March 15, 2017 11:20 pm JST

Cathay Pacific to expand despite first loss in decade

Hong Kong carrier sees signs of recovery in passenger bookings, cargo demand

JENNIFER LO, Nikkei staff writer

Cathay Pacific faces stiff competition from state-backed Chinese and Middle Eastern airlines. © AP

HONG KONG -- Cathay Pacific Airways is planning to ratchet up its operations despite recording its first annual loss since the global financial crisis in 2008 due to intense competition from Chinese carriers.

The Hong Kong-based premium airline aims to boost its passenger capacity by 4-5% annually at least until 2024. This will be achieved with new services to Christchurch and more flights to San Francisco, Brisbane, Manchester and other European cities later this year. Cathay will also add more lounges.

Cathay announced job cuts in January as part of its largest restructuring in two decades but had refrained from aggressive downsizing so far. An employer of about 27,000 workers, it plans to hire 1,300 frontline staff this year as part of its expansion. Some 57 new aircraft will also be added to its fleet between now and 2024.

Citing the need for a "leaner" structure and higher efficiency without giving much detail, Cathay says it will reduce unit costs excluding fuel by 2-3% over the next three years.

"This year, it seems to be off to a much better start," said Cathay Chairman John Slosar at an earnings briefing on Wednesday. He pointed to a pick-up in export momentum and double-digit growth in bookings for its first- and business-class tickets in early 2017. "We see the long-term fundamentals, as a whole, as positive," he added.

Slosar's bullish remarks came as a contrast to Cathay's grim earnings, its third full-year loss in roughly 70 years of operation. The carrier missed analysts' estimates and swung to a net loss of 545 million Hong Kong dollars ($70.1 million) last year, compared with a profit of HK$6 billion in 2015. Revenue fell 9.4% on the year to HK$92.8 billion.

The worst-than-expected results point to much deeper structural issues, nonetheless. Cathay has seen its share in the short-haul market eroded by budget carriers and its core long-haul premium business undercut by state-backed Middle Eastern and Chinese players. Dwindling trade and overcapacity also hurt its cargo revenue, which was down 13% on the year.

Lower oil prices last year offered little help to the carrier. Its hedging policy that locks in fuel prices led to a loss of HK$8.46 billion, slightly better than a HK$8.47 billion loss a year ago. A further hedging loss is expected this year although the carrier said it would be smaller. Increasing fuel costs could also squeeze its profitability.

Cathay is 45% owned by its Hong Kong-listed parent Swire Pacific. Of the 18 analysts polled by Thomson Reuters, none recommends buying Cathay's shares, which closed 1.4% lower at HK$11.4 on Wednesday, against a 0.15% drop in the Hang Seng Index.

Most analysts are not convinced about a quick recovery for Cathay. Kelvin Lau, an analyst at Daiwa Capital Markets, said the recent rebound in passenger traffic was mainly due to an earlier Chinese New Year, which fell in January this year and February last year.

Malaysia's Maybank Kim Eng slammed Cathay with a "sell" rating ahead of its earnings announcement. "The outlook is dreary," wrote the bank's aviation analyst Mohshin Aziz, in a note on March 7.

"The success of the Chinese carriers is often the source of detriment to Cathay as they compete for the same passengers," said Aziz, referring to the aggressive foray of state-owned peers -- Air ChinaChina Eastern Airlines and China Southern Airlines -- into regional and trans-Pacific markets.

With competition escalating, Asian carriers with a focus on long-haul services such as Singapore Airlines and Asiana Airlines reported lower passenger yields -- an indicator of profitability in the industry -- last year. Cathay's passenger yield was down 9% to HK$0.54 for flying a passenger per kilometer, its lowest levels since 2009.

Describing the recent restructuring exercise as "unconvincing," Aziz said in a separate note: "The management is sidestepping the inevitable which is to downsize the business materially... In the airlines industry, sometimes you have to be brutal in order to be kind."

Speculation is also rife that Air China, which owns a 30% stake in Cathay, would acquire the latter. "There is no truth in this room about [the takeover]," said Slosar, stressing that it would not happen any time soon.

Asia300

Cathay Pacific Airways Ltd.

Hong Kong

Market(Ticker): HKG(293)
Sector:
Industry:
Transportation
Airlines
Market cap(USD): 6,029.39M
Shares: 3,933.84M
Asia300

Swire Pacific Ltd.

Hong Kong

Market(Ticker): HKG(19)
Sector:
Industry:
Producer Manufacturing
Industrial Conglomerates
Market cap(USD): 14,442.67M
Shares: 3,900.42M
Asia300

Air China Ltd.

China

Market(Ticker): HKG(753)
Sector:
Industry:
Transportation
Airlines
Market cap(USD): 17,944.02M
Shares: 14,524.81M
Asia300

China Eastern Airlines Corp. Ltd.

China

Market(Ticker): HKG(670)
Sector:
Industry:
Transportation
Airlines
Market cap(USD): 12,154.61M
Shares: 14,467.58M
Asia300

China Southern Airlines Co. Ltd.

China

Market(Ticker): HKG(1055)
Sector:
Industry:
Transportation
Airlines
Market cap(USD): 10,512.62M
Shares: 9,817.56M
Asia300

Singapore Airlines Ltd.

Singapore

Market(Ticker): SES(C6L)
Sector:
Industry:
Transportation
Airlines
Market cap(USD): 8,566.43M
Shares: 1,199.85M

Asiana Airlines, Inc.

South Korea

Market(Ticker): KRX(020560)
Sector:
Industry:
Transportation
Airlines
Market cap(USD): 926.49M
Shares: 205.23M

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