based on expected valuations and researched expenses for specific operations18 |
  19. 19. Why Acquire Other Companies? •  The industry has changed – consolidation trend appears to continue with LSG Sky Chefs and Gategroup gaining market share •  Airlines divesting of in-house catering businesses •  CPCS needs to establish stronger foothold in Asia- Pacific region now – otherwise more kitchens will be bought out •  Very difficult to grow organically until international scale is achieved – LSG and Gategroup both took nearly 20 years to get to where they are today, much of their growth was also driven by acquisition •  The time is right to seek rapid and considerable growth19 |
  20. 20. Criteria for Acquisitions 1. Focus on core aviation hubs within Asia-Pacific 2. Financial feasibility 3. Pure play catering business 4. Potential synergies with existing Cathay Pacific routes 5. Favourable competitive environment 6. Ease of cultural alignment 7. Likelihood of successful acquisition 1.  Singapore Airline Terminal Services There are four companies that are 2.  Q Catering – Quantas Airways currently targets for acquisitions 3.  LSG Sky Chefs 4.  TFK Corporation – Japan Airlines20 |
  21. 21. Reviewing competitors current offerings LSG Sky Chefs TFK Corporation – Singapore Airline Q Catering – • The company will Japan Airlines Terminal Services Quantas Airways consider its options for • JAL plans to sell • Dominant market • Largest flight caterer in the latter as it grows] “to catering business, TFK position in Changi the Southern see whether we are the Corporation as of Jul Airport (80% market Hemisphere, with right parent” – Stephen 2010 share) Australian focus Gemkow, CFO • JAL has 50.7% stake in • Only 23% of • Quantas is the largest • 405mm meals in 2009 TFK Corp. Other consolidated revenues customer, but Cathay globally (128mm in Asia- shareholders: Tokyo from airline catering Pacific is also a Pacific – the market Airport Service, Air after recent customer leader by far) France diversification efforts21 |
  22. 22. Potential Targets Would Cost Between HK$2.4 – 11.4 Billion to Acquire LSG Sky 2009 Data CPCS SATS Q Catering Chefs TFK Corp. Meals Served (000) 20,919 23,470 37,000 405,000 41,344 Revenue per meal $ 44.41 $ 89.91 $ 93.74 $ 42.52 $ 64.23 Revenue (HK$mm) 929 2,110 3,468 17,222 2,655 Profit (HK$mm) 82 169 277 813 212 Valuation (14x P/E) 1,145 2,364 3,884 11,380 2,974 Sources: CPCS, SATS, Q Catering, LSG Sky Chefs, TFK Corp., Deutsche Bank •  The four businesses considered are worth between HKD $2.4 – 11.4 billion, based on our estimates •  14x P/E is the higher range of comparable multiples – necessary for an acquisition All four have higher meals served and SATS / Q Catering have significantly higher revenue per meal, indicating premium pricing position22 |
  23. 23. Cathay Pacific’s Robust Balance Sheet Makes a Transformational Acquisition Possible Cathay Pacifics Net Leverage is Only 1.5x - Significantly Stronger Balance Sheet Compared With Rivals 14.00x 11.66x 12.00x Net Debt / LTM EBITDA 10.00x 7.71x 8.00x 6.24x 5.33x 6.00x 4.53x 3.55x 3.84x 4.00x 1.32x 1.47x 2.00x -1.66x 0.00x -2.00x Air China China Singapore China China Korean Air China Thai Airways Eva Airways Cathay COSCO Airlines Eastern Southern Lines Airlines International Pacific -4.00x Holdings Airlines Airlines Airways Ltd. •  Cathay Pacific generated HK$13.4 bln in EBITDA in the past 12 months •  Even LSG Sky Chefs, which we value at HK$11.4 bln, would only take Net Debt/EBITDA to 2.3x •  Cathay Pacific would still be significantly less levered than the median airline competitor (median = 4.4x)23 |
  24. 24. Our Top Recommendation is to Purchase TFK Corp. Asia-Pacific Financial Pure Play Existing Cathay Favourable Competitive Cultural Likelihood of   Focus Feasibility Catering Routes Environment Alignment Acquisition SATS Yes Yes No Yes Yes Yes No Q Catering Yes Yes Yes Yes Yes Maybe Maybe LSG Sky Chefs No Maybe Yes Yes Maybe Maybe Yes TFK Corp. Yes Yes Yes Yes Yes Yes Yes TFK Corp. meets all of our criteria for an acquisition Alternatives • They have explicitly stated that they want to sell – not the • Q Catering is the second best choice: case with SATS or Q Catering still a catering focused company, but • They are a pure play catering company – SATS is now very cultural alignment may be difficult diversified and only 1/3rd of revenues are from airline • SATS is unlikely to sell to CPCS due to catering 44% holding by Temasek (Singaporean sovereign wealth fund) • Impact on Cathay Pacific’s balance sheet will not be • LSG Sky Chefs is too large for CPCS significant - $3 billion acquisition when they have $21 to integrate, and it does not have an billion in cash on hand Asia-Pacific focus • JAL bankruptcy makes them an eager seller24 |
