Cathay Pacific Airways Ltd. Chief Executive Officer John Slosar told staff the carrier was facing a “very challenging year” and must reduce expenses as cabin crew seek above-inflation raises.
“We must tackle our cost base where we can,” Slosar wrote in the Hong Kong-based carrier’s in-house magazine, without specifically mentioning labor costs. New cost-cutting measures include banning spending on festive gatherings, scrapping a management conference and cutting entertainment expenditure to a “bare minimum,” according to another article on the same page.
Slosar highlighted a rise in fuel prices that has made actual fuel costs 6 percent higher than expected, along with a decline in fares and a cargo slump caused by the economic slowdown. The airline, which had a first-half loss, has this year quickened the retirement of older planes, grounded freighters and offered cabin crew unpaid leave to cut costs.
“Cathay’s business will not be pretty this year,” said Kelvin Lau, a Hong Kong-based Daiwa Securities Group Inc. analyst. “It’s watering down expectations from both employees and investors by issuing this update.”
The airline dropped 0.6 percent to close at HK$13.88 in Hong Kong trading, reversing gains of as much as 1 percent in the morning session. The carrier distributed the article as a trading update via the exchange during the lunchtime break.
Cathay Pacific Airways Flight Attendants Union earlier this month requested a 5 percent wage increase for next year. Hong Kong’s consumer prices were 3.8 percent higher than a year earlier in October.
The union is in pay talks with Cathay, General Secretary Tsang Kwok-Fung said by phone. He didn’t comment on Slosar’s article. The group represents over 5,800 cabin crewmembers, according to its website.
Actual fuel costs have been about 6 percent higher than expected, Slosar said. That would have caused the carrier to exceed its high fuel budget by HK$2.5 billion ($323 million) if it had done nothing, he said. The airline offsets at least some of the higher costs through hedging and surcharges.
The airline is also facing higher charges in areas including airports, catering and groundhandling, Slosar said. Chief Operating Officer Ivan Chu is overseeing a cost-cutting drive, which also includes strict enforcement of a headcount freeze and further restrictions on travel.
Average fares have fallen by 4 percent from last year because of competition and slower demand, Slosar said. Top corporate customers in the finance industry have cut flying by more than 15 percent over the past two years.
“Many airlines are facing similar challenges and the competition for passengers is even more intense than usual,” Slosar said. This is “a very challenging year,” he said.
Cargo sales are down about 13 percent from last year, and freight will probably account for “well below” the almost 30 percent of total revenue it can generate in good years, Slosar said. The carrier has begun tests on a new cargo terminal in Hong Kong that’s due to open early next year, according to the magazine.
Singapore Airlines Ltd. earlier this month said it will park one of its 13 Boeing Co. 747 freighters for more than a year to cut capacity after losses at its cargo unit. The carrier had a smaller-than-expected profit in the quarter ended September.
Cathay Pacific is following Singapore Air in retiring its 747-400 passenger fleet. The Hong Kong carrier is replacing its jumbo jets with 777-300ERs, which are more than 20 percent more fuel efficient than the older 747s. The full benefit will not be realized until 2014 because of delivery schedules, Slosar said.
The airline lost HK$935 million in the six months through June, its first half-year loss since 2008. The carrier will post a full-year profit of HK$1.4 billion, based on the average of nine analyst estimates compiled by Bloomberg.