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Joseph Lo

Oil prices are again nearing record highs. That's a good reason to be pessimistic about the fate of the region's airline industry this year. Well, maybe.

Certainly, skyrocketing jet fuel prices have many airline sector analysts worried about the profitability of some of the  carriers that they cover.

Jet fuel on the Singapore market soared to nearly US$65 a barrel last week, compared with a recent low of US$46 in early January.

Below Deck spoke to several airline fuel experts in recent days and while they  offered hope of stabilised fuel price trends this year, no one was willing to stick his neck out and predict a drop in prices, given that black gold had become a popular speculative instrument for commodities traders.

A typical conversation with an airline analyst usually starts: 'Jet fuel. Big issue'. And then the remainder of the conversation quickly goes downhill from there.

But Cathay Pacific Airways' results this week showed that a rising fuel bill is no impediment to healthy, growing profits - especially if growth in demand is outstripping that of costs.

Cathay chief executive Philip Chen Nan-lok on Wednesday said that were it not for a  $2.6 billion jump in its fuel bill last year - a rise of about four percentage points  - the carrier would have reported another record year for net profit, beating the previous high of  $5 billion  in 2000.

Even so, the airline still reported a  $4.4 billion  net profit, a figure which handily exceeded the forecasts of nearly every financial analyst covering Cathay that Below Deck spoke to, save for two.

One of those two, Peter Negline from JP Morgan, was frank about the reasons why.

He said analysts had been expecting a strong year for Cathay, except their forecasts proved over-optimistic at the interim mark - Cathay reported interim earnings of  $1.77 billion, citing rising fuel costs as a major management concern. That figure was nearly 16 per cent below consensus expectations.

Most analysts then scrambled to lower their full-year profit forecasts for the carrier. At least nine banks that Below Deck talked to at the time slashed their profit projections by up to 25 per cent.

But what many analysts failed to factor into their forecasts was that demand for air travel and freight would continue to grow at phenomenal rates throughout the region.

Cathay carried a record 13.7 million passengers last year, a jump of 36 per cent, while setting a new high for cargo revenue of almost $10.6 billion.

For every passenger the airline carried  last year, it recorded about  $1,932.60 in revenue, up from  $1,855.35 a year  ago. And for every tonne of cargo carried,  it received  $11,687.18 in revenue, compared with  $11,329.14 previously.

It is also worth noting that Cathay recorded particularly strong second-half earnings, even as fuel prices peaked last year in the middle of  October.

High fuel costs are a burden for everyone in the global economy, not just airlines. But even with this burden, the mainland's external trade is still expected to grow strongly, along with the strong rebound in local consumer sentiment.

So there should be little reason for investors to believe that growth in demand for Cathay's services should slip this year.

Cathay is confident enough of its own prospects to be on the verge of a dramatic expansion in its mainland presence. It is also set to increase its fleet of jetliners to more than 110 aircraft over the next two years from   88 now.

One analyst yesterday asked Below Deck's opinion on whether Cathay could repeat last year's results. Our answer was quite simply: who are we to say no?



Cathay Pacific maintains expansion path despite rising jet fuel bill