Cathay refocuses as demand grows

Cathay Pacific Airways has reported an eight-fold increase in its first half profit and announced substantial new aircraft orders, as it concentrates its efforts on its core business.

1st Sep 2010


Cathay Pacific Airways, Hong Kong’s biggest airline, is refocusing its business on its core air transport and cargo activities as it enjoys a rebound in demand and surging profitability.


In early August, the carrier reported that its profit for the first half of the 2010 multiplied more than eight-fold to HK$6.84 billion (US$879 million), from a year-earlier result of HK$812 million. In the same period, passenger numbers rose 9 percent to 13 million and load factors increased 5.5 percentage points to 84 percent, as freight volumes jumped 24 percent.


The same day Cathay unveiled its triumphant financial results, the carrier announced that it had signed a letter of intent with Airbus to acquire 30 of the Toulouse-based manufacturer’s new A350 XWB twinjets, which the airline says will form “the backbone of Cathay Pacific’s future mid-size widebody fleet”. That came alongside a decision to exercise existing purchase rights on six Boeing 777-300ER aircraft.
“The total value of the intended aircraft purchases at list price is about HK$75 billion,” Cathay said. “This is a sum in addition to the significant investment Cathay Pacific will make between now and 2013 that includes aircraft already on firm order, the new cargo terminal at Hong Kong International Airport and enhanced products in the cabin and on the ground.”


The developments followed recent moves by the airline aimed at concentrating the company’s resources on its primary business. In June, Cathay sold its 15 percent shareholding in maintenance, repair and overhaul services provider Hong Kong Aircraft Engineering (HAECO) to its parent company Swire Pacific for HK$2.62 billion. A month earlier, the carrier sold its 10 percent stake in Hong Kong Air Cargo Terminals (HACTL) for HK$640 million.


Remarkable comeback


While these sales gave Cathay’s first-half results a boost, industry analysts still agree that the profit figure was a remarkable comeback. After all, the far weaker year-earlier result had itself only been achieved thanks to a HK$2.1 billion gain from fuel-hedging after revenue for the first half of 2009 plunged 27 percent.
This time, the carrier happily reported that earnings per share for the first six months of 2010 rose by a factor of 8.4 to HK173.9 cents as sales surged 33.7 percent to HK$41.34 billion.
“In the first half of the year the Cathay Pacific Group experienced a continuing and significant recovery in its core business following the extremely challenging conditions experienced for much of the previous year,” the airline said. “The turnaround in business that began in the last quarter of 2009 continued into 2010 and gained momentum. Both the passenger and cargo businesses of Cathay Pacific and [wholly owned subsidiary] Dragonair performed well with revenues continuing to increase despite uncertainty over the stability of the global economy.”
The carrier added that it will reward its staff by paying an advance profit-share in the form of an ex-gratia payment of 14 days’ salary to “all eligible members” of its workforce. “This is a down payment on the final share of profit that will be calculated on the basis of the full-year results for 2010,” Cathay said.
The carrier acknowledged a “marked improvement” in its passenger business compared with the 2009 slump, with revenue returning “to almost pre-financial crisis levels”. Economy-class load factors remained high, as they had been during much of last year, while yields increased.
Cathay said demand for more profitable business-class travel originating in Hong Kong showed a “sharp increase”, although “this was not matched by a comparable increase in demand for travel originating in other major cities”.

