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Asia300

Cathay's full-year loss doubles as margin pressure continues

Overcapacity in passenger market behind first back-to-back loss in over 70 years

Cathay Pacific aircraft at Hong Kong International Airport (Photo by Shinya Sawai).

HONG KONG -- Cathay Pacific Airways continued to bleed cash last year, accumulating losses for the second year in a row due to competition putting pressure on margins as the airline goes through a three-year restructuring program. The net loss for the year ended in December more than doubled to 1.25 billion Hong Kong dollars ($160 million), from a loss of HK$575 million in 2016.

This is the first time the Hong Kong flag carrier has seen two consecutive years of losses in its more than seven decades of operations.

Revenue for 2017 rose 4.9% to HK$97.2 billion, helped by a strong recovery in the cargo business, backed by trade growth. But it did not help to increase margins on the passenger side of the business, amid intense price competition. Passenger yield per kilometer, a key measure of airline profitability, fell 3.3% from a year earlier. The yield declined across the board, from short haul to long haul, but was particularly weak on Cathay's Australian and North American routes.

"Overcapacity in passenger markets led to intense competition with other airlines," Cathay said in a press release.

Fuel expenses, the largest cost component for the carrier, increased 27% as the oil price rose.

However, there are signs of a recovery. On a half-yearly basis, Cathay returned to profit in the second half of 2017. The airline booked HK$792 million of net profit for the July-December period, after recording a HK$2.05 billion loss in the first half. "The trend of the second half of the year was better than the trend of the first half," partly due to the better market conditions and partly as a result of the transformation program, Slosar said. "[The trend] continued for the first couple of months [of 2018]."

The cargo business was a bright spot in 2017, driven by an improvement in global trade and e-commerce demand growth. The revenue from cargo increased 19.1% from the previous year, and yield rose by 11.3%. Taking advantage of the turnaround in market conditions, Cathay plans to make cargo carrier Air Hong Kong its 100% subsidiary by acquiring the remaining 40% it does not own from DHL International at the end of this year.

"I am looking at Cathay returning to the black in the current financial year, underpinned by a recovery in passenger yields. A weaker Hong Kong dollar will help in terms of inbound foreign currency yields," K Ajith, Asia transport analyst of UOB Kay Hian, said.

As Cathay tries to cement its path to recovery, market watchers are waiting to see the outcome of its restructuring, which it embarked on the first half of 2017. The Hong Kong flag carrier aims to cut HK$4 billion in costs over three years. "Evidence of progress became apparent in the second half of the year," Slosar said in a letter accompanying the financial results.

While Cathay booked HK$830 million disposal gains from the sale of investments, the airline also had to bear HK$224 million in redundancy costs related to management and leadership changes.

There was still much to do over the next two years, Slosar told a press briefing on Wednesday evening. Cathay plans to grow its capacity by 3 to 4% per year until the third runway at Hong Kong International Airport is completed by 2030. Adding capacity without hurting the yield is a difficult challenge that many Asian airlines have been facing.

Competition is coming from all directions, including growing airlines from China and the Middle East, as well as low-cost airlines creeping into the long-haul markets. While many regional peers including Qantas Airways and Singapore Airlines are riding on the LCC wave through their own low-cost subsidiaries, Cathay is keeping its distance from this segment. Asked if setting up an LCC was a consideration, chief executive Rupert Hogg only said that the focus remained on growing Cathay Pacific and its regional subsidiary Cathay Dragon.

All market watchers are waiting to see the outcome of Cathay's restructuring, which it embarked on the first half of 2017. The Hong Kong flag carrier aims to cut HK$4 billion in costs over three years. "Evidence of progress became apparent in the second half of the year," Slosar said in a letter accompanying the financial results.

While Cathay booked HK$830 million disposal gains from the sale of investments, the airline also had to bear HK$224 million in redundancy costs related to management and leadership changes.

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