Cathay Pacific hurt by fuel prices

Rising fuel costs have taken their toll on Hong Kong’s Cathay Pacific Airways, which said in August that profit for the first half of this year fell 59 percent, in the wake of an exceptionally strong 2010 and despite rising passenger demand and increased revenue. Profit for the first six months fell to HK$2.81 billion (US$361 million) from a total of HK$6.84 billion in the same period of last year. Earnings per share fell 58.9 percent to 71.4 Hong Kong cents, while sales rose 13.2 percent to HK$46.79 million.

6th Sep 2011

In Focus

Cathay Pacific hurt by fuel prices

Despite rising revenue and passenger demand, Hong Kong’s largest airline has said its profit fell by more than half in the first six month of this year, writes Andrzej Jeziorski.


Rising fuel costs have taken their toll on Hong Kong’s Cathay Pacific Airways, which said in August that profit for the first half of this year fell 59 percent, in the wake of an exceptionally strong 2010 and despite rising passenger demand and increased revenue.
Profit for the first six months fell to HK$2.81 billion (US$361 million) from a total of HK$6.84 billion in the same period of last year. Earnings per share fell 58.9 percent to 71.4 Hong Kong cents, while sales rose 13.2 percent to HK$46.79 million.
“Revenues were boosted by the relative strength of a number of key operating currencies,” the airline says.
“In the first half of 2011, the core business of the group remained generally robust, following the very strong performance of 2010,” Cathay says. “The passenger businesses of both Cathay Pacific and [its subsidiary] Dragonair performed well, with strong demand for premium-class travel, despite economic uncertainty in some of the world’s major economies.”
Cargo performed “reasonably in the first quarter”, the airline says, but was weaker in the second quarter.

 Surging fuel costs

Surging jet-fuel prices had “a significant effect” on the carrier’s operating results, as fuel is the group’s biggest single cost. In the six-month period, fuel costs increased 49.5 percent compared with the same period of 2010 – an increase of HK$6.46 million.
“Managing the risk associated with fuel prices is a key objective and the group has a robust fuel-hedging programme in place,” Cathay says. “In the first half of 2011, hedging activities resulted in a realised profit of HK$962 million, with additional unrealised mark-to-market gains of [HK$1.2 billion] being recognised in reserves.”
Passenger revenue in the six months rose 15.9 percent from the year-earlier period, reaching HK$31.8 billion. At the same time, capacity increased 9.8 percent, while Cathay and Dragonair together saw an increase of 1.7 percent in passenger numbers, to a total of 13.2 million. With capacity outpacing demand, passenger load factors fell 4.7 percentage points as the airline filled fewer of its available seats. Nevertheless, Cathay says its yield rose 11.8 percent to HK65.3 Hong Kong cents.
“Load factors in economy class remained high, particularly on the North American and South-East Asian routes, while demand for premium-class travel remained strong and yields continues to increase,” Cathay says.
“However, the earthquake and tsunami in Japan in March resulted in a significant reduction in demand in one of the Group’s most important markets. By June we were seeing recovery on the Japan routes, though volumes remain well below those achieved before the earthquake and tsunami,” the carrier adds.

 Cargo dip

The Cathay Pacific and Dragonair cargo business performed “reasonably” in the first three months of the year, although there was a significant drop in demand from the carriers’ most important markets – Hong Kong and Mainland China.
In the first half, cargo revenue rose 7.7 percent from the same period of 2010, to HK$11.63 billion. Yield increased 7.1 percent to HK$2.42, while capacity was up 14.6 percent. Load factor fell by 9.6 percentage points to 68.4 percent.
Six new aircraft were delivered to the airline in the six-month period, with eight more expected in the second half. In March, Cathay announced plans to acquire 27 more aircraft – two Airbus A350-900s, 15 A330-300s and ten Boeing 777-300ERs. The same day that the airline released its first-half financial results, it revealed plans to acquire an additional four 777-300ERs and eight 777-200F freighters.
The latest 12 aircraft orders have a combined value at list prices of about HK$25.6 billion, but are being acquired “at a considerable discount, as is the usual practice in such transactions”, the airline says. Deliveries are scheduled between 2013 and 2016, and the aircraft are to be powered by General Electric GE90 engines.
Cathay Pacific already operates 22 777-300ERs on key long-haul routes. The latest purchase brings the carrier’s outstanding orders for the type to 28, with deliveries taking place up to 2015. By the end of the decade, the carrier plans to retire older aircraft in its fleet, including 21 Boeing 747-400s and 13 Airbus A340-300s. The retirements will take place as new-generation aircraft arrive, offering increased fuel efficiency and lower operating costs.
The Boeing 777-200F is a new aircraft type for the airline, and will replace older, less efficient 747-400BCF converted freighters. According to the airline, the 777-200F will burn 15 percent less fuel per payload tonne than a 747-400F over a 3,000nm trip, and 24 percent less than a 747-400BCF.
The new aircraft can fly 4,900nm with a full payload of 102 tonnes, and will be primarily used on regional and European routes, Cathay says.
“The Boeing 777-200Fs, together with the other new aircraft types, will provide us with exactly the right balance in our fleet portfolio through to the end of the decade, along with a more efficient and environmentally friendly operation,” says Cathay Chief Executive John Slosar.
With the latest order announcement comes a delay in the delivery of the carrier’s new 747-8F freighters. “Two are now scheduled to be delivered in September 2011, with three more arriving before the end of the year. However, the delivery schedule is still subject to final confirmation,” Cathay says.
The 747-8s offer a payload of almost 130 tonnes and will be used “almost exclusively on routes between Hong Kong and North America”, the airline says.
With the latest purchases, Cathay says it now has a total of 97 new aircraft – including 79 widebody passenger jetliners and 18 freighters – on its books for delivery up to 2019. The value of all these new aircraft is about HK$200 billion at list prices. Aside from the 28 777-300ERs, the orders also include 19 Airbus A330s, 32 A350-900s, ten 747-8Fs and eight 777-200Fs.

