Cathay Pacific has launched a “critical review” and issued a profit downgrade as weak demand and intense competition from rivals eats into revenues and pushed down yields.
The company said in a statement to the Hong Kong stock exchange on Wednesday night the outlook had deteriorated since its August 17 results announcement, when Cathay said net profit for the six months to June 30 2016 slumped 82 per cent to HK$353 million.
“Overcapacity and strong competition is putting particular pressure on our passenger business, with continued shortfalls in revenue compared with forecasts and heavy pressure on yield,” Cathay said.
“Against this difficult revenue picture, we are engaged in a critical review of our business, the goal of which is to improve revenues and to reduce costs so as to maintain a strong financial position and to deliver acceptable financial returns.
“The review will consider all options for improving efficiency and productivity. At the same time, we understand the need to continue to invest in our businesses and to improve continuously the products and services which we provide to our customers.”
Cathay, and others, have battled the rapid international expansion of Chinese airlines and the ongoing rise of Middle East carriers offering long-haul to long-haul connections through their hubs which have bitten into previously lucrative markets. And in Asia, low-cost carriers have won passengers happy to pay lower fares for a no-frills product on short- and medium-haul routes.
Further, the economic slowdown – both in China and elsewhere – had led to a significant reduction in premium corporate travel in business and first class, particularly on long-haul routes.
In August, the oneworld alliance member said it had cut prices for business class travel in a bid to stimulate demand, with corporate travel originating in Hong Kong to destinations such as London and New York well below expectations.
Further, Cathay said the number of corporate travelers declined for the first time since 2009, when business was affected by the global financial crisis.
Since its market commentary in August, the challenging economic outlook has become worse, prompting Cathay to warn the market net profit for the second half of calendar 2016 would be below the HK$353 million in the first half.
“Against this background, it is no longer expected that the Cathay Pacific group’s results for the second half of 2016 will be better than those of the first half,” Cathay said.
Traffic figures for August 2016 showed the combined Cathay and Dragonair networks carried 2.98 million passenger in the month, a decline of 3.8 per cent from the prior corresponding period.
Load factors dropped 1.8 percentage points to 86.8 per cent, while capacity measured by available seat kilometres (RPK) was down 0.8 per cent.
Broken down by region, demand, measured by revenue passenger kilometres (RPK) fell most on Cathay’s India, Middle East, Pakistan and Sri Lanka routes, which were down 18.3 per cent in August compared with a year ago.
Meanwhile, the airline’s Mainland China network suffered a 5.6 per cent fall in RPKs for August.
Cathay chief executive Ivan Chu has flagged adding more seats on board some of its aircraft in an effort to improve returns and grow capacity at a time where takeoff and landing slots at the busy Hong Kong International Airport were scarce.
Chu told The South China Morning Post newspaper the airline planned to move to 10 seats per row on its Boeing 777 fleet, compared with nine across currently.
“If you look at the Boeing 777s, which everybody uses from the Gulf to the US to European carriers and ourselves, the standard is 3-4-3,” Chu told the newspaper.
“I think we are moving towards that stage, it’s very clear.”
“Slots are very scarce. We want to generate more seats per slot, that’s the key thing. That’s why we are doing it. It’s very important we do it.”
The airline has also ordered new generation aircraft such as the Airbus A350 and Boeing 777X that consume less fuel, fly further and are cheaper to maintain than the older aircraft they are replacing.