Cathay Pacific

Cathay Pacific’s loss narrows to US$33 million as rising costs hamper its turnaround

But Hong Kong’s flag carrier saw 15.7 per cent growth in revenue driven by strong earnings in its cargo business and an ability to charge passengers more

PUBLISHED : Wednesday, 08 August, 2018, 12:26pm
UPDATED : Wednesday, 08 August, 2018, 11:47pm

Cathay Pacific Airways narrowed its losses to HK$263 million (US$33 million) in the first half of this year but it continued to grapple with rising costs, especially from fuel, according to financial results released on Wednesday.

Higher expenses overshadowed the group’s improvement in revenue, which grew 15.7 per cent to HK$53 billion on the back of strong earnings from its cargo business and an increase in airfare prices.

Cathay Pacific, one of Asia’s largest airlines, is midway through a three-year cost-cutting exercise to remove HK$4 billion from its books.

Higher fuel costs to drag Cathay Pacific’s earnings as Hong Kong carrier presses on with cost-cutting to return to profitability

But its overall costs still rose 8.5 per cent to HK$53.3 billion in the first six months of the year.

Every expense item in its financial report grew compared with the same period last year, with fuel costs rising 7.4 per cent, airport landing and parking fees up 18.4 per cent and aircraft maintenance up 5.2 per cent.

In the same period last year, the airline recorded its highest loss in a decade of HK$2.05 billion. Late last week, estimates four analysts gave to the Post ranged from a HK$1.8 billion loss to a HK$154 million profit.

In a note to shareholders on Wednesday, John Slosar, the airline’s chairman, said the operating environment for it and its sister carrier Cathay Dragon “remains challenging”.

But he signalled a positive picture for the rest of the year, saying the airline’s turnaround was “on track” and while there was more to do, he was “confident in [the] future”.

He said: “Our airlines usually perform better in the second half of the year than in the first half of the year. We expect this to be the case in 2018.”

Cathay Pacific passengers to be squeezed into smaller seats but at least the screens are bigger

The first-half loss is still likely to be a disappointment for Rupert Hogg, the airline’s CEO, who has been leading a restructuring of the business.

Hogg took over the reins last May and has since cut jobs and pledged to raise productivity. He has also rapidly expanded the business to fend off competition by launching almost a dozen new routes and upgrading the airline’s offerings, which has also contributed to an increase in costs.

At a press briefing on Wednesday afternoon, the airline said it would hire more than 1,800 people this year to fuel its further expansion, up from the 1,200 it announced earlier.

Corrine Png, CEO of transport research firm Crucial Perspective, agreed with Cathay Pacific’s decision to spend more to meet the ever-increasing needs of its customers, so they would fly more with the airline, particularly with 40 per cent of passenger revenue coming from the front end of the plane.

“This bull market strategy works well when times are good, for example in the first half of this year,” Png said. “However, the key risk to this strategy is that if the global macro environment turns sour, Cathay may not have the pricing power to pass on these higher costs.”

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

Asked about the affect of the US-China trade war at a press briefing, Hogg said there had been no immediate impact detected on the airline’s buoyant cargo business – where revenue rose to an all-time high, up 23 per cent on the same period last year.

But he suggested there was limited room to raise airfares further. Passenger yields, a measure of how much an airline makes on air tickets, rose 7.6 per cent to 55.4 Hong Kong cents in the first half of this year.

“The market sets the price of airfare ultimately,” Hogg said.

At least two analysts though pointed to a change in global accounting standards this year, which made the airline’s numbers look healthier.

Without the accounting change, the core airline business, excluding subsidiaries and associates, would have recorded a loss of HK$1.8 billion excluding one-off costs, according to its financial statement. With the change, the figure was HK$904 million.

“The financial results were bumped up by a number of accounting changes and favourable foreign exchange movements. If not for these, the [business] actually incurred a much larger adjusted loss,” said Png.

“[Cathay Pacific] didn’t provide a rebased number … But on a comparison basis, it’s not correct,” said Geoffrey Cheng Bok-hoi, Bocom International’s deputy head of research.

Still, they said they were encouraged by the airline’s growth. Most analysts expect Cathay Pacific to turn a full-year profit.