  25. 25. Projected IRR of 11 – 14% is Significantly Above Existing 5-10% ROI for CPCS •  Acquisition multiple: Between 10-14x P/E TFK Acquisition High Case Low Case •  Terminal Growth Rate: 3.5% per Initial Investment (HK$mm) 2,124 2,974 annum - conservative estimate for annual air traffic growth 2011E Profit (HK$mm) 220 220 •  IRR of 10.91 – 13.88% for TFK Growth Rate 3.50% 3.50% acquisition •  CPCS’ ROI has been 5-10% from IRR 13.88% 10.91% 2006 – 2010, so this acquisition would increase consolidated ROI •  TFK would make a significant addition to the profitability and product offering of the company25 |
  26. 26. Implementation Timeline Launch Finalize Send CPCS customer service Begin acquisition, set Ambassadors to campaign to negotiations with market share Narita and build Review targets TFK Corp. and targets and Haneda airports relationships for quality and other potential maintain existing to begin change with TFK market share airlines quality management customers and standards process re-align them to the CPCS brand Risks •  Regulatory approval – present with any international acquisition, but less likely with TFK given JAL’s financial troubles •  Cultural integration issues – mitigated by shared commitment to quality (ISO 9000) and experiences with making Asian cuisine26 |
  27. 27. New CPCS Will Have 16% Market Share, Surpassing Gategroup The New CPCS Will Have 16% Market Share in the Asia-Pacific CPCS, 4.4% New CPCS, SATS, 4.9% 15.5% Quantas Catering, 7.7% SATS, 4.9% All Others, TFK Corp All Others, 33.9% (Japan 31.4% Airlines), Gategroup, 8.6% Quantas 13.9% Catering, 7.7% LSG Sky Gategroup, Chefs, LSG Sky 13.9% 26.6% Chefs, 26.6%27 |
  28. 28. Investigate joint ventures and outright acquisitions Focus on core Engage existing competencies and workforce into increase existing growth strategies demand ENGAGE EXISTING WORKFORCE INTO GROWTH STRATEGIES28 |
  29. 29. CPCS needs the right workforce for the job •  CPCS will be growing considerably over the next few years. •  As companies are acquired and new kitchens are built, there is an inherent risk of company fragmentation leading to reduced quality and increased operational complexity •  Establishing a open-minded yet consistent company culture across all kitchens will be crucial to maintain an effective workforce that focuses on quality, safety and creativity29 |
  30. 30. Preparing the Company for Growth Current State Ideal State Employees are routine Employees are proactive and function-oriented. and customer oriented Excellent problem Anticipate problems and solvers, but are reactive find new opportunities Authoritative and permission- Innovative, out-of-the-box based power structure thinkers taking initiative “To be the most valued catering services partner in Asia; we focus on quality and creativity to support our customers in their ultimate goals”30 |
  31. 31. Soaring higher with new HR practices Land Change Soar Aligns employees with the new vision, mission and Mentorship Program values. Ambassador Team Develops a proactive and consistent company culture. Community Calendar Creates organic employee engagement.31 |
  32. 32. Mentorship aligns employees with new vision, mission and values Mentoring creates relationships between Improves teamwork skills people of varying backgrounds, experiences and positions of influence. Facilitates two-way communication Mentors and mentees will hold each other Improves employee satisfaction accountable for personal and professional goals. Promotes goal setting and planning Monthly $200 pair budget will Encourages skill development institutionalize Philip Cocks’ caring family culture. Reinforces vision core values Mentorship ensures that company HR goals of retention and development are institutionalized and helps reduce parental management mindsets through a collaborative improvement process32 |
  33. 33. Mentorship program is a small investment with a big return Item Cost Mentorship Activity Budget $1,920,000 Admin Costs $80,000 Total Yearly Cost $2,000,000 Action Items Q 3 - 2010 Q 4 - 2010 Q1 - 2011 Q 2 - 2011 Creating initial buy-in from key stakeholders Forming mentorship program test group Modifying program based on early feedback Communicating new program company-wide Matching employees and setting up meetings Full program roll-out “Engage and develop our people to excel” - CPCS Mission Statement33 |
  34. 34. Creating CPCS Ambassadors to develop a more proactive and consistent company culture during high growth in the future Ambassadors create opportunity to share Sharing of best practices best practices across kitchens and reward proactive employees Fosters innovative thinking Deployed across CPCS’ international operations to teach and instil vision and Professional development culture Increases plant efficiency Helps achieve highest quality and safety standards throughout supply chain Exposure to different cultures34 |
