Cathay Pacific’s (00293.HK) latest results beg the question: Why would anyone want to run an airline?
It needs lots of assets, lots of hard work but the results are always volatile and return pales in comparison with other industries, even during the good years.
Last year, despite all the advantages of being located in a regional hub, Cathay booked a profit of HK$2.6 billion (US$334.9 million). It was better than a year ago thanks to a range of cost-saving initiatives, but nothing exciting when measured against the capital and asset inputs.
Return on equity, return on asset and profit margin were all in the low single-digit zone. No doubt among the worst of the 50 members of the benchmark Hang Seng Index. By weighting, Cathay now ranks 49.
Latecomers to the index from various fields all flew past Cathay. Rightly so, given their far superior profitability profile.
Snacks maker Want Want (00151.HK) just reported a profit in excess of HK$5 billion. It earned about one dollar for every three dollars of capital.
By a similar yardstick, Cathay is also nowhere near casino representatives Sands (01928.HK) and Galaxy (00027.HK) and tech play Tencent (00700.HK).
Oil prices remained costly in 2013 and Cathay’s mega investment — a new cargo terminal in Hong Kong — commenced services at the wrong part of the cycle. Though critical to long-term development, the new facility brought an immediate hit to the bottom line because of start-up costs. Cargo volume was not picking up.
Like sitting in an economy seat, Cathay does not have much room to maneuver in dealing with outside environmental factors, be it oil price or the global economy and other macro factors.
Cathay had its good times, but they proved to be short-lived. One thing or another bumps it off the route time and again. Over the past two decades, the Asian crisis, 9/11, SARS and the global financial crisis grounded Cathay.
Are the shares going to sink much further? Perhaps not at the current level of HK$15.50, given the better results and a book value of about HK$16. But is the sky turning blue and sunny for Cathay?
The growing popularity of its premium economy class and a younger, more oil-efficient fleet will brighten the prospect a little bit. But a dramatic improvement looks unlikely with all the inherent challenges of the business.
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