Swire Group

Costs, weak demand dent Cathay profits

PUBLISHED : Thursday, 15 March, 2012, 12:00am
UPDATED : Thursday, 15 March, 2012, 12:00am

Cathay Pacific Airways posted a 61 per cent dive in full-year earnings and will slash capacity on its European and Middle Eastern routes in what it says will be a challenging year ahead.

Net profit fell to HK$5.5 billion last year - about 10 per cent below the market's expectation - from HK$14.05 billion in 2010, driven by high fuel costs and weak cargo demand.

The results are in line with that of other airlines. Air France-KLM recently posted a US$1 billion full-year loss, while Singapore Airlines recorded a 53 per cent plunge in earnings for the December quarter from a year ago.

Cathay's profit decline also reflects impairment losses booked for older aircraft which have been put up for sale by Cathay and Air China, its associate.

The carrier said it intended to keep passenger capacity growth below 7 per cent this year by retiring older aircraft.

It is due to take delivery of 10 passenger aircraft this year.

It will add capacity in the Southeast Asia and North Asia markets, where demand remains robust. However, its Middle East service would be cut to 21 flights a week from 25, said Ivan Chu, Cathay's chief operating officer.

Chu said cargo capacity at the world's largest cargo airline was flat in the first two months of this year compared to last year. But Cathay was still targeting 17 per cent full-year growth this year, he said.

John Slosar, Cathay's chief executive, remained cautious about the cargo outlook this year, despite signs of a recent rise in demand.

He said cargo orders were made on short notice, making it harder to predict than the passenger business.

Despite softness in the cargo business, Cathay's HK$5.8 billion cargo terminal would open as planned in the first quarter of next year.

'The new terminal will significantly increase the efficiency for transshipment cargo, which is very vital for our operation in Hong Kong,' said Chu.

Excluding year-ago exceptional gains from the sale of Cathay's stakes in Hong Kong Air Cargo Terminals and Hong Kong Aircraft Engineering Company, net profit slumped 50 per cent last year, the carrier said.

However, revenue rose 9.9 per cent to HK$98.4 billion. Analysts say the market has yet to reflect the full impact of high fuel prices.

'We believe the market is behind the curve with respect to the increase in oil prices, and the dominant theme after the results should be lower earnings revisions by the market as new oil price assumptions get baked into estimates,' Tim Bacchus, aviation analyst for CCB international, wrote in a report.

Singapore Kerosene spot prices stood at US$137.30 per barrel yesterday, easing from a 10-month high of US$137.80 on March 9, compared with an average US$113 last year.

Cathay said it had an active hedging policy to mitigate the impact of rising fuel prices - the carrier's single largest expense, comprising 44.1 per cent of operating costs last year.

It said it had hedged for 20 per cent of fuel usage this year.

Gross fuel costs climbed 44 per cent, or HK$12.5 billion, last year from 2010. Cathay said it had realised a gain of HK$1.18 billion from hedging, with another HK$436 million in unrealised mark-to-market gains.

Passenger revenue increased 14 per cent to HK$67.8 billion as passenger traffic rose 3 per cent. Cargo revenue edged up 0.3 per cent to HK$26 billion.

Cathay shares fell more than 3 per cent after posting the result yesterday. The stock closed down 2.82 per cent at HK$15.14.


The number of aircraft Cathay Pacific and its mainland-focused unit Dragonair operated as of the end of last year