  35. 35. Implementing Ambassador Team Item Cost Training Employees $75,000 Transportation Expenses $48,000 Accommodation Costs $640,000 Opportunity Cost $640,000 Total Project Cost $1,403,000 Action Item Q 3 - 2010 Q 4 -2010 Q 1 -2011 Q 2 – 2011 Ambassador Training and Selection Site Visits and Feedback “Strive for the highest quality and safety standards throughout the supply chain” - CPCS Mission Statement35 |
  36. 36. Creating organic employee engagement with an events calendar Action Item Q 3 - 2010 Q 4 - 2010 Q 1 - 2011 Q 2 - 2011 Determine appropriate system Communicate calendar through company channels Update and check calendar Create an event and activity calendar that is shared with all Events can range from employees. Contains volunteer opportunities to $0 cost, information about what is concerts to community implementable today going on in the community and organized sports who is attending from work.36 |
  37. 37. Soaring higher with new HR practices Land Change Soar Coaching Mentorship Program Goal Setting MBO Involvement Ambassador Team Education Evidence Stream MBO Community Calendar Socializing •  3 program approach ensures creation of momentum and solidification of new company culture37 |
  38. 38. Need to address issues and concerns on all levels Department Heads Why am I getting more work? Will this change affect my employee’s Managers productivity and therefore my performance? Will I have the right skills? Supervisors Will I lose my job? General Staff What is going on? Will I lose my job?38 |
  39. 39. Communicating Plan Main Message Communicated Top-level buy-in is critical because you are role model for the rest of the company. Department Heads Change assistance through mentorship will be provided and your buy-in is necessary Managers as supervisors look up to you. This is a one-time change with the purpose of improve job performance – Supervisors and maintain job stability. It is an expansion strategy and not downsizing. In the end it will provide more opportunities General Staff for employees of CPCS.39 |
  40. 40. Investigate joint ventures and outright acquisitions Focus on core Engage existing competencies and workforce into increase existing growth strategies demand FOCUS ON CORE COMPETENCIES AND INCREASE EXISTING DEMAND40 |
  41. 41. How can CPCS get customers on board with the new vision? Determine customers’ possible values and goals Collect information from current customers Drive unique Value proposition via marketing campaign Develop a consistent yet tailored sales strategy Solidify a unique selling proposition to dominate in Asia41 |
  42. 42. Marketing & Sales Plan Overview 1. 2. Authentic, high Asia’s most quality cuisine. Only trusted from Cathay Pacific Catering Services. airline caterer. With non-stop Primary service from Secondary 14 Chefs Message home, whatever your destination. Message Hong Kong’s most reliable airline “Meet the caterer is now serving you in Team” (Japan, Korea, Campaign Malaysia, etc.) Regionalization Strategy Strategy is highly customized, targeted to convey continental scope. Key Messages: trust and quality authenticity cuisine42 |
  43. 43. Marketing Campaign: Leverage unique competitive advantage of being located in Asia •  Image: Local landmark background, passenger on plane enjoying cuisine of destination country. •  Ad Copy: Asia’s most trusted airline caterer. Hong Kong’s most reliable airline caterer is now serving you in (Japan, Korea, Malaysia, etc.) Source: Travel Magazines |
  44. 44. Sales Strategy: sell on element of guaranteed high quality cuisine Action Item Q 3 - 2010 Q 4 - 2010 Q 1 - 2011 Q 2 - 2011 Identify Customer Goals Assess the Situation Sell on Benefits Invite for Sampling Next Steps Continuous Feedback44 |
  45. 45. A 5 Year Action Prospectus Action Item Year 1 Year 2 Year 3 Year 4 Year 5 Develop Partnerships Expand Partnerships Purchase TFK Transition TFK Mentorship Program Ambassador Program Staff Calendar Develop Marketing Plan Execute Marketing Plan45 |
  46. 46. Solutions Summary and Business Implications Business Partnership • Selecting 5 cities and airlines Ensures robust penetration in Development • Develop shareholder stakes Asian Market • An eager sale for struggling company Capitalize on sale opportunity Acquire TFK Corp • Primarily air catering in Asia to increase capacity and reduce competition Communicate to • Develop sales strategy to communicate Ensures key stakeholders and the changes to customers potential customers are Customers aware of CPCS efforts Company Culture • Mentorship program for innovation Ensures workforce is ready Changes • Ambassador project to promote growth for growth and change46 |
  47. 47. Now You’re Really FlyingBy pursing these strategies andimplementing a plant to exploit thecurrent opportunities, Cathay PacificCatering Services is set to soar abovethe rest.
