Cathay Pacific

Cathay Pacific may report 2016 profit slump amid sluggish fares

Net income may slump 89 per cent while sales decline 9.8 per cent, according to a Bloomberg survey of 18 analysts

PUBLISHED : Sunday, 12 March, 2017, 4:21pm
UPDATED : Monday, 13 March, 2017, 2:28pm

Cathay Pacific Airways is likely to face continuing headwinds in the form of weak demand for business-class travel, rising competition and a softening economy, according to analysts.

The emerging picture added up to one of deflation with the airline likely to face downward pressure on fares over the early part of 2017, said Joe Liew, a research analyst at Deutsche Bank, who recommended that investors “sell” the company’s shares, downgrading his previous view, saying there was “no need to own this stock”.

Deutsche Bank said data it had monitored since October showed Cathay’s fares on most routes had been flat or falling.

“We focused on fares for January to April 2017 as there was little change in the further-dated fares,” Liew said.

Hong Kong’s main carrier may report an 89 per cent slump in 2016 net income to HK$668 million on the back of a 9.8 per cent decline in revenue to HK$92.29 billion, according to a Bloomberg survey of 18 analysts. Cathay reports earnings on Wednesday.

Deutsche Bank said the outlook for passenger yields was negative, noting that figures for the first half of 2016 were at the lowest level since 2009.

Passenger yields refer to how much an airline can charge a single passenger per mile flown. The measure is useful in assessing general trends in fare structures and can help determine how profitable airlines will be in future.

Cathay chief executive Ivan Chu recently cited concerns over structural challenges in the aviation market.

“All the good work in 2016 was overshadowed by one of the most severe business challenges we have faced in recent memory,” Chu was cited as saying in a staff newsletter.

“We have seen our revenue come under pressure before, but what we are experiencing now is different. There is a clear indication that we are seeing structural changes in the industry, and not just a cyclical downswing. The changing competitive landscape is going to require us to do things in a different way. 2017 is going to be a challenging year.”

As part of a restructuring announced earlier this year, Cathay said it would reassign employees, phase out redundant operations and consolidate core functional activities. It plans to implement key changes by the middle of the year in what is believed to be the airline’s broadest organisational revamp for more than 20 years.

“We have not made any changes to our 2017 expense estimates since Cathay will incur restructuring expenses and key changes will be effective by mid-2017,” HSBC analysts Jack Xu and Parash Jain wrote in a recent report. “With the backdrop of macro weakness and overcapacity in the region, there is not much Cathay can do to generate more revenue.”

HSBC forecast Cathay would report negative return on equity in 2017 to 2018. The brokerage maintained its recommendation that investors reduce their holdings in the airline because of a muted outlook in 2017 and 2018.

Intense competition from mainland Chinese airlines is expected to further add to the woes facing Cathay.

Mainland airlines were expected to boost passenger capacity by 8.2 per cent in 2017 from a year earlier, much of which would go, at least among major players, towards expanding their international route networks, Xu said. He added that Shenzhen’s airport had started to record higher international flight traffic.

However, HSBC said adding more seats into long-haul economy-class configurations would improve Cathay’s competitiveness and help offset the slowdown in business travel.

Cathay has said it plans to add more seats to its aircraft in an effort to generate more revenue amid slot scarcity in Hong Kong. The airline’s fleet of Boeing 777-300 aircraft are likely to be among the first to receive new seat layouts that boost capacity.

“Upon completion, the move could add at least 3 per cent more seats annually without additional aircraft,” Xu said.