Cathay Pacific

Cathay Pacific to reassign jobs, review business to reverse earnings slide

Airline’s shares rise to a three-month intraday high ahead of its business review, where it’ll add services to Barcelona and Tel Aviv

PUBLISHED : Monday, 16 January, 2017, 7:32am
UPDATED : Monday, 16 January, 2017, 2:22pm

Cathay Pacific Airways will re-evaluate and reassign jobs to match a new digital focus during this week’s business review, part of the strategy to reverse a three-year earnings slide and revive one of Asia’s worst-performing airline stocks of 2016.

Hong Kong’s biggest airline will make “the right long-term decisions” to prepare it and its Cathay Dragon unit for a “challenging and competitive environment ” in 2017, chief operating officer Rupert Hogg said.

Cathay’s business had deteriorated for three consecutive years even amid falling jet fuel cost, missing earnings estimates and posting HK$13 billion in hedging losses over 18 months. This has prompted the airline to halve its fuel hedging period during in response to the losses.

The carrier does not expect 2017 to be easier, as disruptions to the geopolitical order in Europe and US may hamper global commerce, causing passenger and cargo traffic to dwindle. That will force Cathay to slash costs while finding new revenue sources.

The need for efficiency is only becoming more urgent, as global airlines are likely to suffer an earnings slump in 2017, their first industry decline in six years as higher oil prices erode their margins, according to a December forecast by the International Air Transport Association (IATA) forecast. Net income for the world’s carriers is expected to fall 16 per cent to US$29.8 billion, IATA said.

“If our cost base is too high, we’ll have to find ways to be more productive and more efficient,” Hogg said in an interview with the South China Morning Post, aheadof the much-anticipated review. The airline needs to “become more agile and efficient in dealing with challenges ahead.”

Cathay’s shares rose as much as 3 per cent on the Hong Kong exchange to an intraday high of HK$10.86, the highest intraday level since October 11.

Cathay will “rethink its workforce,” reassigning staff from some outdated roles into new jobs that are better aligned with a “digital focus,” while “never saying never” to redundancies, he said.

The airline had been on the wrong side of the oil hedge, even amid plunging jet fuel cost, with HK$13 billion of hedging losses in 18 months, HK$8.4 billion alone in fiscal 2015.

They have to be less reliant on feeder traffic across the region, and be a real local-centric Hong Kong airline

The airline “won’t hedge as far forward as we have in the past,” Hogg said, cutting Cathay’s fuel hedging programme to two years, from four.

A review of Cathay’s jobs or hedging may not be enough, as the airline must examine its entire business model and address its cost structure, said Maybank Kim Eng’s analyst Mohshin Aziz.

The airline’s management is “stuck at a crossroads,” said Mohshin, who has a “hold” recommendation on the stock. “They just have to be a smaller airline. They have to be less reliant on feeder traffic across the region, and be a real local-centric Hong Kong airline.”

Each of the 19 investment analysts covering Cathay Pacific has either a “hold” or “sell” recommendation on the stock, according to Bloomberg’s data.

Cathay’s margins have been eroded by competition from low-cost carriers and a glut of low fares from airline rivals gnawing away at its customer base, while fewer of the airline’s own customers were willing to pay for premium tickets.

The time is ripe for Cathay’s management to reconsider creating a low-fare airline to compete on regional routes, as the market’s trend continues to pivot toward frequent leisure travel, at low fares, said BOCOM International Holdings’ head of transportation and industrial research Geoffrey Cheng.

“People are looking for low fares from airlines to take them all over the world,” Cheng said. “It’s the market’s development and Cathay noticed that, but they have not been responsive.”

Tourist arrivals to Hong Kong shrank 4.5 per cent in 2016, the biggest annual fall in 13 years since the city was ravaged by the 2003 SARS outbreak. Declines among mainland Chinese visitors fell almost 8 per cent, the biggest contributor to the overall drop.

Still, Hogg found reason for optimism, expanding the airline’s route network with three new destinations — including Barcelona and Tel Aviv — this year, investing in new lounges for premium travellers in Singapore and Hong Kong, while reaffirming a multibillion capital expenditure programme.

“I am confident we have the right strategy going forward to allow the Cathay Group to survive and thrive, and we have a lot of good things going on,” said Hogg, a 30-year veteran at the carrier. “At the end of the day, it all comes down to the customer and we have to focus on developing things that they value and making sure we deliver it and they choose us above the alternatives and we are never complacent about that.”

The airline will take delivery of a dozen next-generation Airbus A350 planes this year, part of a 48-aircraft order in a contract valued at HK$124 billion at list prices.

Cathay Dragon is also close to firming up a deal to renew its entire line-up of 23 narrow body aircraft.

Will Horton, from CAPA Centre for Aviation, agreed that the airline needed to shrink.

Across the region, new capacity production continues – everyone is looking for payback at some point in the distant future, not this year or next,” Horton said.

”Overcapacity multiplies the individual problems.”