Cathay Pacific Hauling Cargo, Not Passengers, Helps Win Hearts

(Bloomberg) -- It took about nine months for Cathay Pacific Airways Ltd. to win its first buy rating from an analyst. When the upgrade came, it was because of the airline’s cargo operations, not its five-star-rated passenger business.

Jefferies Group LLC raised the rating on Cathay’s stock to buy this month, citing signs of a pullback in capacity expansion and improved outlook for global cargo demand and yields. That’s a good start for the marquee brand, which said in May it would cut 600 jobs as part of the biggest revamp in two decades following the carrier’s first full-year loss since 2008.

“Our impression is it’s still difficult out there, but there are one or two signs that things are not as bad as they seem,” said Andrew Lee, a Hong Kong-based analyst at Jefferies. “One is air cargo,” with the other being cost-saving initiatives, he said in an interview, after raising the stock to buy from sell June 7.

With mainland China as its backyard and a boom in e-commerce in the region, Asia’s biggest international airline has been expanding its cargo business even as it streamlines the structure by getting rid of the role of cargo director. The carrier leased two Boeing Co. 747 freighters in May to expand its cargo fleet to 23, after canceling an order for eight Boeing 777-200 freighters four years ago.

Cathay’s cargo yield -- a key measure of profitability for air freight -- is likely to rise 5.2 percent this year as the tonnage increases, according to Lee. The average cargo load factor was about 66 percent in the first five months of the year, versus 62 percent last year. Most market indicators are suggesting a “solid year” for air cargo, with demand from Hong Kong and key Asian markets to North America, Europe and India remaining buoyant, Cathay said on its website.

Still, none of the remaining 19 analysts tracked by Bloomberg recommend buying shares of the Hong Kong-based carrier, giving it the lowest consensus score among members of the Bloomberg World Airlines Index. Persuading those analysts will be one key challenge Friday at a meeting for the top management. Representatives for Cathay didn’t respond to an email seeking comments.

Increased competition from regional low-cost carriers and mainland rivals is damping passenger yields despite growing demand for air travel in Asia. The role of Hong Kong as a hub for international travel out of China has also diminished over the years with the rise of Beijing, Shanghai, Guangzhou and Shenzhen on the mainland.

At the analyst briefing on Friday, Cathay is expected to share its unit cost targets for the next two to three years and potential restructuring charges, said Corrine Png, Singapore-based CEO of Crucial Perspective, a research firm focused on Asian transport equities.

The carrier previously said it’s targeting savings of about 30 percent from employee cost cuts at its headquarters. An official at Air China Ltd., which owns 30 percent of Cathay, said in March that the carrier will reduce more than HK$4 billion ($513 million) in expenses over three years.

To contact Bloomberg News staff for this story: Abhishek Vishnoi in Singapore at avishnoi4@bloomberg.net, Krystal Chia in Singapore at kchia48@bloomberg.net, Dong Lyu in Beijing at dlyu3@bloomberg.net.

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

With assistance from Abhishek Vishnoi, Krystal Chia, Dong Lyu