Cathay Pacific Is the World’s Least-Favorite Airline Stock

Why Analysts Are Cutting Their Recommendations for Cathay
  • Company has lowest analyst ranking among global peers
  • Stock has fallen to a record low versus the Hang Seng Index

Cathay Pacific Airways Ltd. has collected an unwanted title.

Equity strategists have less enthusiasm for the carrier than any other member of the Bloomberg World Airlines Index, according to a ranking of analyst ratings. Cathay shares have tumbled 11 percent this month, falling to a record low versus Hong Kong’s Hang Seng Index on Aug. 22, as brokerages including Credit Suisse Group AG cut their recommendations on the stock.

Asia’s biggest international carrier posted an 82 percent drop in first-half net income as losses from fuel hedging mounted and passenger yields -- the amount earned by carrying a person per kilometer, and a key metric of profitability -- slumped to their lowest in seven years. Rising competition from Chinese airlines and capacity constraints at Hong Kong’s airport are denting the outlook for Cathay Pacific, according to UBS AG, the top forecaster for the stock over the past year.

Cathay Pacific’s passenger yield faces a "multi-year” decline, said Eric Lin, a Hong-Kong based analyst at UBS, who predicts the company’s shares will fall a further 3 percent in the next 12 months. "We turned very cautious on Hong Kong as a transit hub since the second half of last year.”

There are nine sell ratings on Hong Kong-based Cathay Pacific, eight neutral recommendations and two buys, according to analysts tracked by Bloomberg, giving it a score of 2.26 out of a maximum 5. That’s the lowest among the 27 companies on the Bloomberg World Airlines Index that have ratings. Delta Air Lines Inc. has the highest score of 4.73.

Cathay Pacific shocked investors on Aug. 17 when it reported net income in the six months to June fell to HK$353 million ($46 million), compared with the HK$1.07 billion median estimate in a Bloomberg News survey of four analysts. The stock fell 12 percent in two days, their biggest loss since 2008. The shares dropped 0.4 percent on Tuesday, even as the Hang Seng Index climbed 0.9 percent.

Cathay Pacific declined to comment on its stock price and consensus rating. Hong Kong-based conglomerate Swire Pacific Ltd. is the largest shareholder with a 45 percent stake.

Passenger yields declined 10 percent to 54.3 Hong Kong cents as an economic slowdown in China hurt premium class demand and depressed corporate travel from Hong Kong to London and New York, according to Cathay Pacific. The carrier lost HK$4.49 billion from fuel hedges in the first half of the year.

“The earnings came as a surprise,” said Ajith Kom, a Singapore-based analyst at UOB Kay Hian Pte, who has a sell rating on Cathay Pacific and a 12-month target price of HK$10.6. Rising costs and falling passenger yields will continue to pressure the company’s earnings in the second half, he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE