The Cathay Pacific Group hogged headlines last week as it posted a net loss of HK$1.26 billion ($161 million), its largest in nine years, and also the first back-to-back loss in its 71-year history.

Although almost triple that of a year ago, the loss was smaller than expected due to robust cargo revenues and yields, as well as strong contributions from associates. Several industry observers have since said that “the worst is over” for Cathay.



Encouragingly, the group generated a profit of HK$792 million in the second half of 2017, reversing a massive HK$2.05 billion loss in the first half. The HK$1.54 billion loss posted by mainline Cathay and regional subsidiary Cathay Dragon is also substantially lower than those in the two preceding half years.

Moreover, the carrier is encouraged by the slowdown in yield decline and has seen better demand in both business and premium economy cabins.

What continues to be a drag, however, is Cathay’s fuel hedges through to 2019. This year alone, hedges cover 45% of its fuel needs. The group has since amended its hedging policy with a two-year limit in place.


Corrine Png, chief executive of transport equity research firm Crucial Perspective, says the Hong Kong carrier is over the hump.

“I believe the worst is over for Cathay Pacific. A key driver of Cathay’s weak financial results is its massive fuel-hedging losses in the past two years due to its expensive legacy fuel-hedging contracts, which more than offset revenue gains,” she says.


(all values in HK$) Cathay

We will start to see Cathay’s fuel-hedging loss diminish this year and, by next year, most of its expensive fuel hedges will have expired. In fact, its 2H19 fuel hedges are already in the money.”

Credit Suisse has also moved the stock to “outperform” from “neutral”, based on its strong earnings growth outlook. It expects to see a better 2018 for Cathay as premium and cargo demand continues to be strong, and because Chinese competitors are more disciplined in adding capacity.


UOB KayHian aviation transport analyst K Ajith is, however, less positive. “Despite the HK$2.5 billion year-on-year increase in cargo revenue, overall airline operations were still in the red, highlighting the challenges that Cathay faces, despite a reduction in staff headcount,” he says.

Ajith also points to how associate profits were the driver of group profit, primarily due to Cathay’s 18% stake in Air China and 49% holding in Air China Cargo. Weak recovery in passenger yields is also a concern, especially to China and in Southeast Asia, where there is immense competition from low-cost carriers, while cargo revenue could be affected given the looming trade war between US and China, rising interest rates and weak US retail sales.

Another challenge facing the airline group is competition. At the turn of the millennium, Cathay and Cathay Dragon, then known as Dragonair, were effectively the only airlines based in Hong Kong. Today, competition is intense both at home and abroad.

Hong Kong Airlines, launched in 2006, is adding new generation widebodies and expanding into North America and Europe – the traditional strongholds of Cathay and where the majority of its ASKs are placed. The carrier markets itself as a “new luxury carrier”, with fares typically about 10-20% lower than that of Cathay’s.

Cathay also sorely lacks a clear low-cost strategy with close to 20 budget carriers flying into the financial hub. At home, Hong Kong Express has also been on a growth spurt, adding capacity and aircraft, offering attractive fares.

While Cathay has long been facing competition from gulf carriers on European routes, the rapid increase in direct capacity between China and North America, Australia and Europe in recent years is increasingly making transits in Hong Kong redundant.


“The structural competition for Cathay will not change,” says Png. “It still faces stiff competition from the Chinese airlines, Gulf carriers as well as the LCCs, and passenger yields will remain under pressure, particularly on North America and Australian routes. As such, Cathay needs to work harder at improving long-term competitiveness.”

Strong competition was reflected in Cathay’s yields, which were down across all its passenger services markets. Services to North America saw the biggest yield slip at 5%, followed by those to Southwest Pacific and South Africa (3.2%), Southeast Asia (2.9%) and North Asia (2.8%).



“In terms of competition, we are under no illusion,” says Cathay’s chief customer and commercial officer Paul Loo. “We’re constantly competing with more than 100 airlines flying into Hong Kong and there’s also the domestic competition. The intense competition is going to stay.”

However, the airline – and analysts – are hopeful that Cathay’s three-year transformation will soon bear fruit. The programme focuses on a leaner organisation structure, being customer centric and tapping into data analytics to drive operational and cost efficiencies.


The group is also modernising its fleet with the deliveries of fuel-efficient A350s, A321neos and Boeing 777-9X over the next four years. To further reduce seat cost, it is also adding more seats to the economy cabins of its 777s.

Cathay's planned deliveries



Png says that Cathay’s leaner and streamlined management structure will make the airline more nimble in making and executing decisions and strategies going forward, as well as reduce its headquarters and overhead costs substantially.

She adds: “We will start to see some of the fruits of its transformation programme in 2018.”

Chief executive Rupert Hogg insists that there is no complacency on his leadership team and that all eyes are on the transformation. “The three key tenets are adding more value to customers, finding new sources of revenue and making sure we are more productive year-on-year.”

Chairman John Slosar adds: “Difficult but necessary decisions have been made. We are acting decisively to make Cathay Pacific and Cathay Dragon better airlines and stronger businesses. We believe we are on track to achieve strong and sustainable long-term performance.”

Source: Cirium Dashboard