Cathay Pacific first-half profit slumps 82%, missing estimates

 An aircraft operated by Cathay Pacific Airways Ltd., taxis along the tarmac at Hong Kong International Airport in Hong Kong, China, in November 2014.
An aircraft operated by Cathay Pacific Airways Ltd., taxis along the tarmac at Hong Kong International Airport in Hong Kong, China, in November 2014. PHOTO: BLOOMBERG

HONG KONG (BLOOMBERG) - Cathay Pacific Airways, Asia's biggest international airline, reported first-half profit that missed analyst estimates after posting losses from jet-fuel hedges and passenger yields declined amid competition with Chinese carriers.

Net income in the six months through June fell 82 per cent to HK$353 million (S$61.2 million), Cathay said in a statement on Wednesday (Aug 17). That fell short of the HK$1.07 billion median estimate in a Bloomberg News survey of four analysts. Sales declined 9.3 per cent to HK$45.7 billion.

Cathay chief executive officer Ivan Chu has struggled to revive profitability at the marquee Hong Kong carrier as passenger yields - the money earned from carrying a passenger for one kilometer, and a key measure of an airline's profitability - slumped again amid competition with Chinese and Middle Eastern airlines. Chu, who has stuck with the airline's fuel-hedging policy amid the plunge in oil prices, has ordered more than US$10 billion in new aircraft to take on rivals.

"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," Cathay chairman John Slosar said in the statement. "We expect passenger yield to remain under pressure. The benefits from lower fuel prices will continue to be partially offset by losses on our fuel hedging contracts."

Shares in the airline fell 1.6 per cent to HK$12.66 as of the midday trading break in Hong Kong, extending the slump this year to 5.7 per cent.

Cathay reported a HK$4.49 billion in fuel-hedging loss in the first half, smaller than some analysts estimated, and compares with the HK$3.74 billion loss a year earlier. Passenger yields fell 10 per cent to 54.3 Hong Kong cents.

Cathay is among airlines that didn't benefit fully from the drop in oil prices as the level at which it has hedged is higher than the spot market price.

Cathay said in March that 60 per cent of its fuel needs this year is hedged at an average US$85 a barrel. Brent crude now trades at about US$48.57 a barrel. Rival Singapore Airlines hedged 37.5 per cent of its fuel needs in the July-September period at an average US$81 a barrel, compared with 42 per cent at US$87 in the April-June quarter.

Cathay will have "a hard time" for the next two to three years because of its fuel hedging, John Hu, an analyst at Morningstar Investment Service in Shenzhen said Aug. 8.

Cathay and its unit Dragonair carried 2.7 per cent more passengers in the first six months of this year, taking the number to 17.2 million. Traffic during the period rose 2.3 per cent from a year ago, while capacity increased 4.2 per cent.

Cathay's yields have been under pressure as Air China, China Eastern Airlines and other carriers offer more direct services from the mainland, making it less attractive to hop via Hong Kong. That's coming at a time when the Middle East's 'Big Three' - Emirates, Etihad Airways and Qatar Airways - expand more into Asia and offer luxuries such as butlers and shower rooms.

Chinese carriers have added 25 per cent to 30 per cent more direct international flights so far this year, Eric Lin, an analyst with UBS Group in Hong Kong, said Aug 9. That compares with a 2.6 per cent increase for Cathay during the same period, according to the company's June operations statement.

Cathay Pacific also faces other challenges. The Hong Kong city administration scrapped a fuel surcharge starting February and is now imposing a levy to finance a third runway at the Chek Lap Kok airport. Authorities have started imposing a fee of between HK$70 and HK$180 per passenger who fly out of Hong Kong for the HK$141.5 billion expansion of the airport.

While these fees won't have a significant direct impact on Cathay's financials, it limits an airline's ability to raise fares and will put pressure on yields, K. Ajith, an analyst at UOB Kay Hian Pte, said before earnings.

Also, the Hong Kong airport plans to increase parking and landing fees by as much as 27 per cent for airlines starting Sept 1. The fees in the territory account for about 10 per cent of Cathay's total costs, CIMB Group Holdings said in June.

Hong Kong aviation authorities told airlines to remove fuel surcharges from Feb 1, cutting Cathay's ticket prices by 6 per cent to 7 per cent, which is a "disaster" for the city's flag carrier given its fuel-hedging policy, according to a CIMB note dated June 25.

Airlines charged HK$109 for long-haul and HK$24 for short-haul flights from Hong Kong before the levy was eliminated, according to the Civil Aviation Department.