ArrowArtboardCreated with Sketch.Title ChevronTitle ChevronEye IconIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailPositive ArrowIcon PrintSite TitleTitle ChevronIcon Twitter
Business

Cathay Pacific hit by belt-tightening amid tough competition

Cathay Pacific Chairman John Slosar, second from right, and Chief Executive Ivan Chu, second from left, at an interim earnings briefing on Aug. 17. (Photo by Jennifer Lo)

HONG KONG -- Hong Kong-based Cathay Pacific Airways is the latest victim of belt-tightening as a result of China's slowdown and global economic uncertainty, amid fierce competition with carriers in the region.

"Companies need confidence to invest in travel to develop their business. As long as there is uncertainty and they are not sure, cutting down on travel is something they can do," said Chairman John Slosar. He was referring to global uncertainties arising from the U.K.'s late June referendum decision to leave the European Union and recent terrorist attacks.

"As the premium end of the market has always been a great strength for Cathay Pacific... it's not a good trend for us," he said, adding that he did not foresee a "fundamental shift" in the operating environment in the second half of the year.

Slosar's negative outlook came as the carrier posted worse-than-expected results on Wednesday. Net profit plunged 82.1% to $353 million Hong Kong dollars ($45.5 million) in the six months ended in June, missing analyst estimates of HK$1 billion. Revenue fell 9.3% to HK$45.7 billion on the year.

Without issuing an official profit warning, Cathay revealed last month that its first-half performance would be below market expectations.

Falling oil prices offered little relief, owing to the carrier's hedging policy that locks in fuel prices for the future. Cathay's hedging losses climbed 20% on the year to HK$4.49 billion, but the carrier said it would maintain its hedging position, citing the volatility of oil prices.

Cathay also pointed to a slowdown in corporate travel that had hurt demand for premium class seats, especially on long-haul routes. Revenue generated from two of its premium markets, in Hong Kong and the U.S., contracted for the first time since 2009 on a year-on-year basis. In a move to boost sales, the airline offered a 30% promotional discount in May for passengers to upgrade to business class during peak travel periods in July and August.

"We've seen softer traffic demand with customers trading down from front-end to back-end, from long-haul to short-haul, and there is a lot of capacity in Asia," said Cathay's Chief Executive Ivan Chu.

Cathay has faced rising competition from rivals such as Air China, China Eastern Airlines and Middle East carriers like Etihad Airways, which have all expanded their trans-Pacific services and added new routes in the region.

JP Morgan maintains an "overweight" rating for Cathay, but has raised red flags for the company. "We remained concerned about increased competition risks from low-cost carriers in the North Asian markets longer term, which may cap Cathay Pacific's valuation in a cyclical recovery, as happened to Singapore Airlines in 2004-2006," noted JP Morgan transport analyst Corrine Png.

Cathay's shares are trading at a low price-to-book ratio of around 1, close to its historical average valuation since 1998. The shares fell 7.3% to HK$11.9 after the results were announced on Wednesday, after losing 11% since the start of the year, against the Hang Seng Index's 4% gain.

In an attempt to cut costs in the second half, Cathay said it would stop hiring non-critical staff, including back-office workers, but stressed that it had no plans to lay off staff and lower its service quality. The carrier announced this week it would allow an extra 10 kilograms for check-in baggage for passengers across all classes on its flights from September.

"What we are not doing is to cut customer-facing costs -- all costs related to service and catering... We are investing in our aircraft, new destinations, non-stop service [and] lounges," Chu said.

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this monthThis is your last free article this month

Stay ahead with our exclusives on Asia;
the most dynamic market in the world.

Stay ahead with our exclusives on Asia

Get trusted insights from experts within Asia itself.

Get trusted insights from experts
within Asia itself.

Try 1 month for $0.99

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this month

This is your last free article this month

Stay ahead with our exclusives on Asia; the most
dynamic market in the world
.

Get trusted insights from experts
within Asia itself.

Try 3 months for $9

Offer ends July 31st

Your trial period has expired

You need a subscription to...

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers and subscribe

Your full access to the Nikkei Asian Review has expired

You need a subscription to:

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers
NAR on print phone, device, and tablet media