CATHAY PACIFIC Airways has issued further warnings over falling yields and rising costs, despite reporting a 4% increase in net profits for 1994.

Profits ended the year broadly in line with analyst expectations at HK$2.4 billion ($310 million), but Cathay chairman Peter Sutch plays down the improvement, describing 1994 as "another very difficult year".

The airline points out that, with revenues growing at more than 13%, its net profit margins actually fell by a percentage point.

Sutch highlights "familiar" concerns with industry, over capacity, depressed yields and rising costs. "Inflation in Hong Kong remained far higher than in the majority of markets, in which our competitors are based," he says.

Wage costs continued to grow in double digits, contributing to a 12% rise in the airline's operating expenses. Finance costs also doubled, fuelled by higher Japanese yen interest-rates.

The airline has already begun to implement a series of cost-cutting measures to reduce its overheads, including a new stream- lined management structure, revised cockpit-crew contracts, improved aircraft use and staff productivity.

Cathay also hopes that the replacement of its aging Lockheed L-1011 TriStar fleet with new Airbus A330-300s and A340-200s will bring down operating and staff costs.

Sutch says that the airline is "cautiously optimistic about prospects for 1995", with the start of an economic recovery in its major markets and further action to improve efficiency.

He also suggests a bottoming out in the fall of yields, although many financial analysts remain doubtful of any real improvement until 1997, at the earliest. "Life is getting better, but Cathay still faces tough competition," Sutch adds.

Yields are likely to continue to slip in 1995 and 1996, "...putting pressure on profit margins," says Adrian Faure of Merrill Lynch.

During 1994, passenger yields fell by another 2.6%, while cargo suffered a 3% fall. Traffic also rose sharply, however, especially on cargo services, which have benefited from world economic recovery and a rise in European exports to Asia.

Cargo revenues were up by nearly 15%, to HK$4.9 million, because of a 19% growth in traffic. An additional HK$712 million was generated by Air Hong Kong, in which Cathay acquired a 75% stake in 1994.

Hong Kong Aircraft Engineering (HAECO) announced a surprise 7.5% fall in profits for 1994, reflecting low worldwide maintenance rates, over-capacity and high inflation.

Profits dropped to HK$414 million ($54 million), despite a 5% increase in turnover to HK$2.4 billion. Most analysts had been projecting a slight growth on 1994's HK$447 million profit.

Source: Flight International