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Cathay Pacific stays the course despite huge first-half loss

Carrier faces looming first consecutive annual loss, as fuel hedging cuts deep

Cathay Pacific Chairman John Slosar, center, delivers first-half earnings on Aug. 16. (Photo by Jennifer Lo)

HONG KONG -- Cathay Pacific Airways posted its worst first-half loss in nearly two decades on Wednesday, but Hong Kong's flagship carrier had no plans to dramatically change its strategy in fuel-hedging or to launch its own budget carrier to fend off competition.

The premium airline reported a net loss of 2.05 billion Hong Kong dollars ($262 million) in the first six months of this year, compared with a first-half profit of HK$353 million in the same period last year. Its revenue edged up just 0.4% at HK$45.86 billion in the first half from a year ago.

If the company is unable to recuperate those losses in the second half, it will be staring at its first back-to-back annual loss in 70 years of operation.

Cathay blamed intense competition, a capacity glut and higher fuel costs for its results. Its fuel hedging policy caused it to hemorrhage HK$3.24 billion in the period, although that was pared down from a HK$4.49 billion loss a year ago. It is hedging about 54% of its fuel consumption in the second half but will lower the proportion to about 26% next year.

"No new fuel hedging has been undertaken in two years now, but our historical hedging book ... will continue to exert substantial impact on our results through December 2018," said Cathay Chairman John Slosar at a briefing of the results, which were released nearly four hours behind schedule.

Slosar attributed the delay to a "longer-than-expected" board meeting held on Wednesday morning. "There was a lot to talk about," he said, denying speculation of another personnel reshuffle after Rupert Hogg was appointed to replace Ivan Chu Kwok-leung as chief executive in May.

Cathay is 30% owned by national carrier Air China, but ultimately controlled by conglomerate Swire Pacific which holds a 45% stake. Cathay denied that it had been approached by its third-largest shareholder, Kingboard Chemical, about plans to raise its 9% stake in the carrier.

Cathay also has no plans to launch its own budget airline for now. "I don't think passengers honestly care what your business model is," said Slosar, citing the example of Cathay's competition with budget carrier AirAsia in Penang several year ago. "At the end of the day, they were the one to leave the route and we stay on it."

"Just because we consider ourselves a full-service airline does not mean we can't compete with the so-called low-cost airlines. They may be low cost but they are not low price all the time," said Slosar.

Spreading its wings

Instead, Cathay is looking to expand its capacity by around 3% for the year. It recently added new services to Tel Aviv and Barcelona, and will begin flying to Christchurch in New Zealand from December. Some 52 aircraft will be added to its fleet between now and 2024. Cathay aims to introduce Wi-Fi on all its long-haul flights by 2020.

Paul Loo, Cathay's chief customer and commercial officer, noted an improvement in cargo revenue, which was up 11.7% in the first half, lifted by stronger exports and e-commerce demand. "We are confident that our second-half earnings will improve," he said, citing a pick-up in demand for long-haul premium seats. However, its passenger revenue fell 3.9% in the first half.

The latest results paint a grim picture for premium airlines like Cathay, which have lost market share to budget carriers in the short-haul market and to state-owned Gulf and Chinese carriers in long-haul routes. Cathay is also hurt by the demise of Hong Kong as a travel hub as there are now more direct flights between China and gateway cities abroad.

In March, Cathay posted a net loss of $575 million for 2016, its first annual loss in a decade and its third annual loss since 1946. The airline earlier announced 600 job cuts as part of a three-year restructuring plan, its largest in two decades. But redundancy payouts are estimated to reach HK$300 million for a potential saving of HK$500 million annually.

Analysts urged caution despite a recovering cargo business recently. "As revenue from the cargo operation has never surpassed 30% of total, the cargo operation improvement should have only offset the lackluster performance of passenger operation in a marginal fashion," wrote Geoffrey Cheng, a transport analyst at Bank of Communications International, in a note on Monday.

Eleven of the 16 analysts, including from BOCOM, polled by Thomson Reuters have a "sell" rating for Cathay. Only one has a "buy" recommendation on the stock, which closed 0.86% higher at HK$11.7 before the results were announced Wednesday. Cathay's shares have plummeted more than 40% since mid-2015.

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