Cathay Pacific's Recovery Hits Rough Patch on Oil, Trade War

(Bloomberg) -- It’s turning out to be a bumpy road to recovery for Cathay Pacific Airways Ltd.

Just when the premium airline was showing signs of a rebound, crude oil played spoilsport again, denting early gains from a transformation plan that Chief Executive Officer Rupert Hogg considers crucial to survival. More uncertainty lies ahead for the world’s third-largest cargo carrier as a global trade war escalates.

Cathay Pacific's Recovery Hits Rough Patch on Oil, Trade War

Hong Kong’s flagship airline is likely to report a net income of HK$140 million ($18 million) for the first half of 2018, according to the median estimate in a Bloomberg News survey of five analysts. While that is better than the HK$2.05 billion loss a year earlier, it is smaller than the HK$792 million profit in the second half of 2017. The numbers are due around noon on Wednesday.

Hogg, who became CEO in May last year, is seeking to turn Cathay’s fortunes around in the face of intense competition from budget carriers and mainland Chinese rivals. He has reduced jobs starting with the carrier’s head office in Hong Kong to cut costs and introduced better business-class services on long-haul flights to help lure premium passengers.

Shares of Cathay have declined 18 percent since March 16, when they reached HK$14.68, their highest level in more than two years.

Here’s what to watch out for in Cathay’s earnings:

1. Oil Impact

Brent crude prices in the first half of the year rose 19 percent, increasing costs for airlines. Singapore Airlines Ltd. reported a 59 percent decline in net income for the April-to-June period, mainly weighed down by fuel.

Still, higher crude won’t be all bad news for Cathay because it will help reduce its paper losses on fuel hedging. The carrier hedged nearly half its needs at an average $80.81 a barrel in the first quarter and $81.13 in the second quarter. During those periods, Brent crude traded at an average of $67.23 and $74.97, respectively.

Cathay Pacific's Recovery Hits Rough Patch on Oil, Trade War

2. Trade Dispute on Cargo

The silver lining for Cathay in the first half continued to be its cargo service despite rising tensions between the U.S. and China over trade. Still, that momentum may taper off as more capacity is being added into the market, which could undermine yields. Higher tariffs arising from a prolonged trade dispute between the U.S. and China could hurt the air-freight market, according to analysts including Corrine Png at Crucial Perspective Pte. in Singapore.

“We expect the escalating trade tensions to dampen global trade,” Png said. “Cathay’s cargo traffic growth will moderate in the second half.”

In its monthly traffic statement last month, Cathay expressed caution on tariff disputes, saying they “have the potential to significantly impact both our passenger and cargo businesses.”

Cathay Pacific's Recovery Hits Rough Patch on Oil, Trade War

3. Travel Demand

Under its three-year transformation program, Cathay has been trying to lift its yields, a key indicator of profitability reflected by earnings from carrying a passenger per kilometer.

The carrier has been trying attract more premium passengers by offering greater choices of in-flight meals on long-haul business cabins and opening a new lounge in Hong Kong. It has also implemented digital reforms to improve services and adding destinations.

The measures seem to be paying off. Cathay said in July that demand in the premium cabins across its network has been “strong” and “small yield growth came on the back of improved business travel and traffic mix over last year.”

Cathay Pacific's Recovery Hits Rough Patch on Oil, Trade War