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Russell Barling

Airline shrugs off Sars outbreak to post impressive profit of $1.3b for year from loss of $1.2b in first half

Cathay Pacific Airways will launch  a daily direct flight to New York in July, as Hong Kong's biggest carrier looks to build on the aviation industry's  recovery from last year's devastating Sars outbreak.

Cathay, which on July 1 will become the only airline to offer a daily direct flight between New York and Hong Kong, revealed yesterday it had used a strong second-half performance last year to turn a $1.24 billion first-half loss into a net profit of $1.3 billion for the year, beating analysts' forecasts.

It recorded a net profit of $3.98 billion in 2002.

'It was remarkable turnaround,' Cathay chairman James Hughes-Hallett said. 'The first half was obviously incredibly testing, but because of the strong second half we've come through it in good shape.'

Mr Hughes-Hallett estimated the airline earned $2.5 billion in the second half, buoyed by the post-Sars release of pent-up demand and the success of city-wide marketing ventures such as the 'We Love Hong Kong' campaign.

Cathay's sales fell a comparative 10.6 per cent to $29.57 billion. Passenger revenue led the decline, falling 16.6 per cent year on year, but the overall result was supported  by a record year from its cargo division.

Nine analysts polled by the South China Morning Post predicted an average net profit of $991 million.

'Currency gains appear to be double what we were expecting,' an analyst for a European investment bank said. 'So there seemed to be a stronger non-operational component to earnings than we had factored for.'

Mr Hughes-Hallett offered a different take on how the analysts might have underestimated last year's earnings by an average  30 per cent, saying it appeared that people had 'underestimated the improvements we made on yield and the size of the contribution from our cargo business'.

Cathay carried a record 874,724 tonnes across its global network last year, generating $9.91 billion in sales, or 33.5 per cent of overall revenue.

The volume was achieved after a comparative 2.8 per cent expansion of its available tonne-kilometres, an industry measurement of capacity provided.

'The cargo market remained strong all year,' chief executive David Turnbull said.

'Even at the height of the Sars outbreak when some of our flights were operating with about 10 per cent passenger loads, the bellies were full, which is how we were able to keep operating those services.'

Peter Hilton, an aviation analyst for Credit Suisse First Boston, said the result was particularly impressive given that fuel costs had broached historic highs.

'What they achieved in local currency gains helped them to absorb  higher jet fuel prices,' Mr Hilton said.

'Operationally, it was a pretty impressive set of results.

'In the second half, they produced a profit not far short of their record. That is impressive considering we didn't see a full recovery in passenger numbers until later in the second half.'

Mr Hilton said the currency gains Cathay achieved from its hedging activities were  the 'prime driver of passenger yield'.

Passenger yields, or revenue per seat divided by kilometres flown, fell a little more than two cents, to 43.3 cents, in a year when the airline was forced to fly aircraft half-full for much of the second quarter.

The inauguration of the direct Hong Kong-New York flight will bump the carrier's services to twice daily on the route; it will continue a daily service which transits through Vancouver.

Mr Hughes-Hallett said Cathay could now 'confidently look forward to regaining the traffic pattern of the past few years', and said China might play a bigger role in  earnings this year.

'The big swing factors that would work in our favour are a calm global economy, a decrease in fuel prices and stronger loads from north Asia,' he said.

Cathay has applied to mainland aviation authorities for permission to launch thrice-daily services to Beijing and Shanghai, and thrice-weekly to Xiamen.

It  serves Beijing three times a week.



Cathay plans direct New York flights as recovery takes hold