Across The Border

Air China feeling the effects of Cathay Pacific’s travails

National carrier’s net profit drops 39.8pc to 1.5 billion yuan in the first quarter, which was in part blamed on its investment losses of 141.6 million yuan, the majority of which was from Cathay, of which it owns 29.99 per cent.

PUBLISHED : Monday, 08 May, 2017, 11:47am
UPDATED : Monday, 08 May, 2017, 10:09pm

The financial turbulence being felt by Hong Kong’s Cathay Pacific Airways has filtered into Air China, which has come in with losses of its own way below market consensus for early 2017.

The national carrier’s net profit dropped 39.8 per cent to 1.5 billion yuan (US$72.8 million) in the first quarter,which was in part blamed on its investment losses of 141.6 million yuan, the majority of which was from Cathay, of which it owns 29.99 per cent.

Cathay itself expectedly swung into loss of HK$575 million (US$73.8 million) in 2016 and has projected just as turbulent times ahead this year.

Cathay Pacific and Cathay Dragon carried a combined 2,851,661 passengers in March, 3.7 per cent fewer than March last year.

“We consider the result a slight miss on our expectations mainly due to losses at Cathay Pacific,” said Vincent Ha, an analyst at Deutsche Bank who maintains his “Hold” rating on Air China’s Hong Kong shares, but has a “Sell” rating on its A-shares, given their significant valuation premium over the H-shares.

“We are concerned about the earnings outlook of Cathay given the uncertainty of its ongoing restructuring,” added Ha.

The much-maligned carrier unveiled a three-year transformation plan in January to revive its business, investing in technology and a fuel-efficient fleet to save costs, while redeploying staff.

It also replaced chief executive Ivan Chu Kwok-leung, with chief operating officer Rupert Hogg, on May 1.

Removing its Cathay stake from the figures, Air China’s gross revenue rose an impressive of 9.8 per cent to 29 billion yuan in the first quarter, on the back of 7.8 per cent passenger traffic year-on-year growth.

“The airline’s passenger traffic outlook remains solid, given resilient demand, despite the concerns over Cathay,” added Ha, who still warned that earnings pressure from increasing jet fuel prices had lifting Air China’s operating expenses by 15.2 per cent in the quarter.

That rising oil price is also bothered China’s other major airlines.

Operating expenses at China Eastern Airlines, for instance, increased 14.7 per cent in the first quarter but the added cost was partially offset by its own annual growth in passengers.

But the company reported a 45.3 per cent decline in recurring pre-tax profit in the period, if the company strips out the disposal gain of 1.8 billion yuan, derived from transferring of Eastern Air Logistics to the parent.

Significantly the Shanghai-based airline has seen a robust 12.4 per cent increase in international passenger traffic, a major contributor to the 10.8 per cent rise in passenger numbers in the first quarter.

“Going forward, we expect that yield trend to improve, like some of its local peers just did, after attaining better-than-expected demand-supply trend.” said Ha.

“We also see upside potential from its low-cost carrier unit, China United Airlines, and contained foreign exchange losses due to lower US dollar debt levels.”

China eastern is better positioned given it operates from a Shanghai hub, and that’s likely to translate into an improvement in company’s long-term earnings outlook as visitors continued growing to the city, he added. It is also the launch customer for China’s home-grown C919 passenger jet, which made its long-awated maiden flight on Friday.

At the other end of the country, Guangzhou-based China Southern Airlines, Asia’s largest carrier, has just reported a 48 per cent collapse in operating profit to 1.8 billion yuan in the first quarter, again put down to rising operating expenses, mainly fuel costs.

“Air passenger traffic demand remains resilient amid a good macroeconomic backdrop, we are tuning up its [China Southern’s] estimated revenue for the coming year on slightly more optimistic yield expectation,” said Sun Fei, a research analyst from Deutsche Bank.

“However, we have cut our net profit estimates by 0.8 to 3.3 per cent mainly on higher cost assumptions.”

While reducing US dollar debt levels represents another positive to the airline’s outlook, Sun remains

cautious about increasing competition for the South east Asia, Australia and New Zealand routes from other airlines, and the consequent yield pressure on those routes.

Luo Laijun, acting director of Southern’s commercial steering committee, admitted recently it expects passenger yields on international routes to remain in decline this year because of fierce competition.

“The downside risks [on its performance] comes from slower-than-expected expansion of the international passenger business and a worse-than-expected impact from high-speed railway line launches in China,” Sun added.

Early last month , the carrier announced an increase in flights to the US under a code-sharing arrangement with American Airlines, its new minority shareholder, and the company said it would

operate more non-stop flights to the US as part of our cooperation with American Airlines.