  48. 48. EXHIBITS Additional Information48 |
  49. 49. Strategy alignment difficulties Competitors Cost pressures have Executing the increasing global developed more company’s vision puts efficiencies by demands on product pressure on Human consolidating smaller and service Resource Culture companies Inability to appropriately address global market forces is not allowing CPCs to realize growth opportunities49 |
  51. 51. Passenger Traffic Growth Has Rebounded Significantly from the Recession
  52. 52. 26% of Global Air Traffic Occurs in the Asia-Pacific Region World Air Passenger Traffic, 2004 - 2009 1,600,000 1,400,000 1,200,000 Millions of passenger km 1,000,000 North America 800,000 Europe Asia-Pacific 600,000 Other 400,000 200,000 - 2004 2005 2006 2007 2008 2009Source: Euromonitor
  53. 53. Global Airports by Passenger Volume in 2009
  54. 54. Passenger Numbers by Carrier in the Asia-PacificSource: Travel Catering Research Centre, Annual Catering Research Report
  55. 55. Air Passengers by Continent in 2009Source: Airports Council International
  56. 56. Cathay Pacific and Its Competitors
  57. 57. TFK Corp. Letter From the PresidentMessage from the President•  We Tiefuke, founded in 1959 as the companys first meal in Japan, since then, we have played a role in the leadership role of local catering company. With the motto to provide reliable service and safe, high quality meals now at Narita and Haneda Airport JAL airline companies won contracts with several companies including the 30 international groups, and various food safety We receive high levels of confidence in the airline product development capabilities by developing the menu.  We are operating principle of the "food safety" in order to run reliably, and international health standards and compliance with HACCP standards, international standards for quality management system ISO9001: 2008 certification continues to , and strive to strengthen quality control of branch office Haneda Narita, conducting campaign business efficiency, we are committed to improving service quality levels.   In addition, the renewal Headquarters Narita 2004, also in terms of facilities, established a system of production can be prepared from food to 70,000 per day, gradually thereafter, and to update facilities and equipment, improvement of fulfillment both hard surfaces soft side aim, we have grown to be recognized as one of the companies in the worlds leading Ketara.  Utilizing the expertise gained in the food of this meal, and make hotel and restaurant management and business development and contract services to major airlines in the terminal lounge at Narita Airport, we are also challenging new business .  We walked along the history of domestic meals, celebrated its 50th anniversary in 2009, thank you.And to contribute to society through the meal will continue to strive to further improve service quality and strict hygiene and food safety.  President Hukada MakotoSource: TFK Corp. website, translated from Japanese using Google Translate
  58. 58. TFK Corp. History1951.10 Preparation of the first meal1959.12 "Flight Kitchen Ltd. Tokyo" founding1960.9 Open from (Tokyo Airport Service (Inc.) and inherited the business from the meal)1978.5 Headquarters in New Tokyo International Airport (Narita, Chiba Prefecture)1996.4 Bill Curry in the New Tokyo International Airport Terminal 2 & Cafe "Ra Tokku" opened1999.7 Casual restaurant in the New Tokyo International Airport Terminal 2, "La Vista" opened1999.12 The division headquarters meal ISO9002 certification2003.1 The division headquarters meal ISO9001: 2000 certification2004.6 Headquarters Renewal2006.3 Certified Food Safety voluntary certification schemes have branches in Tokyo Haneda2007.11 Haneda Branch also ISO9001: 2000 certificationSource: TFK Corp. website, translated from Japanese using Google Translate
  59. 59. SATS Historical Forward P/E
  60. 60. SATS and Aviation Service ComparablesSource: DBS Vickers
  62. 62. CPCS: Vision, Mission and Values Source: Food For Thought June 2010, |
  63. 63. CPCS Current Customers Source: CPCS |
  64. 64. Vision Statements of Major Airline Caterers •  Cathay Pacific Catering Services –  To be the most valued catering services partner in Asia; we focus on quality and creativity to support customers in achieving their ultimate goals. •  Gate Gourmet –  Great food… and so much more. –  “We offer you: - Airline catering and last mile provisioning - Onboard retail solutions, a major driver of ancillary revenue - The same catering and provisioning services for non-airline customers: railway companies, lounges and business aviation” •  LSG Sky Chefs –  To be the preferred global provider of quality catering and integrated in-flight services. –  “As a logical extension of its capacities, LSG Sky Chefs has also begun a successful incursion into adjacent markets, such as train, school and healthcare catering as well as retail.” Source: CPCS |
