Cathay Projects ‘Substantial’ Loss as Virus Follows Protests

(Bloomberg) -- Cathay Pacific Airways Ltd. predicted a substantial loss for the first half of this year, becoming the latest high-profile carrier to warn about the mounting financial toll of the coronavirus deterring people from traveling.

The warning came as Cathay said its net income tumbled 28% to HK$1.69 billion ($218 million) in 2019, slightly better than the average estimate of six analysts tracked by Bloomberg. Profit in the traditionally stronger second half was only HK$344 million as unrest in Hong Kong and U.S.-China trade tension intensified.

“We were faced with an incredibly challenging environment to operate as the Hong Kong economy slipped into recession,” Chairman Patrick Healy said in a statement. The coronavirus outbreak has exacerbated Cathay’s troubles and put it on course for its first loss in two years. In a news briefing Wednesday afternoon, Healy said the scale of the challenge Cathay faces is unprecedented.

The airline has slashed capacity to mainland China by 90% and reduced its entire international network by about 40% because of the coronavirus, which has infected nearly 120,000 people and killed more than 4,200 worldwide. Cathay, which is particularly exposed to the virus because close to half of its revenue comes from Hong Kong and mainland China, has also asked employees to take unpaid leave as it tries to weather the latest crisis.

Cathay has emerged as one of the airlines hardest hit by the coronavirus outbreak, with the International Air Transport Association saying it could cost the industry as much as $113 billion in lost revenue this year. British airline Flybe collapsed last week as the epidemic ended prospects for a U.K. state-backed rescue, while carriers from United Airlines Holdings Inc. and Singapore Airlines Ltd. to Deutsche Lufthansa AG and Qantas Airways Ltd. are slashing flights.

Average flight bookings have fallen to as low as 11,000-12,000 a day from the standard 90,000 at Cathay, Chief Customer and Commercial Officer Ronald Lam said at Wednesday’s briefing. Healy added that the Hong Kong government should provide more financial support.

“The airport authority is a key business partner and its important they provide relief commensurate with the scale of the unprecedented challenge the aviation industry is facing,” Healy said. “Hopefully they will come to the table with more.”

Besides asking the government for help, Cathay said it’s in talks to delay deliveries of some Airbus SE jets and using some of its aircraft to transport cargo to help the company weather the crisis.

Cathay shares rose 3.1% to HK$10.18 on Wednesday, trimming this year’s loss to 12%.

Hong Kong’s flag carrier said it is likely to continue cutting passenger capacity in May following reductions of about 30% in February and 65% for March and April in terms of available seat kilometers. It will also reduce flight frequencies. “It is difficult to predict when these conditions will improve,” the company said.

Cathay said its passenger load factor declined to about 50% at the end of February -- about a month after the airlines began cutting operations because of the coronavirus -- and year-on-year yield fell significantly.

When the virus abates and demand recovers, Cathay could even stand to benefit as competitors collapse or have difficulty returning their services, according to Bloomberg Intelligence analysts James Teo and Chris Muckensturm. Cathay’s “dominance in Hong Kong was already strengthened by its acquisition of HK Express last year, which should serve it well as the city remains a key Asian financial and trade hub,” they wrote in a note.

What Bloomberg Intelligence Says
Cathay’s passenger revenue could drop 80%, we estimate, exceeding its 65% capacity cut. Still, Cathay isn’t alone in this crisis and may even stand to benefit should competitors fail to survive or have difficulty scaling services back up when demand recovers. Cargo revenue may also be better than expected, with yield growing at double digits due to a near-term bellyhold shortage.

--James Teo, analyst

Click here for the research

“Cathay Pacific’s 2019 results show that well-managed, well capitalized carriers are able to withstand severe crises,” said Shukor Yusof, founder of aviation consultant Endau Analytics Pte in Malaysia. “It’s handling of Covid-19 is better than many others, although Cathay needs to seriously consider furloughing staff and reduce its fleet size given that Hong Kong is no longer the financial and trading center it once was.”

Cathay warned about its results before the virus struck as Hong Kong protests led to lower bookings and passengers in the latter part of last year. In addition to the broad drop in tourist numbers, Chinese state-run companies told employees to avoid flying with the airline on business or personal trips after Cathay came under fire from Beijing because some of its workers took part in a general strike and demonstrations.

“Inbound traffic was hit hard, particularly on short-haul and Mainland China routes, while outbound traffic also decreased,” Healy said in Wednesday’s statement. “Demand for premium travel was weak and we became increasingly reliant on lower-yielding transit traffic.”

“We expect our passenger business to be under severe pressure this year and that our cargo business will continue to face headwinds,” Healy said.

Cathay said it will continue to bring in new aircraft this year and is maintaining its plan to take delivery of 70 new planes by 2024. Its new subsidiary HK Express reported a post-acquisition loss for 2019 against expectations for a small profit, while Air China Cargo suffered “a significant decline in results as trade tensions escalated.”

“They had a great first half last year and then all of a sudden with the protests the second half was really dismal,” Sobie Aviation analyst and consultant Brendan Sobie said in a Bloomberg Television interview Wednesday. “It’s just gone from bad to worse for Cathay Pacific and they’re in a very challenging position.”

“It’s going to be pretty bad for most of this year probably and will take a while for the Hong Kong market and global market to recover,” Sobie said.

--With assistance from Haidi Lun and Kyunghee Park.

To contact the reporters on this story: Anurag Kotoky in New Delhi at akotoky@bloomberg.net;Shirley Zhao in Hong Kong at xzhao306@bloomberg.net;Harry Suhartono in Jakarta at hsuhartono@bloomberg.net

To contact the editors responsible for this story: Young-Sam Cho at ycho2@bloomberg.net, Will Davies

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