Cathay Declines After Carrier Gives Scant Details on Revamp

(Bloomberg) -- Cathay Pacific Airways Ltd. shares dropped the most in three months after the carrier’s planned business revamp fell short on details, failing to soothe investor concerns over a slide in earnings.

Changes at Asia’s biggest international airline "will start at the top" and the carrier will eliminate some positions as part of a review, with key changes taking effect by mid-year, Cathay said in a statement Wednesday. The stock fell 3.9 percent to HK$10.40 in Hong Kong on Thursday, the biggest loss since Oct. 13.

“We wanted to see hard changes, things like cutting capacity, what sort of savings level they hope to achieve,” said Mohshin Aziz, an analyst at Maybank Investment Bank Berhad in Kuala Lumpur. “Not only did we want more decisive actions, but more sharing of how the plan is going to be implemented. We had neither.”

With premium travel declining and the diminishing role of Hong Kong as a transfer hub for Chinese outbound travelers, Cathay has been struggling to revive earnings. It also has a challenge at hand as Emirates and other Middle Eastern airlines expand more into Asia, luring passengers with frills. Cathay shares have slipped 33 percent since Ivan Chu took over as chief executive officer in March 2014 as the airline reported its smallest half-year profit in more than two years. 

Lacking Vision

“If the statement is any indication, it could well be that he may not be there for long,” Shukor Yusof, founder of aviation consulting firm Endau Analytics said by phone, referring to Chu. “They haven’t embraced the changes. They’ve lacked the vision to grow the company and that has been one of the main reasons for the decline in the company’s performance and profit.”

A spokeswoman said the company doesn’t comment on speculation when asked whether Chu will be replaced. Chu has been at the helm of the carrier for about three years now. His predecessors John Slosar and Tony Tyler both held the top job at the marquee airline for about three years. In both instances, the then chief operating officer was promoted to the chief executive’s role.

“The competition is here to stay and the uncertainty is the ‘new normal’ - we must simply respond,” Cathay said in the statement after a leadership conference in Hong Kong on Wednesday.

The airline is looking at ways to pare costs as mounting competition from Chinese and Middle Eastern carriers have eaten into Cathay’s premium long-haul customer base, causing passenger yields - a key measure of profitability - to drop to a seven-year low.

The carrier will hedge jet fuel for two years, instead of the current practice of four years, Chief Operating Officer Rupert Hogg told the South China Morning Post earlier in comments confirmed by Cathay.

“This change will create opportunities, but some jobs will no longer be needed,” the airline said, without elaborating. “Some new jobs will be created and other jobs may be redefined.” Cathay employed about 26,700 people at the end of June.

Cathay said in October that its second-half result was “no longer expected" to be better than that in the first half. In August, the airline reported an 82 percent plunge in net income in the first six months of the year. Full year results are due by March.

“You just can’t feel confident with this kind of announcement,” Maybank’s Mohshin said. The management doesn’t seem to “want a big change,” he said.

Jefferies Group LLC expects the carrier to report losses in the second half of 2016 and also next year, Andrew Lee, an equity analyst at the brokerage, wrote in a report in November. A second-half loss in 2016 would be Cathay Pacific’s first six-month loss in four years, data compiled by Bloomberg show.

Not one of the 19 analysts tracked by Bloomberg recommends buying Cathay stock. Five of them suggest a hold while 14 advise selling the stock, which fell 24 percent last year, extending a 21 percent decline in 2015.

The current year “is going to be a year of significant change and opportunity to better align our business with the increasingly competitive aviation landscape,” Cathay said.

--With assistance from Daniela Wei Prudence Ho and Dong Lyu To contact Bloomberg News staff for this story: Kyunghee Park in Singapore at kpark3@bloomberg.net, Jeanny Yu in Hong Kong at jyu107@bloomberg.net. To contact the editors responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net, Sam Nagarajan

With assistance from Jeanny Yu, Kyunghee Park