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Cathay hammered by first annual loss in eight years

March 17, 2017 Headline News No Comments Email Email

Cathay Pacific has posted its first annual loss in eight years as it battles fierce competition and extra capacity from state-owned mainland Chinese carriers, a fall in business travel, losses from fuel hedging and a strong Hong Kong dollar that has made Hong Kong a comparatively pricey destination.

The airline posted a net loss for 2016 of HKD 575 million (AUD 96.3 million), compared with a profit of  HKD 6 billion (AUD 1 billion) in 2015.

The airline bet the wrong way on fuel hedging, putting hedges in place when the fuel price was much higher than now.

In the face of all that, Cathay chairman John Slosar dismissed persistent rumours that Air China, with which Cathay has a cross shareholding, is interested in taking over Cathay. Air China owns a 29.9% stake in Cathay, which in turn holds an 18% stake in Air China. Britain’s Financial Times reported that Slosar said the subject of an Air China takeover had never arisen “and I don’t think it ever will”.

Slosar said the airline expected the operating environment in 2017 to remain challenging.

In an issued statement, he said strong competition from other airlines and the adverse effect of the strength of the Hong Kong dollar could be expected to continue to put pressure on yield.

“We expect to continue to benefit in 2017 from the fact that fuel prices are much lower than their previous high levels, but to a lesser extent (because of some increase in oil prices in recent months) than in 2016.  We also expect to incur further fuel hedging losses in 2017, but these should be less than in 2016. Our subsidiaries and associates are expected to continue to perform satisfactorily.”

Cathay’s passenger revenue in 2016 was about HKD 67 billion (AUD 11.2 billion), a decline of 8.4% from 2015. Capacity increased by 2.4%, reflecting the introduction of new routes and increased frequencies on other routes. The load factor fell by 1.2% to 84.5%. Yield, under intense pressure throughout the year, fell by 9.2% to just HKD 54.1 cents (AUD 9 cents), reflecting overcapacity in the market, a decline in premium class demand and weak foreign currencies.

Slosar stressed that Cathay was embarking on a three-year program of corporate transformation with the intention of achieving returns above the cost of capital. “The goal is to become a more agile and competitive organisation in order to take advantage of changing market trends and customer preferences.”

He said Cathay expected its business to grow in the long-term.

“Air traffic to, from and within the Asia-Pacific region is expected to grow strongly. We intend to benefit from this growth by increasing our passenger capacity by 4-5% per annum, at least until the third runway at Hong Kong International Airport is open. We will continue to introduce new destinations and to increase frequencies on our most popular routes.  We are buying new and more fuel efficient aircraft. This will increase productivity and reduce costs.”

“We will continue to make investments designed to strengthen our brand and what we offer to our customers.  We aim to deliver better services and to do so more effectively through the use of data analytics and mobile technology. Doing this will increase operational efficiency and help us to meet our customers’ needs better.    We are reviewing our revenue management, distribution and pricing practices.  We intend to increase ancillary revenue.

“Just as important as improving revenues is reducing costs.  We are working on operational changes intended to improve the reliability of our schedules. This will reduce the costs of disruption and will also enable us to use our assets more efficiently and to improve our on-time performance.  Our organisation will become leaner.  This will improve productivity and reduce costs and will also enable us to make decisions more quickly. Our aim is to reduce our unit costs excluding fuel over the next three years.”

Written by Peter Needham

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