Soured fuel hedging bets and the reported losses for 2016 have contributed to weak sentiment on Cathay Pacific Airways (00293.HK), but investors may be overlooking some of the encouraging trends going on that could lead to much improved profitability for the carrier over the longer term.
One of them is the airline’s growing revenue derived from selling miles to credit card firms.
My interest in Cathay as an investment was triggered by the growing popularity of Asia Miles.
Because it is relatively cheap to buy tickets through mile redemption plans offered by credit card firms, I noticed that many of my friends have decided to plan their trips several months ahead in order to turn their credit card reward points into air tickets.
More banks are launching similar programs to cater to the increasing market demand.
The mile redemption model has enabled airline carriers to collect money in advance as well as enhance customer loyalty and fight the competition from budget airlines.
There are lots of airlines to choose from in the market, but in terms of mile redemption program, Asia Miles has a dominant position.
As more people actively swipe their credit cards to redeem free air tickets, Cathay could get billions of cash inflow in advance per year.
The market boom is still in the early stage, and credit card companies are pretty happy with the business model. Therefore, there might be explosive growth in the future.
Nevertheless, the market has largely underestimated the potential of the changing business model, from selling flight seats to selling miles.
Two or three years down the road, Cathay could enjoy a double boost from the new model as well as the end of the dampening impact from its fuel hedging program.
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