Cathay Pacific Slumps to a Surprise Loss as Crude Oil Hobbles Recovery

(Bloomberg) -- More passengers, higher ticket prices and a cargo rebound couldn’t save Cathay Pacific Airways Ltd. from slumping into yet another loss. For Chief Executive Officer Rupert Hogg, that means his restructuring efforts need to strengthen further to turn the tide.

After back-to-back annual losses, the carrier is midway through a transformation program under Hogg, who has been cutting jobs and improving services to lure back the premium traveler since taking over as CEO in May 2017. Rival Singapore Airlines Ltd., which has a budget carrier under its wings and earned a profit in the quarter through June, has also been restructuring as Asia’s two marquee airlines grapple with the threat from low-fare carriers and the expansion of Chinese and Middle Eastern companies.

“They need to take more drastic and deeper measures in their restructuring efforts,” said Shukor Yusof, founder of aviation consulting firm Endau Analytics. “They need to endure more pain.”

Cathay Pacific is “on track” to achieve sustainable long-term performance, Cathay Pacific Chairman John Slosar wrote Wednesday in a note to shareholders after saying earnings were dragged down by oil hedging losses and rising prices of jet fuel. Cathay shares fell 1.8 percent in Hong Kong after the numbers, the biggest loss in six weeks.

Under Hogg’s plan to tackle competition, Cathay Pacific has taken steps to improve its cabin offerings by providing wider choice of meals in business-class cabins on long-haul flights, added newer and more fuel-efficient aircraft to its fleet and started services to more destinations.

Also, at the back end of the aircraft -- the economy class -- the carrier is trying to boost revenue by adding another row of seats on its Boeing Co. 777 planes. The change will result in a 3-4-3 configuration, in line with the industry standard adopted by many premium carriers, although legroom would remain the same, Cathay said in March last year.

“Cathay Pacific’s earnings recovery should accelerate as it is benefiting from continued improvement in its core passenger business,” Bloomberg Intelligence analysts Rahul Kapoor and Chris Muckensturm wrote after the earnings. “Passenger yields rebounding sequentially” is a key takeaway, they said, adding, “second-half profit should see a strong rebound if yield recovery is sustained, barring an oil price shock.”

The carrier reported a net loss of HK$263 million ($34 million) for the six months through June, according to a statement on Wednesday. That compares with a loss of HK$2.05 billion a year earlier and the median estimate for a profit of HK$140 million in a Bloomberg News survey of five analysts.

Cathay Pacific and Cathay Dragon paid 32 percent more for fuel, the biggest expense for carriers in Asia, as a 19 percent surge in Brent crude during the period weighed on costs. Although fuel-hedging losses narrowed as Hogg scaled back contracts that were hurting the bottom line, they stood at HK$653 million, versus HK$3.24 billion a year earlier.

Still, all’s not bad news for Cathay. Some of the measures under the revamp plan are paying off. Passenger yield -- a key metric of profitability measured by the money earned from carrying a customer per kilometer -- rose 7.6 percent in the first half from a year ago to 55.4 Hong Kong cents, helped by increasing demand for its premium products. Cargo and mail yield jumped 16 percent to HK$1.93. Both the figures are their highest since 2015.

The carrier plans to hire more than 1,800 staff this year, Slosar told reporters at a briefing Wednesday in Hong Kong.

The trade war between the world’s two biggest economies has the potential to hurt the carrier significantly, Slosar said.

“We are keeping a close eye on things, especially how tariffs and currency movements could impact the demand for travel, and our revenue and cost,” he said.

Cathay Pacific’s loss doubled to HK$1.26 billion in 2017 as the emergence of Chinese carriers such as Air China Ltd., China Southern Airlines Co. and China Eastern Airlines Corp. took the sheen off Hong Kong as a transit hub. A profit of HK$792 million in the second half of 2017 was boosted by earnings from investments in associates including Air China, in which Cathay owns 18 percent.

Cathay Pacific has said that it plans to increase passenger capacity by 4 percent to 5 percent a year, at least until the Hong Kong airport’s third runway starts operating, and will increase frequencies on the most popular routes.

“Our airlines usually perform better in the second half of the year,” Slosar said in his note. “We expect this to be the case in 2018,” he said, adding fuel costs are set to rise while hedging losses will decline.

--With assistance from Daniela Wei and Jinshan Hong.

To contact Bloomberg News staff for this story: Dong Lyu in Beijing at dlyu3@bloomberg.net;Kyunghee Park in Singapore at kpark3@bloomberg.net

To contact the editors responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net, Sam Nagarajan

©2018 Bloomberg L.P.

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