Passenger surge


The airline and Dragonair carried a combined total of 13 million passengers in the six-month period, up 8.5 percent from a year earlier. At the same time, capacity increased just 0.1 percent. Revenue from the passenger business jumped 25.7 percent year-on-year to HK$27.41 billion, while yields rose 17.5 percent to HK58.4 cents.
“Cargo business was very robust for the whole of the first half, with strong demand in all key markets,” the airline said.
Freight volumes in the first half increased 24.4 percent to 872,000 tonnes as load factor gained as much as 11.8 percentage points to a record 78 percent. Cargo revenue surged 63.1 percent to HK$11.84 billion with yields rising 36.1 percent to HK$2.26.
Fuel prices rose significantly in the period, gaining 51.1 percent from a year earlier. “Managing the risk associated with fuel price is a key challenge and objective,” Cathay said.
“The turnaround has enabled the Group to rebuild its balance sheet and strengthen its financial position, putting it in a better position to proceed with its core objectives of growing its airlines and further strengthening the position of Hong Kong as one of the world’s leading international aviation hubs,” the carrier said.
Cathay adds that its strategic partnership with Air China “continues to go from strength to strength”, with the February announcement of plans to form a new cargo joint venture using an existing subsidiary of the mainland Chinese airline, Air China Cargo. The venture is expected to begin operations in October, with Cathay Pacific directly owning a 25 percent stake, as well as funding an offshore trust, through a loan, that will take a further 24 percent. The remaining 51 percent will be held by Air China.
At the same time, the Hong Kong airline recommenced work in March on its own cargo terminal at its home base – a HK$5.5 billion project that the airline said will “enhance the competitiveness and efficiency of Hong Kong as an air-freight hub”.

Aircraft orders


The 30-unit Airbus order was for A350-900 versions of the planned widebody twinjet. The aircraft are to be delivered between 2016 and 2019.
The -900 offers a non-stop range of more than 8,000 nautical miles, enabling Cathay to operate the aircraft across its route network, “including on non-stop flights to Europe and North America”. The aircraft will be powered by Rolls-Royce Trent XWB turbofans and “will enable Cathay Pacific to benefit from the lowest operating costs of any aircraft in its size category,” the airline said.
Airbus Chief Operating Officer, Customers, John Leahy welcomed the order: “We are honoured that Cathay Pacific Airways, as one of the most prestigious and well-managed airlines in Asia has selected the all-new A350 XWB over the competitor’s offering. We are equally pleased to welcome Cathay Pacific as our first Chinese customer for the A350.”


Leahy added that the aircraft offers Cathay a “25 percent fuel-burn reduction”.


“The delivery schedule fits our requirements very neatly,” said Cathay Pacific Chief Executive Officer Tony Tyler. “The 30 new aircraft will be deployed to replace older aircraft and grow our fleet to meet the challenges of the future.”


The airline’s decision to exercise purchase rights on six General Electric-powered 777-300ERs, adding to the 30 already on firm order, comes “subject to the satisfactory outcome of negotiations” with Boeing, Cathay said. To date, 18 aircraft of the type have already been delivered to the carrier, with the remaining 12 due to arrive by 2013.


“Cathay Pacific will make the Boeing 777-300ER the backbone of its ultra-long-haul and long-haul fleet, chiefly serving destinations in North America and Europe with greatly improved operating economics compared to the older aircraft in its fleet,” the airline says.


The carrier now operates a fleet of 128 widebody aircraft, including 25 freighters.


Cautious optimism


Looking forward, airline Chairman Christopher Pratt said: “If present trends continue, we expect our financial results to continue to be strong in the second half of 2010. That said, conditions can change rapidly in the airline industry.”


Any further significant increase in fuel prices, or – as some economists fear – a ‘double-dip’ recession, would hurt Cathay’s results, “and very quickly so”, Pratt warned.


Still, the Cathay chairman added that the board remains confident in the long-term future of both the Group and Hong Kong itself – “one of the world’s great cities and a premier international aviation hub”.


Pratt’s cautious optimism is notably more restrained than the enthusiasm shown by some analysts in response to the results. Daiwa Capital Markets’ Kelvin Lau predicted that the airline is likely to achieve a record profit this year, even after subtracting exceptional gains.
"The robust rebound in earnings shows that a recovery of the industry is in place, supported not only by strong cargo demand but a gradual comeback of premium passenger air services," Lau said.
 

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