Fuel, yield pressures and cargo woes hit Cathay’s profits

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Hong Kong-based Cathay Pacific has blamed fuel costs, yield pressure and weak cargo demand for an 83% fall in its full-year net profit last year.

The Cathay group, which includes regional carrier Dragonair, recorded a net profit of Hong Kong dollar (HK$) 916 million ($118 million), down sharply on the HK$5.5 billion recorded in 2011.

The Oneworld carrier says that it was "a challenging year for the aviation industry generally" as economic uncertainty in the eurozone and the persistently high cost of fuel took their toll on its profitability.

"The cost of fuel remains the biggest challenge, particularly for an airline such as ours where long-haul operations form a significant part of our total operations," says chairman Christopher Pratt.

The airline group's fuel costs increased by 0.8% compared with the previous year, and accounted for 41.1% of its total operating costs. However, the airline was able to take advantage of a reduction in prices during May and June to engage in more hedging activity to mitigate the increase in price.

It further mitigated the situation by accelerating its plan to draw down its ageing fleet of Boeing 747-400s and also grounded four 747-400BCFs.

Cathay noted that strong competition on key routes and travel restrictions being imposed by some corporations put pressure on its premium class yields.

That was despite the carrier introducing a premium economy class and new economy seats on its long-haul services, as well as new regional business class seats during the year.

Nevertheless, it was able to record a 1.2% increase in yield as a result of fuel surcharges.

On the cargo front, the airline noted that there was weak demand on services between Asia and Europe, while shipments from Hong Kong and mainland China were "well below expectations" for most of the year.

That saw cargo revenue decrease by 5.5% to HK$24.6 billion. Cargo capacity was cut by 3.1% to better meet demand, but the cargo load factor also declined by three percentage points to 64.2%.

Despite the challenges, Pratt says that the airline has taken the right measures to deal with the challenges and remains positioned to take further action "should the business environment not improve".

This includes a recent agreement with Boeing to cancel orders for eight 777-200 Freighters and instead purchase three 747-8Fs, while Boeing will purchase four grounded 747-400BCFs.

"Our focus will remain on protecting the business and managing short-term difficulties while remaining committed to our long-term strategy," says Pratt.

"Our core strengths remain the same as ever: a superb team, a strong international network, exceptional standards of customer service, a strong relationship with Air China and our position in Hong Kong. These will help to ensure the success of the Cathay Pacific Group in the long term."