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Cathay Beats Profit Expectations in 2015, Helped by Travel Demand

  • Full-year net income jumps 90.5 percent from a year earlier
  • Cheaper tickets drive passenger growth but hit revenue, yield

Cathay Pacific Airways Ltd., Asia’s largest international airline by passengers, reported profit that beat estimates as lower oil prices drove down the cost of fuel. The stock rose to its highest intraday level in more than three months.

Net income nearly doubled, rising 90.5 percent to HK$6 billion ($773 million) last year, Cathay said in a stock exchange statement Wednesday. That compared with the average estimate of HK$5.32 billion by 13 analysts, according to data compiled by Bloomberg. Sales declined 3.4 percent to HK$102.3 billion despite a 7.6 percent rise in the number of passengers, as the elimination of a fuel surcharge meant cheaper tickets.

Crude oil’s decline to its lowest levels in more than a decade has reduced costs, and cheaper fares have encouraged more people to travel. The savings have been partially offset by losses on hedges as some Asian carriers, including Cathay and Singapore Airlines Ltd., locked in fuel purchases at higher prices to protect themselves against a sudden spike in prices. Chief Executive Officer Ivan Chu is trying to cut costs and increase productivity as Cathay prepares to add 12 Airbus Group SE A350 aircraft to its fleet this year.

Shares of Cathay were up 3.9 percent at HK$13.90 as of 1:50 p.m. in Hong Kong, poised for their highest close since Nov. 26. The stock has fallen 15 percent in the past year, compared with a 17 percent decline in the benchmark Hang Seng Index.

Yields Pressured

The carrier’s total fuel costs fell 38 percent last year before accounting for losses on fuel hedges, or 18 percent including those hedges, according to Wednesday’s exchange statement. The hedging loss widened to HK$8.47 billion from an HK$911 million loss a year earlier, though the unrealized loss on outstanding hedges narrowed to HK$5.42 billion, from HK$7.42 billion as of last June 30.

"Overall passenger demand remains strong and we expect to continue to benefit from low fuel prices," Cathay Chairman John Slosar said in the statement. "Strong competition from other airlines in the region, foreign currency movements and weak premium class passenger demand will put pressure on passenger yield." 

That yield, the money earned from carrying travelers every kilometer, fell 11 percent to 59.6 Hong Kong cents, the company said. Cathay filled 85.7 percent of its seats last year, an increase of 2.4 percentage points from 2014. 

The contribution to Cathay’s earnings from Air China Ltd. -- in which Cathay has a 20 percent interest -- rose "significantly" last year as the Beijing-based carrier benefited from low fuel prices and strong travel demand, Slosar said. Associated airlines’ contribution to Cathay’s bottom line more than doubled to HK$1.96 billion, from HK$772 million a year earlier, according to the statement.

"Moving forward, it will be important to know how they plan to protect yields," said Geoffrey Cheng, head of transportation and industrial research at BOCOM International in Hong Kong. "As a result of lower fuel prices the Hong Kong government has done away with fuel surcharges this year, so it’s about competition. How they structure their networks to protect their yields is probably more important."

Still Hedging

The decline in oil prices and airlines’ fuel-hedging losses are reminiscent of events in 2008 and 2009, when Cathay, Chinese carriers and Singapore Air reported millions of dollars in losses because of fuel hedging. Carriers have to account for unrealized losses on their hedges or pay charges to unwind the contracts prematurely.

While Cathay’s Chinese competitors have stopped using fuel hedges, Chu has vowed to persevere with the strategy. After Brent crude prices fell 35 percent in 2015, the International Air Transport Association expects most airline hedges to come off by the middle of this year, but Cathay has continued to hedge through 2019.

"In the past it was seen as a strength that Cathay’s strong cash position allowed it to hedge twice as far as others," Will Horton, a Hong Kong-based analyst at CAPA Centre for Aviation, said by e-mail Wednesday. "Fuel hedging that was supposed to bring smoothness to the business has instead brought the greatest volatility in recent years."

Cathay said last August it had hedged 63 percent of its needs for rest of 2015 at an average Brent oil price of $91 a barrel. For 2016, the airline has hedged 60 percent of its needs at an average price of $85 a barrel.

Boxed In

Cathay’s capacity increased 5.9 percent last year. That growth may be limited until Hong Kong airport starts operating a third runway by 2023, enabling Asia’s busiest airport for international flights to handle 100 million passengers a year. The airline also faces challenges as mainland Chinese carriers, including China Southern Airlines Co. and China Eastern Airlines Corp., offer more direct flights to the U.S. and Europe.

“Cathay has no room to grow because the Hong Kong airport is almost full,” said Mohshin Aziz, a Malayan Banking Bhd. analyst in Kuala Lumpur. “Until the third runway opens, Cathay will have to somehow find ways to increase efficiency to try to generate more growth.”

Capacity at Chinese airlines grew as much as 18 percent last year as they expanded international services, helped by low fuel prices and the yuan’s strength against most Asian currencies, according to Bloomberg Intelligence analyst John Mathai.

Faced with mounting competition, Cathay recently rebranded its Dragonair regional subsidiary and is expected to receive its first A350 in May, Slosar said in the statement. Cathay currently operates 146 planes with an average fleet age of about 7.9 years.

The planned addition of 12 A350s this year "is quite aggressive in terms of planned capacity addition, but the A350s will yield substantial fuel-cost savings compared to the A340s and B747s they’ll replace," said K. Ajith, an analyst at UOB Kay Hian.

— With assistance by Clement Tan, and Kyunghee Park

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