Hong Kong’s flagship carrier Cathay Pacific Airways (00293.HK) suffered a worse than expected loss of HK$2.05 billion in the first half of this year.
Many blamed it on the carrier’s fuel hedging losses, but I believe falling passenger yield is the real culprit.
In fact, Cathay Pacific has been driving down the loss from fuel hedging after revising its hedging policy two years ago. As a result, the fuel loss dropped to HK$3.24 billion in the first half of this year from HK$4.49 billion in first half last year.
Rupert Hogg, chief executive of Cathay Pacific, expects less impact from fuel hedging in coming years.
Expecting the fuel hedge issue will come to an end in a few years, Kingboard Chemical Holdings (00148.HK) spent about HK$4 billion to buy shares of Cathay Pacific. Kingboard now holds a nearly 9 percent stake in the carrier.
Kingboard chairman Cheung Kwok-wing expects the share price of Cathay Pacific to recover to above HK$20 when all its existing fuel hedging contracts expire. That would represent a rally of nearly 70 percent from the current level.
But in my opinion, share price recovery may not be possible even if Cathay can get rid of fuel hedging losses because the company is also grappling with another problem — falling passenger yield.
Passenger yield, which measures the average fare earned per kilometer per passenger, was down 5.2 percent to HK$0.515 from HK$0.541 last year.
The income Cathay Pacific earns from flying one passenger for one kilometer has actually slumped by nearly a fourth from the level three years ago.
That’s why its revenue from passenger service plunged by over 10 percent to HK$32.15 billion in the first half of this year from same period in 2014, while the number of passengers carried actually soared more than 10 percent to 17.16 million in the same period.
Traditional carriers like Cathay have faced considerable rivalry from budget airlines in recent years.
Some handled the competition better. Singapore Airlines, for instance, only suffered a 3 percent drop in its passenger yield in the fiscal year to March 30. It posted a 9 percent decline in operating profit to HK$3.6 billion during the period.
But Cathay seemed to have taken a bigger hit, partly because Hong Kong, as a transport hub in Asia, has been targeted as a key market by budget airlines all over the world.
Cathay Pacific has been forced to cut prices and do more promotions to cater to price-sensitive passengers. That has resulted in a decline in passenger yield. Also, it has maintained some long-haul flight services even at a loss to protect its brand image.
Worse, budget airlines are expanding into the business class market, a core profit center for airlines. These all added up to dampen Cathay’s passenger yield.
Cathay Pacific is fighting back. It has launched Premium Economy Class to compete with budget airlines, and reduced the legroom for some economy class seats.
The prospect of Cathay and thus its share price performance will largely hinge on whether these counter measures work.
This article appeared in the Hong Kong Economic Journal on Aug. 21
Translation by Julie Zhu
[Chinese version 中文版]
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