Cathay Pacific Airways posts H1 loss at $262 mn, worst in over 20 years

Airways saw its market share erode due to aggressive expansion of mainland Chinese and Gulf airlines

Hong Kong's Cathay Pacific Airways on Wednesday said it did not see operating conditions improving over the rest of 2017 after posting its worst first-half loss in at least two decades as it continued to lose customers to lower-cost rivals.

The airline has in recent years seen its market share on international routes eroded by aggressively expanding mainland Chinese and Gulf airlines. This, with poor fuel hedges and its lack of a budget arm, have hurt its competitiveness.

On Wednesday, it reported a loss of HK$2.05 billion ($262.07 million) for the six months ended June, versus a profit of HK$353 million a year ago, putting it on track for its first ever back-to-back annual loss since it was founded in 1946.

Group revenue edged up 0.4 per cent to HK$45.9 billion and its fuel costs grew by 33.4 per cent in the first half to HK$2.87 billion.

"We do not expect the operating environment in the second half of 2017 to improve materially," Cathay Chairman John Slosar said in the statement.

The airline posted an annual loss last year for the first time since the global financial crisis and is also in the midst of a three-year reorganisation plan, the benefits of which Slosar said would begin to surface in the second half of 2017.

Its first-half results were impacted by a number of one-off events, including the European Commission's decision in March to levy a fine of around HK$498 million against it and other cargo carriers for infringing European competition law.

The reorganisation of its head office, which was almost completed, had also resulted in HK$244 million in redundancy costs, Cathay said. It also made gains of HK$830 million from share disposals.

"But even excluding the exceptional items, gains and losses, it's about HK$2.1 billion in net losses, so it is worse than expected," said UOB Kay Hian analyst K Ajith, which had forecasted a net loss of HK$1.2 billion.

He said Cathay's passenger yields, which fell 5.2 per cent, were lower than expected and the company did not reap as big a benefit as anticipated from a weaker Hong Kong dollar, indicating that there was poor demand for its product offering.

In its passenger business, Cathay said its Australia and New Zealand routes performed below expectations while it was facing increased competition on routes to Canada which put increased pressure on yield.

Yields on its cargo services, however, rose 4.4 per cent on strong demand for mainland China exports.

Difficult six months

There were already earlier signs that Cathay was experiencing a difficult first-half after its revenue passenger kilometres (RPK), a measure of traffic, grew by just 1.4 per cent, its lowest growth rate since the turn of the decade.

In comparison, the RPK of mainland rival China Southern Airlines' rose 12.49 per cent year-on-year over the same period, according to company data.

Cathay's performance has also paled in comparison to its regional rival Singapore Airlines which despite facing similar competition posted a 45.6 per cent rise in first-quarter operating profit last month after filling a higher proportion of seats.

Such competitive conditions have led some analysts to suggest the possibility of takeover by Air China, which has a cross-shareholding with Cathay.

At a press conference on Wednesday, Cathay said it had "productive relations" with Air China. "We will work closely with Air China whereas it is sensible to do so," Chief Executive Rupert Hogg said.

The airline had been initially expected to publish results around midday Hong Kong time (04:00 GMT) but eventually published them at 4.30 pm local time. Slosar said the delay was due to a longer-than-expected board meeting.

"But there is no change in plan and no change on the board or anything," he said.

Shares in Cathay closed up 0.86 per cent before results were announced, in line with the Hang Seng index, which was up 0.9 per cent.