Cathay Pacific

Cathay Pacific racks up first back-to-back loss in 71-year history, at US$160 million 

Robust earnings from cargo unit and healthy contribution of profits from subsidiaries and associate businesses help offset steepest losses in 9 years

PUBLISHED : Wednesday, 14 March, 2018, 12:10pm
UPDATED : Thursday, 22 March, 2018, 2:23pm

Cathay Pacific Airways, Asia’s largest international airline, saw its net loss more than double to HK$1.25 billion (US$160 million) in 2017, marking the carrier’s first back-to-back loss in its 71-year history.

The poor performance was better than many had expected however, and signalled the business was on course to return to profitability, analysts said.

Robust earnings from Cathay’s cargo unit and a much larger contribution of profits from subsidiaries and associate businesses helped offset the steepest loss in nine years brought on by bad fuel hedging bets, one-off fines and redundancy costs.

Some analysts had estimated a net loss as large as HK$2.8 billion. The airline recorded a HK$575 million loss in 2016.

Excluding one-off gains and losses, the airline managed to record a second-half profit of HK$792 million, after a deficit of HK$2.05 billion in the first half of 2017. The latter half of the year is traditionally a stronger period.

Hong Kong’s largest airline is in the midst of a three-year restructuring exercise worth HK$4 billion in savings. That has meant 600 job cuts so far as Cathay responds to stiff competition and vigorous expansion among mainland Chinese and Middle Eastern airlines as well as low-cost carriers who are eroding its market share.

The airline said it had benefited in 2017 from the early fruits of its restructuring, a brisk cargo business, weaker currency and improved premium passenger demand.

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“We took decisive action through our transformation programme to make our businesses leaner and more agile,” Cathay Pacific chairman John Slosar said.

“Our focus in 2017 was on building the right foundations, structure and strategy to improve revenue and to better contain costs. Evidence of progress became apparent in the second half of the year.”

Slosar on Wednesday underlined his confidence in the airline’s restructuring and in its profitability for the first half of 2018. 

“The trends of the second half were better than the first half,” Slosar said. “It is always hard to say whether trends will continue but they continued through the first couple of months of this year.”

Focusing on the competition, chief executive officer Rupert Hogg was bullish on Cathay’s strategy. “We intend to grow. We’re ambitious,” he said. 

The airline plans to launch routes to seven new destinations in 2018.

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Not on the management’s agenda to boost competitiveness however was a merger or acquisition. Hogg batted off suggestions that Cathay buy into rival local carriers Hong Kong Airlines and Hong Kong Express, which are controlled by distressed Chinese conglomerate HNA Group and have billions of US dollars in assets up for sale.

Slosar has retained the chairmanship of Cathay Pacific despite being due to step down from roles at Swire Pacific and Swire Properties this summer. Swire Pacific is the largest shareholder in Cathay. But Slosar signalled he could also exit the airline role once the restructuring was complete. 

“I am staying on for a bit longer to at least see through the transformation programme. But after that there is no date fixed,” he said. 

Cathay Pacific and its regional airline Cathay Dragon carried 34.8 million passengers last year, down 0.1 per cent year on year.

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For 2017, losses associated with the airline’s core business grew by about a third to HK$4.3 billion. The firm managed to generate revenue of HK$97.2 billion, an expansion of 4.9 per cent, but it came as operating expenses increased 7.1 per cent to HK$101.3 billion. Profits from its associates and subsidiaries jumped 28 per cent to HK$2.6 billion.

A number of one-off factors affected the airline’s earnings including a HK$498 million fine from the European Commission and HK$224 million associated with redundancy payments.

But the airline booked gains of HK$830 million from the partial disposal and sale of assets.

Fuel costs, the group’s largest expense at 30.7 per cent of its total, jumped 27 per cent to HK$31.1 billion. This included a HK$6.3 billion loss arising from hedging contracts, although it was 25 per cent smaller than a year ago and was expected to shrink further in 2018.

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Passenger yield, a measure of how much an airline makes on air tickets, fell 3.3 per cent to 52.3 Hong Kong cents, as Cathay again faced overcapacity in key markets leading to “intense competition”.

Cargo yield jumped 11.3 per cent to HK$1.77, on the back of stronger demand.

Analyst Corrine Png, chief executive of Crucial Perspective, said: “Cathay Pacific was widely expected to incur a substantial loss so investors are encouraged that the airline actually made a profit in the second half of 2017.”

But she added that Cathay would “need to work harder at improving cost efficiencies to boost its long-term competitiveness and profit margins more significantly in 2018 and beyond”.

Geoffrey Cheng, deputy head of research at Bocom International, said the airline’s core loss-making business “was still a bit of an issue” but the results were “quite positive”.

Despite the poor performance, Cathay kept its full-year dividend unchanged at 5 cents per share. Losses per share more than doubled to 32 cents from 14.6 cents. 

Cathay Pacific shares closed flat at HK$13.78 on Wednesday, even trading as high as HK$14.22 after the results were made public.