  65. 65. Addressing the Relationship with CX Major customer and shareholder Owns 100% of CPCS 1.  Underline long term alignment of values 2.  Emphasize value addition of CPCS 3.  Demonstrate independence in operation and continue to focus on deliver results for CX65 |
  66. 66. Preparing for Future Success Questions to consider: 1.  Quality –  Strive for the highest quality and safety standards throughout the supply chain. Do these changes reflect the values of CPCS’s focus on quality? If not, can something be done to meet the quality standards? 2.  Safety –  Occupational health and safety is our prime concern. In order to maintain a safe and healthy working environment so as to minimize the occurrence of injuries and occupational illnesses, we are committed to implementing this Occupational Health and Safety (OH&S) Policy Will implementation of this new plan or process jeopardize the safety of CPCS’s work environment? 3.  Environmental Awareness –  The company realizes, that its operations do affect the environment. In order to minimise the impacts on the environment, we have established an Environmental Policy so as to manufacture, deliver products and services in a manner that is not detrimental to the environment. Is this strategy going to comply with CPCS, Cathay Pacific and Swire Group’s dedication to environmental sustainability and long term growth?66 |
  68. 68. Average Daily Meals Served to Cathay Pacific and Interlines
  69. 69. Average Daily Flights Served by CPCS for Cathay Pacific and Interlines
  70. 70. CPCS Meals per Average Flight
  71. 71. CPCS Revenue by Segment
  72. 72. CPCS Revenue per Meal by Segment, CM and PAT per Meal
  73. 73. CPCS Profitability Metrics
  75. 75. Gategroup Weighs Takeover of Asian Catering Companies, CEO Says (Bloomberg News – Oct 13, 2010)Gategroup Holding AG, the world’s second-largest in-flight caterer, is interested in acquiringthe food units of carriers including Japan Airlines Corp. and Cathay Pacific Airways Ltd., itschief executive officer [Guy Dubois] said.“It’s a logical step that the suppliers will consolidate and grow together with the airlines, andGategroup plans to be a player in this game,” Dubois said. “It’s a large market, with thebiggest opportunities in the Asia-Pacific. And we have one global, ‘galactic’ competitor inLufthansa.”“These airlines still have their own kitchens and I expect that over time many of them willoutsource,” Dubois said.
  76. 76. Recent M&A Speculation•  Cathay Pacific has “no intention of disposing of our interest in Cathay Pacific Catering Services which is a strategic component of our aviation business,” it said in an e-mail to Bloomberg.•  JAL and All Nippon Airways Co. of Japan, Hong Kong-based Cathay and Australia’s Qantas Airways Ltd. -- whose Q Catering unit is the southern hemisphere’s largest airline meal provider -- are among carriers that may favor selling food operations to cut costs and take non-cash generative assets off their balance sheets, [Gategroup CEO] Dubois said. JAL plans to sell its TFK catering unit as part of a turnaround plan, Jiji Press reported last month.•  Qantas’ catering is an integral part of its business, said Olivia Wirth, a spokeswoman.•  Gategroup may itself become a takeover target, said Jon Cox, an analyst at Kepler Capital Markets SA in Zurich with a “buy” rating. “With consolidation going on in the market Gategroup could themselves become a target,” Cox said. “It’s certainly affordable if you are a big institution.”Source: Bloomberg News, Oct 13, 2010
  77. 77. Lufthansa’s BMI, Austrian Purchases Return to Profit (Business Week – Oct 28, 2010)•  Among the fastest-growing businesses in coming months will be ...the LSG Sky Chefs in-flight catering division, [CFO Stephen] Gemkow said. The company will consider its options for the latter as it grows, “to see whether we are the right parent,” the executive said.•  Gategroup Holding AG, the biggest global rival to Sky Chefs, said this month that it will use proceeds from a capital increase to fund purchases and is interested in acquiring the food units of carriers including Japan Airlines Corp.
