Cathay Pacific posts second straight full year loss, says Australian routes weak

written by Gerard Frawley | March 15, 2018

Cathay Pacific Airbus A350-900 B-LRA arrives in Brisbane. (Lance Broad)
A Cathay Pacific Airbus A350-900 at Brisbane Airport. Demand on the airline’s Australian routes has been weak. (Lance Broad)

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 launched Melbourne-Hong Kong flights in July 2017 with Sir Richard Branson a special guest. (Virgin Australia)
Virgin Australia launched Melbourne-Hong Kong flights in July 2017 with Sir Richard Branson a special guest. (Virgin Australia)

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

Cargo was a rare bright spot for Cathay Pacific in 2017. The airline flies Boeing 747-8F B-LJM to Brisbane West Wellcamp Airport once a week. (Wellcamp)
Cargo was a rare bright spot for Cathay Pacific in 2017. The airline flies Boeing 747-8F B-LJM to Brisbane West Wellcamp Airport once a week. (Wellcamp)

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.”
Cathay Pacific will later in 2018 take delivery of its first Airbus A350-1000. (Cathay Pacific/Twitter)
Cathay Pacific will  take delivery of its first Airbus A350-1000later in 2018. (Cathay Pacific/Twitter)

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18 Comments

  • Scott

    says:

    Maybe boosting capacity and dumping when a new entrant enters the market is not the correct play. With Virgins arrival the upgrade on services from the “route optimised” 330’s to 777’s just to add seats and capacity due slot constraint m is partly to blame here. It’s self inflicted and we have seen it time and time again in the Australian Aviaiton market by large estabolished players over cooking capacity per flight when a new competitor ties to enter and get a small piece of the pie.

  • Adrian P

    says:

    The middle east hubs are more convenient for Europe.
    It is a long flight to London from Hong Kong.
    Perhaps they should look at hobbing for North America, Eastern Europe and Western China

  • Craigy

    says:

    Virgin can’t make money on the BNE – Pom route and blames QF and PX. CX sees weak demand on Aus routes and blames VA as a causal factor for lower profits. Maybe they should spend a bit of time looking at their product rather then blaming others.

  • Scott

    says:

    Please advise when Virgin as an established dominant carrier increased capacity by 25-75% on new entrant and then blamed weak loads and poor yield, PME is valid but not for this issue.

  • Arbeysix

    says:

    Scott: I think CX was planning to add capacity well before VA made its plans clear. I have flown CX regularly in and out of Australia for many years and the 330 loads were consistently high before the capacity increases associated with the 350 and 777 (which,incidentally, from an economic perspective have other benefits offsetting weakness in passenger loads). This has little to do with VA (who frankly lack any relevance whatsoever for most business travellers in and out of Asia) and everything to do with the rapid increase in city pairs added by Chinese carriers plus some seasonal weakness in demand which I have noticed in the past couple of months. Overall and despite these challenges I would say CX is still doing exceptionally well (see extensive coverage of yesterday’s results on FT, Bloomberg and other international sites) and will remain the preferred carrier of choice into Asia for many of us…

  • Lechuga

    says:

    I guess that’s what happens when you upgrade Melbourne from 3x daily A330-300s to 2x daily A350-900s and a 777-300er all in the space of about 8 months. Whilst another airline throws in an A330-200.
    The demand will pick up again, but will be a slow rise. They could probably do with a bit more belly freight.

  • Scott

    says:

    Lechanga your seeing what I’m seeing as well.

  • Australiana

    says:

    @Adrian P
    Hong Kong to London is a long flight and the Middle East Hubs are more convenient?
    Well Hong Kong to London isn’t as long as Australia to Dubai or Abu Dhabi..!
    No way would I ever subject myself to that.
    For my money, Hong Kong is infinitely better as a stopover destination.
    Cathay will bounce back.

  • Adrian P

    says:

    Melbourne to Hong Kong 9 hrs. 20 min Hong Kong to London13 hrs. 10 min
    Melbourne to Dubai 13 hrs. 20.min Dubai to London 8 hrs.
    I used to like the Melbourne-Singapore -Dubai-London route to stretch legs.
    As for stop overs Hong Kong, Singapore all good.
    London-Dubai- stop over Perth internal to Melbourne was pleasant.
    London-Broome-Melbourne would be good. Just build the airport to do it.

  • Craigy

    says:

    FlightGlobal is reporting that Cathay is about to commence changing the seating configuration of its B777 aircraft from 9 across to 10. Seat pitch 32″ and seat width of 17.2″ (was 18.1″). That should help fill the planes from Aus to Hong Kong!!

  • Arbeysix

    says:

    Craigy: This was announced a while ago. Sad but inevitable given configurations used by other 777 operators, Chinese and LCC competition etc etc

  • Siste Ma

    says:

    I am an avid loyal CX customer to date but recently service including food quality were bad. Just look at the uniform of the stewardess specially from their shoes alone the moral of employees are at the lowest. Compare the work attitude of flight attendants of SQ to CX and one can realize why CX is not on the top list of choices when choosing which airline to go. CX should get their act together.

  • Q

    says:

    it should be noted that HNA. a Chinese investment group which owns Hainan airlines, Hong kong airlines and a few others is running out of money fast and may be forced to sell some of its airlines or force them to cut back on launching new routes. another point which should be noted that alot of theses Chinese airlines launching new routes to secondary chineses cities have low load factors.
    Both of theses factors combined means Cathay should realisiticly be fine and should be able to keep expanding but might need to cut some costs where possible.

  • Australiana

    says:

    @Adrian P
    Flight time from Melbourne to Dubai is 14 hours. Longer from Brisbane and Sydney.

  • freedom flyer

    says:

    Interesting to read where load factors were and are high, but this has little to do with the economics of profitability. It is the YIELD the airlines earn from Passenger fares, and fares are really quite low these days. The airlines have a large amount of fixed costs where they have little room to act, but as fares become lower, the yields the airlines earn become less and profitability becomes more elusive. You can have a flight with a full load of passengers and that flight might still not make enough money to cover all the costs. With most Asian and middle east airlines being state owned, their costs are covered by their state owners, making it harder for non state own airlines to compete on a level field.

  • Craigy

    says:

    @abeysix I am aware it was announced sometime ago but my point was jamming more seats in the B777 isn’t going to bring more passengers

  • Bernard Beston

    says:

    Drop training of Cabin Crew and dont complain when service suffers. Fly inyo Brisbane at 11.30 pm when all publuc transport is gone. Whose going to spend $120 on a Taxi when other flight arrive when an $18 train is available. It’s just common sense and LOCAL Knowledge.

  • Neil

    says:

    Bottom line is if the product is not up to standard – which unfortunately Cathay’s is not, having experienced their product several times recently – people who regularly travel will go elsewhere – as I have.
    They used to have an excellant reputation for service – now sadly lacking compared to Singapore, Qantas, Emirates.

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