Cathay Stock Drops After Posting First Loss Since 2008

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  • Loss in 2016 at $74 million; second interim dividend scrapped
  • Carrier predicts challenging operating environment in 2017

CAPA Analyst Sees Cathay Pacific Management Changes

Cathay Pacific Airways Ltd. reported its first loss in eight years and scrapped plans for a second-half dividend after competition from Chinese airlines and losses from fuel hedging dented earnings. Shares declined.

The net loss totaled HK$575 million ($74 million) in 2016, while sales dropped 9.4 percent to HK$92.8 billion, Hong Kong-based Cathay, Asia’s largest international airline, said in a statement Wednesday. Jefferies Group LLC said the losses could continue in the current year as well.

Cathay said the operating environment in 2017 would remain challenging, and that premium travel from Hong Kong was below expectations, prompting the airline to sell such tickets at promotional prices to leisure travelers. The carrier, whose passenger yields have been damped by competition from full-service carriers for business seats and budget airlines for the mass market, said it is starting a three-year “corporate transformation” program to improve returns and operational efficiency.

The carrier is “facing structural problems from competition headwinds, given Chinese airlines continue to aggressively expand international capacity, yield pressures from weak premium-class traffic and cost-conscious leisure travelers,” Andrew Lee, an analyst at Jefferies, wrote in a note Wednesday.

Chief Executive Officer Ivan Chu has seen Cathay’s shares plunge about 25 percent since his appointment in March 2014, compared with a gain for Hong Kong’s Hang Seng Index. The stock declined 1.4 percent to HK$11.44 on Wednesday after dropping as much as 6.9 percent earlier in the day.

Cathay, whose parent is the Swire Group, last posted a loss in 2008, of HK$8.7 billion, according to data compiled by Bloomberg. The carrier, in which Air China Ltd. holds almost 30 percent, has been widening its discounts to premium offerings in a bid to fill seats as it competes against rivals such as China Eastern Airlines Corp.

For instance, an economy-class ticket on Cathay’s Hong Kong-New York direct flight a month from now costs about $1,235, while seats on Asiana Airlines Inc. and Korean Air Lines Co. go for less than $750, based on a search on Chinese online travel-booking app Ctrip. China Eastern is offering tickets for $715 from Shenzhen to the U.S. city via Shanghai.

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“The bar for air travel is getting lower as cheap fares are driving growth in the economy class,” Geoffrey Cheng, an analyst at Bocom International Holdings Co., said before the earnings announcement. “For those who still travel in the premium cabin, they increasingly favor transfer flights” because “it’s cheaper than non-stop service,” he said.

For an analysis of Cathay’s costs, click here

Chairman John Slosar struck an upbeat note at a press conference after the earnings.

“It’s easy to focus on the downside of more competition,” he said. “The upside is, this is where the travel markets are exploding. There’s a lot of travel going to be available in Asia over the next generation. We just need to figure out how we’re going to position ourselves to take best advantage of it.”

Cathay’s passenger yields, the money earned from flying a traveler for one kilometer and a key measure of profitability, dropped 9.2 percent to 54.1 Hong Kong cents last year. Cargo yield declined 16 percent to HK$1.59.

Analysts in a Bloomberg News survey had predicted full-year results ranging from a profit of HK$1.5 billion to a net loss of HK$1.5 billion. The disparity in the figures reflected varying estimates of charges due to fuel-hedging losses.

To watch the earnings press conference, click here

Losses from fuel hedging totaled HK$8.46 billion last year, compared with HK$8.47 billion in 2015. Cathay said it expects further fuel-hedging losses in 2017, although that should be less than for last year. The carrier had unrealized hedging gains of HK$3.57 billion at the end of 2016.

It was expected to pay a second interim dividend of 27 Hong Kong cents, according to estimates compiled by Bloomberg.

Under the revamp plan, Cathay is reviewing revenue management, distribution and pricing practices. It also intends to increase ancillary revenue, and is working to reduce unit costs excluding fuel over the next three years.

Despite challenges, Cathay plans to increase passenger capacity by 4 percent to 5 percent a year, at least until the Hong Kong airport’s third runway begins operating, and will increase frequencies on the most popular routes in addition to introducing new destinations.

“For Cathay, it’s committed to a premium strategy in the Hong Kong hub,” said Will Horton, a Hong Kong-based analyst at CAPA Centre for Aviation. “They’re going to ride this out.”

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