Cathay Pacific reports interim loss

Eleanor Steed
By Eleanor Steed August 17, 2017 16:12

Cathay Pacific reports interim loss

Cathay Pacific has reported an attributable loss of HK$2,051 million for the first six months of 2017, which compares to an attributable profit of HK$353 million for the same period in 2016 and an attributable loss of HK$928 million in the second six months of 2016. The loss per share for the first six months of 2017 was HK52.1 cents compared to earnings per share of HK9.0 cents for the first six months of the previous year.

The Group’s passenger revenue in the first six months of 2017 was HK$32,105 million, a decrease of 3.9% compared to the same period in 2016. Capacity increased by 1.1%, reflecting the introduction of a route to Tel Aviv and increased frequencies on other routes. The load factor increased by 0.2 percentage points, to 84.7%. Yield fell by 5.2% to HK51.5 cents, reflecting intense competition in all classes and the adverse effect of the strength of the Hong Kong dollar on revenues denominated in other currencies.

John Slosar, chairman of the airline group highlighted “fundamental structural changes within the airline industry” that have continued to affect the operating environment for Cathay’s airlines and “created difficult operating conditions in the first half of 2017”.

Slosar cites factors including, intense competition, higher fuel prices (including the effect of its hedging programme), the adverse effect of the strength of the Hong Kong dollar on revenues denominated in other currencies, and higher aircraft maintenance costs. The results were also impacted by several special factors including the European Commission’s decision to fine the airline €57.12 million (equivalent to approximately HK$498 million) in relation to the alleged charging of cargo surcharge levels prior to 2007.

Although, the airline has made an application to the General Court of the European Union to annul the decision which led to the fine, the full amount of the fine has already been recognised.

A further special item is the dilution of Cathay Pacific’s share in Air China following the completion of the issue of 1.44 billion A shares that reduced Cathay Pacific’s shareholding in Air China was to 18.13% and a gain of HK$244 million was recognised on the deemed partial disposal. In April, Cathay Pacific disposed of its entire interest in Travelsky Technology Limited at a profit of HK$586 million.

In the first half of 2017, Cathay Pacific commenced a three-year corporate transformation programme intended to address the fundamental challenges that it is facing in the current airline industry environment. In May, as part of this programme, the group announced a reorganisation of its head office and the associated redundancy costs (HK$224 million) has been recognised in staff expenses.

Cathay is continuing with its three-year corporate transformation programme that seeks to achieve returns above the cost of capital and reduce its unit costs, excluding fuel, while at the same time seeking to strengthen the brand and maintaining high standards.

Cargo revenue improved, reflecting robust demand. Tonnage carried grew faster than capacity, and yield benefited from the resumption (from April) of fuel surcharges and improving demand for Mainland China exports. Demand for shipments within Asia was stronger and shipments on European routes grew. The Group’s cargo revenue in the first six months of 2017 was HK$10,515 million, an increase of 11.7% compared to the same period in 2016. The cargo capacity of Cathay Pacific and Cathay Dragon increased by 2.3%. The load factor increased by 4.0 percentage points, to 66.2%. Tonnage carried increased by 11.5%. Yield increased by 4.4% to HK$1.66.

Total fuel costs for Cathay Pacific and Cathay Dragon (before the effect of fuel hedging) increased by HK$2,871 million (or 33.4%) compared with the first half of 2016, reflecting a 31.5% increase in average fuel prices and a 1.6% increase in consumption. Fuel is the Group’s most significant cost, accounting for 30.4% of total operating costs in the first half of 2017 (compared to 29.1% in the same period in 2016). Fuel hedging losses were reduced. After taking them into account, fuel costs increased by HK$1,678 million (or 12.7%) compared with the first half of 2016.

There was a 2.8% increase in non-fuel costs per available tonne kilometre. Excluding fuel and one-off items, the increase was 0.5%. Cost savings offset higher aircraft maintenance, depreciation and finance costs.

Cathay has taken delivery of six A350-900s during the first six months of 2017 and another one in July. A further five aircraft are scheduled for delivery in 2017.

Cathay retired one Boeing 747-400BCF converted freighter aircraft in June and wet-leased two Boeing 747-8F freighters from Atlas Air Worldwide in the same month.

Slosar does not expect the operating environment in the second half of 2017 to improve materially and warns that the passenger business “will continue to be affected by strong competition from other airlines and our results are expected to be adversely affected by higher fuel prices and our fuel hedging positions”. He is more confident of the outlook for the cargo business, however, where the company expects robust demand and growth in cargo capacity, yield and load factor in the second half of this year.

Eleanor Steed
By Eleanor Steed August 17, 2017 16:12