Cathay Pacific Seeks to Upgrade Cargo With Diamond Focus

Cathay Pacific Airways Ltd. aims to replicate its business-class strategy in a cargo trade upgrade. It wants to fly more diamonds and medicines rather than T-shirts.

“Similar to the passenger service, we are not a low-cost carrier,” said Nick Rhodes, the airline’s cargo director. “We try to be a full-service cargo carrier. That’s really our DNA.”

The world’s biggest international air-cargo carrier will start operating its first independently owned goods terminal at its home base in Hong Kong later this month, increasing that airport’s capacity by half. The airline has spent HK$5.9 billion ($761 million) on a facility it says will help Cathay target an increase of up to 20 percent in more profitable shipments of high-value goods, perishables and vaccines.

Success with that strategy is critical to boosting profit in a business that accounts for over a fifth of the airline’s revenue. Cathay has cut some cargo flights while Middle East carriers like Emirates boost capacity and increase competition with Asian rivals. Singapore Airlines Ltd. and Korean Air Lines Co. also want to move to higher-value goods even as the global air-freight market declined for a second straight year in 2012, amid a slump in demand across Europe.

“Cathay chasing higher-end products will help broaden its cargo sources and boost revenue,” said Geoffrey Cheng, a Hong Kong-based analyst at Bank of Communications Co., with a neutral rating on the stock. “It will lose to rivals if it fails to capitalize on the relatively faster-growing seafood and pharmaceutical demand.”

Cathay Pacific rose 1.1 percent, the most since Jan. 18, to close at HK$15.12 in Hong Kong trading. The city’s benchmark Hang Seng Index lost 0.3 percent.

1,000 CC-TVs

A chain of 1,000 closed-circuit television and biometric fingerprint systems have been installed in the new terminal, according to Portia Cheuk, a spokeswoman of the facilities’ operator Cathay Pacific Services Ltd. said in an interview. Special measures are also in place to boost security when dealing with high-value items such as diamonds and gold bullion, she said.

At the terminal, the location that handles high-value items such as diamonds is the most-restricted zone. Only a limited number of staff have access and visitors are restricted.

Cathay, which moves cargoes with 22 dedicated aircraft and bellies of passenger aircraft, carried 1.56 million tons of cargo and mail last year, 5.3 percent less than a year earlier, the company said in a statement last month. Revenue, measured by weight multiplied by kilometers, also fell 7.3 percent to 8.94 million.

Globally, the air freight market shrank 1.5 percent in 2012, according to the International Air Transport Association. Passenger demand increased 5.3 percent.

Emirates, Etihad

Asian airlines, the biggest players in the air-cargo market, reported a 5.5 percent decline in demand, and 2.4 percent cut in capacity last year, according to IATA. In comparison, Gulf carriers including Emirates and Etihad Airways saw demand growing 14.7 percent, and the biggest capacity expansion at 11.4 percent, it said.

“The industry suffered a one-two punch,” IATA Director General Tony Tyler said in a Jan. 31 statement. “World trade declined sharply. And the goods that were traded, shifted towards bulk commodities more suited for sea shipping,” said Tyler, a former chief executive officer of Cathay.

Cathay said in August that it posted a loss of HK$935 million in the six months ended June. Chief Executive Officer John Slosar told staff in November that the carrier was facing a “very challenging year,” referring to 2012. The airline is due to report its full-year results on March 13.

Most Complicated

Profit in the year ended in December may be HK$812 million, according to the average of 12 analyst estimates compiled by Bloomberg. In 2011, the company had a profit of HK$5.5 billion.

“Our strategy is to chase the most complicated, difficult-to-handle cargoes from shippers who are very demanding,” Cathay cargo director Rhodes said. “We can look after their cargoes, we can’t compete just on price.”

Cathay cut freighter frequencies to Europe 63 percent to 11 flights per week earlier this year from about 30 flights a week in 2008, as a decline in the Asia-Europe market hurt the carrier the most, Rhodes said in an interview on Feb. 6. The airline got 24 percent of its sales from cargo in the first half of last year.

The new terminal, together with 10 Boeing 747-8 freighters Cathay ordered in 2007, are long-term investments as Hong Kong has the advantage of being located in the center of Asia, Rhodes said. The carrier has received eight of those freighters with the remaining two set for delivery later this year.

Construction of the terminal had been delayed for one and a half years during the financial crisis, according to Cheuk.

‘Bad Timing’

It’s “bad timing” for Cathay to get the freighters and open the new terminal, said Bank of Communications analyst Cheng. “But it can’t do much about it. As a market leader, Cathay has to look at long-term development and continue to invest if it doesn’t want to lose market share.”

Rivals are pressing on. Singapore Air’s flights in the Southwest Pacific region posted the biggest improvement in cargo load factor in December after it moved seasonable perishables, the carrier said in a statement earlier last month. The carrier filled 66.1 percent of its planes on this service, an increase from 59.6 percent a year earlier.

Korean Air has also been focusing on moving high-margin products, such as perishable goods and medicines, to ensure profitability, the carrier said in a statement Feb. 1.

With air conditioning, Cathay’s new facility is designed to help store the likes of flowers, medicines and perishable goods for transport.

Fresh Goods

The terminal, which has a site area of 11 hectares, is designed to have an annual capacity of 2.6 million tons, increasing Hong Kong International Airport’s annual capacity 50 percent to 7.4 million tons. It will have full operation in the second half of this year.

Cathay and its Hong Kong Dragon Airline Ltd. unit will be the terminal’s initial customers. The major terminal in the city Cathay uses is owned by a group of investors including Jardine, Matheson & Co., Hutchison Port Holdings Ltd. and The Wharf (Holdings) Ltd.

The facility aims to cut loading and unloading times to keep the lobsters, fish and flowers fresh.

“Hong Kong people always like fresh goods,” Cheuk said.

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