  78. 78. CPCS’s Share of Meals Produced Including New Joint Ventures •  Assuming 40% market share, with CPCS holding a 35% stake •  Source: Airports Council International78 |
  79. 79. CPCS’ Future Market Share in the Asia-Pacific and Globally79 |
  81. 81. Total Meals Served in Asia, by Catering Services CompanySources: SATS filings, Gategroup, LSG Press Release, Deutsche Bank reports
  82. 82. Singapore Airline Terminal Services SATS Revenue Breakdown •  Vision: “We aim to be the first choice provider of gateway services and food Food solutions by leveraging on our capabilities Solutions - to delight users and exceed customers Airline expectations.” Catering 23% Food •  Dominant market position in Changi 33% Solutions - Non-Airline Airport (80% market share) •  Changi – 37mm passengers in 2009, 6th 44% Airport Services busiest in Asia (21st in world) behind Beijing, Tokyo, Hong Kong, Dubai, and Suvarnabhumi (Thailand) •  Only 23% of consolidated revenues from airline catering after recent diversification effortsSources: SATS, DBS Vickers, Airports Council International
  83. 83. Q Catering – Quantas Airways •  Largest flight caterer in the Southern Hemisphere, with Australian focus •  Quantas is the largest customer, but Cathay Pacific is also a customer •  Halal food capabilities •  Value-added services: newspaper, laundry, VIP meals •  6 locations: Syndey, Melbourne, Brisbane, Perth, Adelaide, CairnsSources: Q Catering, Deutsche Bank
  84. 84. LSG Sky Chefs•  [The company will consider its options for the latter as it grows] “to see whether we are the right parent” – Stephen Gemkow, CFO•  Largest player in global catering services market is “up for sale”•  405mm meals in 2009 globally (128mm in Asia-Pacific – the market leader by far)•  Very successful story of global expansion since 1986•  Value-added services: in-flight equipment, retail products•  LSG is growing in Asia-Pacific, but its dominance is more clear in Europe, North AmericaSource: LSG Sky Chefs, Business Week (October 28th, 2010)
  85. 85. TFK Corporation – Japan Airlines•  JAL plans to sell catering business, TFK Corporation as of Jul 2010•  JAL has 50.7% stake in TFK Corp. Other shareholders: Tokyo Airport Service, Air France•  Founded in 1959, provides service at Narita and Haneda airports•  Compliance with ISO:9001:2000 certification (since 2007, both branches)•  Value-added services: hotel / restaurant management, liquor and tobacco sales•  JAL filed for bankruptcy in 2009 due to the financial crisis – looking to divest of non-core assets•  JAL plans to cut 19,133 out of 47,000 jobs by 2015 as part of significant restructuringSource: TFK Corp., BusinessWeek (Oct 13, 2010), Jiji Press, Nikkei Business Daily,Air Transport World
  86. 86. Report: JAL to slash more than 19,000 jobs by March 2015 (Air Transport World – Aug 10, 2010)•  Japan Airlines, undergoing bankruptcy rehabilitation, plans to cut 19,133 jobs from its workforce of 47,000 by the end of March 2015, according to documents cited by Kyodo News•  JAL filed for bankruptcy under Japans Corporate Rehabilitation Law in January and is facing an Aug. 31 deadline for filing its official reconstruction plan•  Multi-year restructuring - By 2014, JAL hopes to post a ¥106.7 billion net profit, according to the draft plan
  88. 88. Why not organic growth into new markets?• Setting up new kitchen requires significant capital investment – especially if you wantto be a competitor of size - ~HK$500mm for 20,000 meals per day capacity• 7 – 10 years break-even based on Hong Kong kitchens• In the meantime – substantial risk of building a new customer base in markets thatalready have established kitchens from current airlinesSources: CPCS, Airport Authority
  89. 89. Beijing Capital International Airport: Potential Organic Growth Opportunity •  Although we would prefer growth through Joint Ventures and Acquisitions, organic growth may be feasible in very high growth markets •  Beijing’s main airport has increased traffic by 5.9mm per year (2007 – 2009) •  This means annual increase in meal production of about 13,000 meals / daySources: Airports Council International, CPCS
  90. 90. Why not maintain the status quo? CPCS’ Market share of non-CX meals is dropping -  Interline meals have fallen 16% since 2006 due to loss of Quantas, British Airways, HK Express, Siem Reap Airways International, EVA Airways -  LSG is operating at 87% utilization, Gate Gourmet at 92%, while CPCS is only at 77% à this provides further evidence of a shift to the international players If market share is dropping – status quo is not the option given CPCS’ vision to be a growth-oriented profit centreSources: CPCS
