Cathay Pacific Earnings Lag Behind Estimates on Yields

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 and losses from affiliates widened.

Net income jumped 14-fold to 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. Hong Kong-based Cathay forecast business “to be better” in the second half of the year.

Passenger yields fell in the first half amid competition with Emirates and Etihad Airways PJSC, which are challenging Asian airlines offering features such as showers and butlers. Chief Executive Ivan Chu has ordered new planes and is adding flights to the U.S. and Europe even as a weakness in the cargo market that started with the global financial crisis persists.

“Yields are disappointing,” said Andrew Orchard, a Hong Kong-based analyst at CIMB Group Holdings Bhd. “Yields in the first half were a bigger drop than some of its peers. They had to put in promotional fares because of the long-haul routes that were added to the network and that has had a negative impact on pricing.”

Cathay fell 1.7 percent to HK$14.68 at the close in Hong Kong trading. The carrier has declined 10 percent this year, compared with the 6.8 percent gain in the benchmark Hang Seng Index.

Difficult Environment

Passenger yields fell 3.5 percent to 66.6 Hong Kong cents, the carrier said in the statement. 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.

“The operating environment for the Cathay Pacific Group and the aviation industry as a whole remains challenging,” Chairman John Slosar said in the statement. “This makes it difficult to maintain yields. We expect business to be better in the second half of 2014.”

The loss from associates in the first half widened to HK$265 million from HK$155 million a year earlier, according to the statement.

“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 CIMB’s Orchard. “In the second half, we will see more stability in demand and yields.”

Capacity Growth

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.

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.

Freight volumes increased 8.5 percent on robust demand on trans-Pacific routes from Asia, the company said. The carrier plans to increase cargo capacity by 9 percent this year.

Fuel Costs

Excluding hedging, Cathay’s fuel costs rose 5.2 percent from a year earlier to HK$19.95 billion. The airline also had fuel-hedging gain of HK$1.02 billion, it said. High fuel prices are still affecting profitability, the carrier said.

The carrier has hedged 44 percent of its projected fuel needs for 2015 at $101 a barrel of Brent and 25 percent at $99 for 2016 and 2017, Finance Director Martin Murray said at a press conference in Hong Kong.

Cathay, which is phasing out less fuel-efficient Boeing Co. 747-400s, retired two jets from its fleet in the first six months of this year and another four will leave in the second half. The company had a total of 142 planes on its fleet at the end of December. Cathay will retire 11 Airbus Group NV A340-300 by 2017, of which four will be retired by the end of next year.

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.

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