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Record loss for Cathay Pacific exacerbated by fuel hedges

Shares rise 12% as forewarned investors take red ink in stride

Higher charges to carry freight offset some of Cathay Pacific Airways' vanished passenger revenue in the first half. (Photo by Konosuke Urata)

HONG KONG -- Cathay Pacific Airways has reported a record net loss of nearly $1.3 billion for the first half of the year under the impact of the coronavirus pandemic which has grounded all but a small fraction of the group's passenger flights.

The carrier's 9.87 billion Hong Kong dollar ($1.27 billion) loss was aggravated by hedging contracts for fuel set when no one could have imagined oil futures trading at prices below zero. A year earlier, the company generated a net profit of HK$1.35 billion.

"The first six months of 2020 were the most challenging that the Cathay Pacific group has faced in its more than 70-year history," said Chairman Patrick Healy in a statement accompanying the results. "We do not expect to see a meaningful recovery in our passenger business for some time to come."

Revenue dropped 48.3% to HK$27.67 billion as higher charges to carry freight offset some of the group's vanished passenger revenue.

Investors, who had been warned of the impending loss in mid-July, took the loss in stride, pushing Cathay shares up 12% to HK$5.88 in trading on the Stock Exchange of Hong Kong.

"There is a feeling among investors that the worst is behind Cathay Pacific," said Kenny Wen, market strategist at brokerage Everbright Sun Hung Kai, noting market talk about COVID-19 vaccines and the opening of transfer connections to Chinese cities via Hong Kong International Airport.

Passenger revenue fell 72.2% in the half-year to HK$10.4 billion. Passenger yield, a measure of the average fare collected, managed to rise 1.1% to 55.5 Hong Kong cents even as the few passenger flights operating had more empty seats than usual. The group's full-service airlines, Cathay Pacific and Cathay Dragon, operated just 3% of normal capacity during April and May but that proportion is set to rise to 10% this month.

Still, Healy said that the group had moved a third of the passenger planes it had parked in Hong Kong to storage in Alice Springs, Australia, adding, "We are in discussions with other locations as well."

The company's cargo revenue rose 8.8% to HK$11.18 billion in the first half. Although the group's freight capacity was reduced by a nearly a third due to the grounding of passenger flights that normally carry about half of Cathay's cargo traffic, cargo yields rose 44.1% to HK$2.71 due to high demand. Air Hong Kong, the group's freight-only unit, turned a profit of HK$363 million, up 8.3%.

While the fall in fuel prices, as well as usage due to the grounding of many flights, generated a HK$8.97 billion benefit for Cathay overall, its bottom line would have fared better if not for previously arranged supply contracts set to hedge against the possibility of fuel inflation. Such contracts, tied to an average price for Brent crude of more than $62 a barrel and covering 40% of the group's normal consumption, inflicted a HK$1.6 billion loss on Cathay as Brent fell as low as $16.

Given the group's outlook for fuel consumption and prices in the July-September quarter, Chief Financial Officer Martin Murray told reporters that the group had recorded a HK$95 million charge in relation to fuel deliveries for that period but said that "we don't envisage future losses at this time" from hedging activity beyond this quarter. Added Healy, "We won't be adjusting the hedging policy," stressing that such contracts have helped the group to iron out fuel price volatility.

Cathay said its results reflected receipt of HK$1.06 billion in COVID-related aid from various governments as well as HK$2.47 billion in accounting charges related to 16 jets it now expects will not "reenter meaningful economic service again." Cathay shareholders last month approved a HK$39 billion bailout led by the Hong Kong government.

Hong Kong Express, the group's budget flight unit, incurred a loss of HK$779 million as it grounded all flights for half the period. The carrier resumed operations on Aug. 2, but public broadcaster RTHK reported Wednesday that two of its planes collided during a towing operation at Hong Kong.

Following reports that the owner of Donghai Airlines, a carrier based in the neighboring city of Shenzhen, had applied to start a new Greater Bay Airlines in Hong Kong, Healy said it was "great to see other people with confidence in the future of the Hong Kong aviation hub as much as we have."

Following Cathay's acquisition of Hong Kong Express last year, the group has just one locally based competitor, struggling Hong Kong Airlines.

Additional reporting by Narayanan Somasundaram

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