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Cathay Pacific sees 'incredibly challenging year' from coronavirus

2019 results top bearish forecasts despite Hong Kong protests

HONG KONG -- Cathay Pacific Airways has beaten analysts' bearish expectations by posting a net profit of 1.69 billion Hong Kong dollars ($217.5 million) for 2019 despite headwinds from prolonged social unrest in its home market of Hong Kong and the U.S.-China trade war.

Chairman Patrick Healy, however, said he expects Cathay will "incur a substantial loss" in the first half of 2020 under pressure from the new coronavirus outbreak, which has led it to slash three-quarters of its passenger flights for March and April. He said the airline will further adjust schedules "week-to-week... [to] make agile decisions."

Cathay filled only around half its seats with paying passengers in February, versus 82.3% for 2019 as a whole. New daily bookings have dropped to around 15,000-16,000 from a normalized level of about 90,000 amid the airline's flight cutbacks and governmental travel restrictions, Healy said.

"We are facing an incredibly challenging year ahead," said Healy, who took on the chairman's role last November after an exodus of top executives following tensions with Chinese regulators over the airline's handling of staff participation in antigovernment protests.

"It is difficult to predict when these conditions will improve," he said. "Travel demand has dropped substantially and we have taken a series of short-term measures in response."

To cope, the airline asked staff to take three weeks' unpaid leave and put a freeze on hiring. It is also seeking discounts or extended payment schedules from suppliers.

Following Cathay's update, analyst Ivan Su of Morningstar said he now expects the airline to post a loss of HK$1 billion this year, assuming travel demand slowly picks up in the second half of 2020.

Cathay on Wednesday acknowledged that one of its flight attendants had had a positive preliminary test for the COVID-19 virus. The attendant and her colleagues from a flight between Madrid and Hong Kong have been taken off duty for monitoring.

The airline said Wednesday that it would not pay a year-end dividend, after giving stockholders 20 Hong Kong cents a share a year ago. Cathay shares are down 11.6% so far this year, despite rising 3.1% after the company's financial update.

Cathay recorded a net profit of HK$344 million in the second half of 2019, usually its better half due to holiday passenger and cargo demand, compared to a profit of HK$1,347 million in the first half. For the year as a whole, profit declined 27.9% from 2018.

Analysts had on average expected the airline to report profit of HK$1.38 billion, according to FactSet, but some were far gloomier given the carrier's previous warnings about slackened demand.

Andrew Lee of Jefferies, for example, had put likely profit at HK$387 million but he indicated in a research note Wednesday that Cathay's pricing power proved more resilient than expected, particularly with fliers. Passenger yield, a measure which balances ticket receipts against distances flown, declined 3.9% while the airline's cargo yield declined twice as much.

Luya You of Bocom International said the airline's forceful cost-cutting measures and careful capacity management had also helped it to beat expectations.

Cathay, Asia's biggest carrier of cargo, is now poised to benefit as freight demand looks to rebound faster than passenger demand.

"We are cautiously optimistic about cargo following the recent reduction in U.S.-China trade tensions and we have maintained our cargo capacity intact," Healy said. However, while its freighter services are still running normally, the drastic cuts to the airline passenger flights has reduced overall cargo carrying capacity by a third.

Consequently, the airline is using some passenger planes solely to carry freight, said Ronald Lam, who took over as chief customer and commercial officer last August, alongside new Chief Executive Augustus Tang. Short-term demand for cargo space has resulted in "double digit" improvements in yields, officials told analysts in a private briefing Wednesday afternoon.

Cathay last year benefited from falling fuel prices, with its overall fuel costs falling 12% even as its consumption grew 1.7%. Kelvin Lau of Daiwa Capital Markets projected that Cathay could incur HK$2.4 billion of losses this year on defensive supply contracts linked to oil prices of more than $60 a barrel but concluded that it would still come out ahead from recent steep decline in oil prices.

For 2019 as a whole, Cathay's showcase brands -- Cathay Pacific and Cathay Dragon -- turned a profit of just HK$241 million. The balance of the company's profits came from other group companies and associates, including cargo carrier Air Hong Kong and an 18.1% stake in mainland flag carrier Air China.

Hong Kong Express, a budget carrier that Cathay acquired control of last July from troubled HNA Group, posted a loss of HK$246 million after the purchase, frustrating Cathay's profit expectations for the new affiliate.

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