Transport Airlines

Gulf Carriers Cut Into Cathay Pacific’s Profitability

Aug 13, 2014 9:11 am

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Despite missing estimates, Cathay is still in a strong position, especially as it expands to Latin America.

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Cathay Pacific

Seat back entertainment in Cathay Pacific's Premium Economy section. Cathay Pacific


Cathay Pacific Airways Ltd., Asia’s biggest international airline by passengers, reported profit that lagged behind estimates as competition with Middle East carriers held down fares.

The net income was HK$347 million ($45 million) in the six months ended in June, Cathay said in a stock exchange statement today, compared with the HK$462 million median profit estimate in a Bloomberg News survey of eight analysts. The Hong Kong-based airline posted a profit of HK$24 million a year earlier.

Cathay’s yields, or price a passenger pays to fly one kilometer, are under pressure as Emirates and Etihad Airways PJSC challenge Asian airlines for premium international traffic with features such as showers and butlers. Chief Executive Officer Ivan Chu has ordered new planes and is increasing flights to the U.S. and Europe even as a weakness in the cargo market that started with the global financial crisis persists.

“Competition is likely to heat up,” said Geoffrey Cheng, head of transportation research at BOCOM International in Hong Kong, who recommends investors sell the stock. “Cathay had emphasized previously that yield pressure was pretty high.”

Cathay and its Hong Kong Dragon Airlines Ltd. carried 15.4 million passengers in the first half of the year, 6.5 percent more than a year earlier, helped by growing travel demand to Northeast Asia and North America. Cathay filled 83.6 percent of all seats, an increase of 2.3 percentage points, according to earlier stock exchange filings.

Airline Earnings

Global airline earnings are likely to generate net income of $18 billion in 2014, 70 percent higher than a year earlier, the International Air Transport Association said in June. Of the total, those in the Asia-Pacific region are expected to earn $3.2 billion this year.

“There’s been some improvement in demand both for cargo and passenger but at the same time there’s still a lot of capacity,” said Andrew Orchard, a Hong Kong-based analyst at CIMB Group Holdings Bhd. “In the second half, we will see more stability in demand and yields.”

Cathay is Asia’s largest international carrier, having moved 21.4 million passengers in all of 2013 while its regional rival Singapore Airlines Ltd. moved 18.7 million, according to IATA. Singapore Air, which was ahead of its Hong Kong-based competitor when it came to the distance flown by passengers, last month reported first-quarter profit dropped after yields declined.

More Flights

Cathay plans to increase passenger capacity by 8 percent this year, Chu said in March. The airline plans to start services to Zurich in March and to Manchester in December, after increasing flights to Los Angeles and Chicago earlier this year.

“They’ve increased their capacity to North America quite dramatically as they rebuild parts of the network that were cut in 2012,” said Timothy Ross, a Singapore-based analyst at Credit Suisse Group AG. “That process required the launch of promotional fares to fill those seats.”

Cathay plans to increase cargo capacity by 9 percent this year as it adds services to manufacturing hubs in inland China, Vietnam and Mexico. The airline will also add freighter services to Calgary, Canada in October and started flying to Mexico City in March.

Cathay, which is phasing out less fuel-efficient Boeing Co. 747-400s, retired five jumbo jets from its fleet last year and took delivery of 19 aircraft. The company had a total of 140 planes on its fleet at the end of December.

The airline became the first Asian buyer of Boeing’s new 777X jet for $7.5 billion in December. It ordered 21 of the larger -9 version to fly them to North America and Europe when they are delivered from 2021 to 2024.

The company said last week it invested in Fulcrum BioEnergy Inc. to help achieve its target of carbon-neutral growth from 2020. The airline also agreed to buy 375 million gallons of fuel, or 2 percent of its current fuel consumption, from the U.S. biofuel developer over a 10-year period.

To contact the reporters on this story: Kyunghee Park in Singapore at kpark3@bloomberg.net; Clement Tan in Hong Kong at ctan297@bloomberg.net. To contact the editors responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net. 

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