Cathay Pacific has posted its first back-to-back full year loss since the airline was established in 1946 as intense competition hit the bottom line, including on its Australian routes where demand was weak.
The airline reported a net loss of HK$1.259 billion (A$04 million) for the 12 months to December 31 2017, a deterioration from a HK$575 million (A$93 million) loss in the prior year, representing Cathay’s biggest loss in nine years and only the fourth annual loss in its history.
Revenue rose 4.9 per cent to HK$97.284 billion, Cathay Pacific said in reporting its results on Wednesday afternoon.
Cathay Pacific chairman John Slosar said the factors that led to a second consecutive full year loss in 2017 was “largely the same as in 2016”.
“Fundamental structural changes within the airline industry continued to create a challenging operating environment for our airline businesses in 2017,” Slosar said.
“Overcapacity in passenger markets led to intense competition with other airlines and continued pressure on yields on many of our key routes.
“Fuel prices were higher.”
Further, Slosar said congestion at Hong Kong International Airport and air traffic control constraints in the Greater China region continued to impose costs on the airline group.
Cathay Pacific, 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.
In particular, the rapid growth of Chinese carriers on international routes has reduced the number of passengers from China transiting through Cathay’s Hong Kong hub.
And at the budget end, Asian-based low-cost carriers have won passengers happy to pay lower fares for a no-frills product on short- and medium-haul routes.
Further, the demand for premium corporate travel in business and first class, particularly on long-haul routes, has been patchy.
In response, Cathay Pacific, under chief executive Rupert Hogg, has embarked on a three-year transformation program that comprises a reorganisation of the business, hundreds of staff layoffs and other cost reduction efforts.
Slosar said transformation was aimed at making Cathay Pacific more consumer focused and responsive.
“Difficult but necessary decisions have been made,” Slosar said.
“We are improving our competitive position by expanding our route network, increasing frequencies on our most popular routes and buying more fuel-efficient aircraft.
“We have improved productivity and efficiency and at the same time we are improving our already high customer service standards.
“We are acting decisively to make Cathay Pacific and Cathay Dragon better airlines and stronger businesses. We believe we are on track to achieve strong and sustainable long-term performance.”
AUSTRALIA ROUTES WEAK
Cathay said the performance of its Southwest Pacific network, which covers Australia and New Zealand, was below expectations with demand weak.
“Increased capacity from Mainland China, Hong Kong and Australian carriers put pressure on yield and the number of transit passengers,” Cathay Pacific said, echoing the commentary from its 2017 first half results presentation in August 2017.
Cathay Pacific serves six points in Australia and two destinations in New Zealand with passenger flights. In addition to the growth in nonstop Australia-China routes, the airline also faced increased competition in the Australia-Hong Kong market after Virgin Australia introduced nonstop flights from Melbourne in July 2017.
Virgin Australia’s arrival put downward pressure on ticket prices between Australia and Hong Kong, with the new entrant offering sub-$400 sale fares shortly after entering the market.
And the pressure of Cathay Pacific’s Australian networks looks set to intensify later in 2018, with Virgin Australia due to start daily Sydney-Hong Kong nonstop flights with Airbus A330-200s from mid-year.
Cathay Pacific flies four times daily to Sydney with a mixture of Boeing 777-300ERs and Airbus A330-300s and recently flagged plans to boost capacity on the route with larger aircraft.
Cathay said passenger yields fell 3.3 per cent overall and were down in every market. The biggest declines were in North America, where yields tumbled 5.0 per cent.
Yields on Southwest Pacific and South Africa routes (which are grouped together in Cathay’s results presentation) dropped the second most, sliding 3.2 per cent.
CARGO A RARE BRIGHT SPOT
There was more encouraging news on the cargo front, with Cathay describing demand as “robust” in 2017 as the volume of freight carried grew faster than capacity. There were also strong cargo exports from Mainland China.
Revenue from Cathay Pacific’s cargo business rose 19.1 per cent in calendar 2017, while yields improved 11.3 per cent as the airline benefits from the growth in e-commerce.
On fleet matters, Cathay Pacific said as at December 31 2017 it had taken delivery of 22 Airbus A350-900s, with a further six more to join the fleet by 2020. Meanwhile, the airline expects to pick up eight A350-1000s in 2018, as well as two used 777-300s.
In terms of the outlook Slosar noted the benefits transformation program had begun to be felt in the second half of calendar 2017, with the loss from its Cathay Pacific and Cathay Dragon flying business “lower than those in each of the preceding half years”.
“We also look to benefit from a slowing of the decline in passenger yields as global economic conditions improve,” Slosar said.
“The outlook for our cargo business is positive and we will take best advantage of opportunities in the growing global cargo market.”