Cathay Pacific Stock Drops on Unexpected First-Half Loss

Cathay Pacific Airways Ltd. (293), the biggest international air-cargo carrier, fell the most in about three months in Hong Kong after posting an unexpected loss on a freight slump, higher fuel costs and waning premium travel.

The airline swung to a first-half loss of HK$935 million ($121 million) as it carried 10 percent less cargo and suffered from wider losses at a freight venture with affiliate Air China Ltd. (753) Volumes have fallen because of slower global trade and competition from fast-growing Middle Eastern airlines.

“Cargo is really bad,” said Jim Wong, a Hong Kong-based transport analyst at Nomura Holdings Inc. Earnings “may recover in the second half as cost pressures will be eased by lower fuel prices and cargo may pick up for the traditional peak season.”

The Hong Kong carrier, which forecast “disappointing” first-half earnings in May, slid 4.3 percent to close at HK$12.36. Part-owner Air China dropped 4.3 percent. Cathay, which also holds a stake in Beijing-based Air China, has dropped 7.2 percent this year, compared with an 8.85 percent gain for the city’s benchmark index.

The airline won’t pay an interim dividend after an 18 Hong Kong cents payout a year earlier. In May, it stopped hiring ground staff, offered cabin crew voluntary unpaid leave and pared capacity growth to help pare costs.

Cargo Slump

Cathay’s first-half cargo revenue fell 7.6 percent to HK$11.9 billion. It filled 64.3 percent of freight space, down 4.1 percentage points from a year earlier, even after cutting capacity.

The carrier made a loss of HK$300 million from its stake in Air China Cargo, Finance Director Martin Murray said at a Hong Kong press briefing. It also had a smaller gain from its Air China stake, according to the statement. The company’s total earnings from all of its affiliates slumped to a HK$167 million loss from a HK$861 million profit.

“The combination of very, very high fuel prices and generally weak revenues is a big challenge for every airline in the world,” Chief Executive Officer John Slosar told reporters. Cargo is always “very volatile” and will eventually rebound, he said.

Scrapped Plane

The company also booked a HK$247 million loss from scrapping a freighter as it phases out older Boeing Co. (BA) 747-400 aircraft for more-fuel efficient models. Cathay is selling four 747-400 passenger planes converted into freighters to Air China Cargo. Two more have been parked.

Cathay saw “poor” demand on North American and European routes because of the economic slowdown. Airlines shifting planes from these routes also created more competition in stronger markets, such as India, it said.

Emirates and other Middle East carriers are also winning a larger share of the cargo market as they add more planes and take advantage of hubs well placed for trade between Asia, Europe and Africa. Airlines in the region boosted freight traffic 15 percent in the first half, compared with a 2.6 percent drop in the overall market and a 7 percent decline for Asian carriers, according to the International Air Transport Association.

Cathay’s total first-half sales rose 4.4 percent to HK$48.9 billion. It was expected to make a profit of HK$490 million based on the average of four analyst estimates compiled by Bloomberg. Net income was HK$2.8 billion a year earlier.

Premium-class seat sales were hit by economic concerns, which deterred businesses from buying tickets, Cathay said. Corporate-travel demand from Hong Kong declined, hitting revenue on flights to cities including Singapore and New York, it said.

Hong Kong Airlines said today that it will halt an all- business-class service to London next month.

Fuel Costs

Cathay’s fuel costs, excluding hedging, rose 6.5 percent from a year earlier because of increased consumption and higher prices. Realized fuel-hedging gains fell 59 percent from a year.

The carrier has hedged 37 percent of its fuel requirements for the second half after taking advantage of a dip in prices in June, said Murray. It has also covered 27 percent of 2013’s fuel needs. He didn’t say at what price the carrier has hedged.

Maintenance expenses rose 24 percent from a year earlier in the first half to HK$4.6 billion. The carrier was hit by a spike in shop visits for engines on its 747-400s, Slosar said.

Higher Yields

Passenger yields, a measure of average fares, rose 1.2 percent including fuel surcharges. Yields, excluding surcharges, dropped less than 10 percent, Slosar said. The cheaper fares helped Cathay and unit Hong Kong Dragon Airlines Ltd. boost traveler numbers 8.6 percent to 14.3 million. The airline filled 80.1 percent of seats, an increase of 0.8 percentage points.

Singapore Airlines Ltd. (SIA), which has taken similar cost- cutting steps, posted a loss in the three months ended March followed by a better-than-expected increase in profit in the quarter to June.

Cathay also today agreed to order 26 Airbus SAS A350-1000s. The deal, which was provisionally announced last month, comprises 10 new aircraft orders and the conversion of 16 previous orders for smaller A350-900s.

The carrier had a fleet of 181 planes at the end of June, including a venture with DHL. It has firm orders for another 92. A total of 10 new planes will arrive in the second half.

To contact the reporter on this story: Jasmine Wang in Hong Kong at Jwang513@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

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