Cathay Pacific rallies on analysts' optimism

Cathay Pacific's chairman John Slosar (right) and CEO Rupert Hogg at a conference in Hong Kong on Wednesday. The airline reported a net loss of HK$2.05 billion (S$360 million) for the six months to June.
Cathay Pacific's chairman John Slosar (right) and CEO Rupert Hogg at a conference in Hong Kong on Wednesday. The airline reported a net loss of HK$2.05 billion (S$360 million) for the six months to June.PHOTO: BLOOMBERG

Stock upgraded as worst may be over, even as airline CEO says it won't go budget route

HONG KONG • Shares of Cathay Pacific Airways rallied as brokerages from Daiwa Securities to Bank of America Merrill Lynch upgraded the stock on optimism that the worst may be over for Asia's biggest international airline, following its worst loss in about two decades.

The upbeat sentiment followed the assertion of chief executive officer Rupert Hogg that Cathay is not going to embrace the discount-fare revolution, undaunted by the worst half-year loss in at least two decades, declining passenger numbers and cheaper fares.

Instead, Mr Hogg said he planned to focus on better services such as new lounges in major airports, offering Wi-Fi on board planes, more dining options and self-check-in facilities to nurse the carrier back to financial health.

Cathay shares rose as much as 6.2 per cent to HK$12.42 in Hong Kong trading yesterday, after Bank of America recommended buying them, raising the stock from underperform, while Daiwa analyst Kelvin Lau upgraded his advice to hold from sell.

Although the second half will remain loss-making, "we believe losses have bottomed out as management forecasts passenger and cargo yields to sequentially improve", Jefferies analyst Andrew Lee said in a research note after Wednesday's earnings report.

Capa Centre for Aviation analyst Will Horton said: "The first half was an ugly combination of one-offs and non-structural costs. The good news is that the core airline operation, excluding fuel hedging, did surprisingly well, given even greater overcapacity in all long-haul segments."

The marquee airline had reported a net loss of HK$2.05 billion (S$360 million) for the six months to June, potentially putting it on course for the first back-to-back annual losses in its 70-year history.

Passenger yields continued to decline in the first half of the year, led by its services to North America and Europe, as discounts to help fill seats took a toll on the key metric of profitability. The measure - the money earned from carrying a passenger for 1km - declined 5.2 per cent to 51.5 Hong Kong cents, hovering around the lowest level since 2009, Cathay said in a statement on Wednesday.

"Broadly speaking, we have no plans to start a low-cost airline," Mr Hogg, 55, said on Wednesday. "But we compete with low-cost carriers on different routes and we have to have a proposition that price-sensitive travellers, new travellers and first-time travellers find attractive and prefer."

Analysts, including Ms Corrine Png, chief executive officer of Singapore-based Crucial Perspective, and Mr Shukor Yusof, founder of Endau Analytics in Malaysia, have said that Cathay needs to take a leaf out of rival Singapore Airlines' book and start a budget carrier, or turn its affiliate Cathay Dragon into one to keep a grip on Hong Kong passengers.

"They still believe they have this unique market position," Mr Shukor said about Cathay. "They don't realise that the way things were done doesn't work anymore. Their reluctance to change is very disturbing."

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on August 18, 2017, with the headline 'Cathay Pacific rallies on analysts' optimism'. Print Edition | Subscribe