 Improving service

The company says it is continuing its “efforts to provide a better proposition for its customers”, strengthening its network improving products both on the ground and in the air. Cathay Pacific began flying to Abu Dhabi in June and will start Chicago services in September, adding frequencies to Milan, Paris, New York and Toronto, as well as on “a number of South-East Asian routes”.
At the same time, Dragonair has increased services to “a number of” cities in Mainland China. Cathay adds that its new Business Class product has been well-received by passengers and is now being offered on seven aircraft, while the carrier has also unveiled plans to introduce a premium-economy product (see box).
Separately, in a major development in the first half of the year, Cathay Pacific began a cargo joint venture with Air China in May. The venture operates from Shanghai under the Air China Cargo name and intends to “capture air-freight opportunities from the Yangtze River Delta region”, the airline says.
At the same time, Cathay says it is stressing its commitment to its home market by constructing a HK$5.5 billion cargo terminal at Hong Kong International Airport (HKIA).
“The airline has given its full backing to building a third runway at the airport to address the issue of capacity constraints, ensure the survivability of the Hong Kong economy and maintain Hong Kong’s position as Asia’s premier aviation hub,” the airline says.
Plans for the third runway have raised new environmental concerns among Hong Kong residents, and Cathay says it recognises the significance of this issue and “is playing an active role in the industry effort to reduce emissions and noise”.

 ‘More challenging’ 2011

Cathay Pacific Chairman Christopher Pratt says that 2011 is proving more a more challenging year than 2010, which was “exceptionally strong”.
“High fuel prices are increasing costs and recovering them through higher tariffs may affect demand,” Pratt says. “The outlook for the world economy is uncertain and a return to recessionary economic conditions would also affect demand and possibly average price levels.”
Strong performance by the airline last year enabled it to rebuild its balance sheet, Pratt continues.
“Our financial position is strong. We remain in a good position to deal with increased operating costs and the economic uncertainty with which we are faced, and to reinforce Hong Kong’s position as a leading international aviation hub,” Pratt says.
He describes current high fuel prices as “a reminder that we operate in a challenging and unpredictable industry and accordingly must continue to manage our finances prudently”.

 Cathay to introduce premium economy class

Cathay Pacific says it plans to introduce a premium-economy product on its fleet in the second quarter of next year.

In a statement on 29 August, Chief Executive John Slosar confirmed the launch of the new product and promised passengers that it would be “a real upgrade over economy” and that they would get a high-quality product for the additional cost.

Slosar said the new product would be introduced on all of Cathay Pacific's long-haul routes, ultra long-haul services to Europe and North America, and medium-haul routes down to Australia, the Middle East and other destinations.

According to Slosar, the airline's new product will be much better than regular economy seats.

“The seat will be more like a regional business class seat. We’ll have great recline and plenty of leg space," the Cathay CEO said. “But it’s not just the seat, we’ll have an improved service as well. The meal service will be improved and little extras will leave anyone who chooses Cathay Pacific’s premium economy feeling they really got value for their money.”

Slosar said the airline was now convinced that premium economy is becoming a standard product everywhere.

"And certainly, as a standard product, Cathay Pacific will want to offer it and we’ll want to do a really good job of it. Starting second-quarter next year we will offer a premium-economy product in our aircraft,” he said.

The new product will be installed on the fleet “at the same time as we install the new Business Class seats,” Slosar said. “We’ll be doing all this quite quickly, although it will still take most of 2012 before it is on most of our aircraft.”


Asian Aviation at a glance