Cathay posts big profit decline as premium demand dries up

written by australianaviation.com.au | August 17, 2016
A supplied image of Cathay Pacific's first A350's maiden flight. (Airbus)
Cathay has taken delivery of three Airbus A350-900s. (Airbus)

Cathay Pacific says a difficult operating environment due to economic fragility and intense competition is expected to persist for the rest of calendar 2016 after reporting a sharp decline in first half profit and fewer passengers travelling in its business and first class cabins.

The Hong Kong flag carrier said net profit for the six months to June 30 2016 tumbled 82 per cent to HK$353 million, compared with HK$1.97 billion in the prior corresponding period.

Revenue slipped 9.3 per cent to HK$45.68 billion, Cathay said in a regulatory filing in Hong Kong on Wednesday afternoon.

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Cathay said there was “sustained pressure” on revenues in the first half due to the suspension of fuel surcharges, weak currencies in some markets, weak premium class demand, particularly on long-haul routes, and a higher proportion of passengers transiting through Hong Kong.

As a consequence, yields – an industry term measuring revenue per passenger per kilometre – fell 10.1 per cent to HK54.3 cents in the half.

Cathay chairman John Slosar said the outlook for the period ahead was difficult.

“We expect the operating environment in the second half of the year to continue to be impacted by the same adverse factors as in the first half,” Slosar said in a statement.

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“We expect passenger yield to remain under pressure.

“In this difficult environment, we will manage capacity and strive to make further improvements in operational efficiency. We will also continue to be vigilant on costs.”

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 eaten 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 response, Cathay cut prices for business class travel in a bid to stimulate demand.

“Premium class yield and load factor were lower than in the first half of 2015,” Cathay said.

“Corporate travel originating in Hong Kong was well below expectations, particularly to London and New York. Numbers travelling declined for the first time since 2009, when business was affected by the financial crisis.

“We sold premium class tickets on a promotional basis to leisure travellers, in an effort to counter the shortfall in corporate travel.

The oneworld alliance member said demand on its Australian routes was “robust”. However, the recent increase in capacity from Chinese carriers and a lower Australian dollar put pressure on yields.

“Tourism from Mainland China to Hong Kong is weak,” Cathay said.

“To compensate, we have been trying to get passengers from Mainland China to connect through Hong Kong, with some success. Demand for connecting flights to Australia and North America was strong in the first six months of 2016.”

Cathay flies 74 times a week from Hong Kong to Australia, serving Adelaide, Brisbane, Cairns, Melbourne, Perth and Sydney.

Cathay said its total fuel cost fell 31.9 per cent to HK$13.26 billion in the half thanks to a 33.3 per cent decrease in the average price of oil. However, the full benefit of the lower fuel price was offset by losses from Cathay’s fuel hedging contracts.

The company booked a HK$4.49 billion fuel-hedging loss in the first half, larger than the HK$3.74 billion fuel-hedging loss a year earlier.

There were also pressures on Cathay’s cargo operation, where revenues tumbled 17.2 per cent to HK$9.42 billion, compared with the prior corresponding period due to “overcapacity and economic fragility”. Yields were also down, dropping 17.6 per cent in the half in response to “strong competition, overcapacity and the suspension of fuel surcharges.

“Demand on European routes continued to be weak and demand on transpacific routes weakened. India was one of the few routes where demand strengthened,” Cathay said.

“The Group managed freighter capacity in line with demand and carried a higher percentage of cargo in the bellies of its passenger aircraft.”

In terms of the fleet, Cathay said it expected to take delivery of nine new Airbus A350-900s between now and December. The airline picked up its third A350-900 in August.

Meanwhile, the remaining five A340-300s were scheduled to be completely withdrawn in 2017, while the last three Boeing 747-400 superjumbos were expected to be retired by October 2016.

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2 Comments

  • Stuart lawrence

    says:

    Cathy Pacific is a really good airline and flight to Paris was good on a 747 400. Maybe Cathy Pacific should drop Moscow flights as Russia would be a weak link in flights to Europe as Most European busines is done in Frankfort Zurich and London

  • Bob

    says:

    HK$4.49 billion fuel-hedging loss!!!! Holy crap!!!

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