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Cathay Pacific Shares Reach 7-Year Low With Outlook Scrapped

  • Airline conducting ‘critical review’ to improve performance
  • Jefferies expects Cathay to report losses in second half, 2017

Cathay Pacific Airways Ltd. shares tumbled in Hong Kong to the lowest level in more than seven years after Asia’s biggest international carrier scrapped its profit outlook and said it is conducting a "critical review” of its business.

The stock fell 4.7 percent to HK$10.26 on Thursday, the lowest level since July 2009, making Cathay Pacific the day’s worst performer on Hong Kong’s Hang Seng Index. The company, which reported an 82 percent slump in net income in the first six months of the year, said in a filing Wednesday that the second half “is no longer expected” to be better.

At least two brokerages cut their ratings on the stock. Chief Executive Officer Ivan Chu has struggled to revive earnings amid a drop in passenger yields -- a key measure of profitability in the industry. Singapore Airlines Ltd. has also warned of tougher days as competition with Middle East carriers increases. With Chinese airlines offering more direct services to the U.S. and Europe from the mainland, Cathay Pacific’s Hong Kong hub is no longer so critical for travelers.

“Any targets, any projections they had have been thrown into the wind,” Mohshin Aziz, an analyst at Malayan Banking Bhd. in Kuala Lumpur, said by phone Thursday. “They will have to relook at their network. They should put their arsenal on where it still works for them.”

HSBC Holdings Plc cut its rating on Cathay Pacific to reduce from hold, and Jefferies Group LLC reduced its recommendation to underperform from hold.

After announcing first-half results in August that missed analyst estimates, Cathay Pacific Chairman John Slosar said the business outlook "remains challenging" and the carrier warned that premium travel was declining.

“Since the interim report was issued, the outlook for our airlines’ business has deteriorated," the carrier said in the statement Wednesday. "Overcapacity and strong competition is putting particular pressure on our passenger business, with continued shortfalls in revenue compared with forecasts and heavy pressure on yield."

Cathay Pacific and its unit Dragonair carried 1.8 percent more passengers in the first eight months of this year, taking the number to 23.3 million. Yields -- the money earned from carrying a passenger for one kilometer -- slumped 10 percent in the first half amid increased competition.

Cathay Pacific group employed more than 33,700 people at the end of June and had a fleet of 200 planes. The Singapore Air group, which includes budget carriers Scoot and Tigerair, had 24,574 employees as of the end March, with a combined fleet of 164 planes, according to latest available data from the two companies.

For a Gadfly column on Cathay Pacific, click here.

"We are engaged in a critical review of our business, the goal of which is to improve revenues and to reduce costs," Cathay Pacific said in the statement. "The review will consider all options for improving efficiency and productivity."

Cathay Pacific faces further challenges. Qantas Airways Ltd. said Thursday it will begin daily flights between Sydney and Beijing next year through a code-share with China Eastern Airlines Corp., returning to the route for the first time since the global financial crisis.

The Hong Kong city administration scrapped a fuel surcharge starting February and is imposing a levy to finance a third runway at the Chek Lap Kok airport. Authorities are requiring a fee of between HK$70 and HK$180 for each passenger flying out of Hong Kong for the HK$141.5 billion expansion of the airport, which also increased parking and landing fees for airlines by as much as 27 percent.

“We believe capacity and competition headwinds are unlikely to be resolved in the near term,” Andrew Lee, a Hong Kong-based analyst at Jefferies Group, wrote in a research note Wednesday. Jefferies expects Cathay Pacific to report losses in the second half of this year and also in 2017. The second-half loss would be Cathay Pacific’s first half-yearly loss in four years, according to data compiled by Bloomberg.

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