  92. 92. Institutional Catering – Not the Ideal Solution CPCS derives only 2.4% of its revenues from Non-Aviation Food •  While an interesting area of expansion, non-aviation food currently does not constitute a major part of CPCS’ business •  Competitive dynamics of non-aviation industry are not as appealing – fewer barriers to entry suggests higher competition •  Airline catering in HK has high barriers to entry, airport authority hasn’t authorized a new caterer since 1998 Most importantly – diversifying the business, while important, does not address the underlying issue: CPCS is losing market share to global competitors because it does not currently have the global reach of LSG Sky Chefs or GategroupSources: CPCS
  93. 93. Non-Aviation Catering is Not as Appealing an Industry •  One of the largest public catering company in the United States •  Services to hospitals, hotels, universities •  Average profit margin over the past 5 years was 3%, whereas the profit margin for CPCS was 6% Source: Standard & Poor’s •  The general catering industry is therefore NOT an attractive nor strategically significant business for CPCS93 |
  95. 95. Mentorship Program – Why it Works•  Mentorship will allow employees to develop new skills and promotes a proactive culture•  Mentees will have a pillar of support to lean on during the change•  Indirect way of teaching employees Management By Objective – goal setting is essential in an innovative, proactive company•  Coaching provides a two way feedback mechanism during the change management process. Creates ability to generate more natural buy-in and contain and mitigate any backlash
  96. 96. Ambassador Team – Why it Works•  Ambassador system involves an education component where staff will learn about the benefits of the new company culture•  Management by objective will force them to break past comfort zones and take more ownership over the change.•  A constant evidence stream will be flowing as these employees travel from kitchen to kitchen improving their processes•  General staff may see this team as a threat attempting to replace them by machines. Contrarily, unemployment rates are going down and companies may be facing a job labour shortage. Need to communicate clearly that this team is team is about process improvement – making their jobs more efficient and more engaging•  Some team members may not be comfortable tackling such a large scale endeavour. That is why all 4 units (from general staff to department head) are involved on the team.
  97. 97. Community Calendar – Why it Works•  Community calendar reinforces the family-oriented aspect of CPCS, promoting socializing and communication•  If people are resistant to using the calendar, leverage mentor network to promote it internally. Also prepopulate the calendar with upcoming events (dinner, sports games) and incentivize people by giving away event tickets. Also possible to display calendar on a TV inside the entrance of the building
  98. 98. What Motivates People? – Study by The Gallup Organization
  99. 99. Change Management TechniquesGoal Setting • Using existing goal-setting process to set a goal that requires change. Enables change.Coaching • Bringing in a coach to help employees having difficulty managing and adapting to change. Used to create change momentum.Management by Objectives (MBO) • Setting formal objectives for people to achieve without explaining how to achieve it. By giving them relatively free reign you can encourage them to think outside the box. Used to enable change and generate momentum.Education • Teaching employees about the need for change and how embracing change is far more effective than resisting or maintaining status quo. Used to to enable change and generate momentum.Involvement • Getting employees involved in the change will make them feel empowered. Used to create change momentum.Evidence Stream • Getting employees to accept a change by providing a steady stream of evidence demonstrating that the change has happened and is successful. Used to solidify a change.Socializing • Seal changes by building them into social structures and empowering social leaders. Used to solidify a change.
  100. 100. CPCS Ambassador Structure•  8 person team –  1 department head –  2 managers –  2 supervisors –  3 general staff