Profits plunge 61% but Cathay Pacific remains optimistic

AFTER a record year in 2010, Cathay Pacific Airways’ profit plunged 60.8% to HK$5,501 million (US$710 million) in 2011, from HK$14,048 million. This was recorded on a turnover of HK$98,406 million, up 9.9% from $89,524 million.

It is the same woes as faced by other airlines, blaming the instability and uncertainty in the global economy, aggravated by 44.1% increase in fuel costs amounting to HK$12,455 million. The year’s performance was also affected by natural disasters in Japan and Thailand as well as the political unrest in the Middle East. Both Cathay and subsidiary Dragonair carried a total of 27.6 million passengers, up 2.9%, garnering passenger revenue of HK$67,778 million, an increase of 14.2%. This was against a capacity increase of 9.2%, resulting in a fall of load factor by 3.0 percentage points.

Cargo business suffered from a decline in the Chinese (both Hong Kong and mainland China) export market, with revenue increasing by 0.3% against a capacity increase of 6.9%, resulting in a fall in load factor by 8.5 percentage points to 67.2%.While recognizing the likelihood of the economic uncertainties persisting, Cathay remains cautiously optimistic, encouraged by an apparently strong demand for premium class travel. Cathay chairman Christopher Pratt said: “We faced a number of major challenges in 2011 and we are still operating in a very challenging environment, particularly for our cargo business. However, the Cathay Pacific Group has a clear strategic focus and we are moving ahead with a number of initiatives that will make our airlines stronger and provide a better experience for our customers.”

Those initiatives include the delivery of 19 new aircraft in 2012, the introduction of a new premium economy class product, new long-haul economy class and business class seats, improved lounge facilities, and a new cargo terminal in Hong Kong scheduled to open in early 2013.

The fall in Cathay’s profitability did not come as a surprise, following on the heel of similar reduced profitability (or losses) reported by rival airlines such as Singapore Airlines (SIA), Qantas and Malaysia Airlines. The near-term competition would test the different strategies adopted by various airlines to take on the challenges of the time.

Both Cathay and SIA are banking on the growth of the premium market. Malaysia Airlines and Qantas mull over cutting back on capacity, something that is likely to happen with Cathay and SIA which are acquiring new aircraft that will expand their fleet. SIA is launching a medium range budget carrier named Scoot to protect and grow its low-end business while the parent airline focuses on the higher yield premium market. Cathay is already reporting healthy forward booking for its premium economy class, a concept which SIA has decided is not the right strategy for its operations.

Meantime, Qantas is reviving its dream of an Asia-based premium carrier, the plans for which had been plagued by labor problems at home and abortive talks with possible partners last known to be Malaysia Airlines. There is rumor that both parties are back at the negotiating table, but few observers are ready to bet their last dollar on any sign of a fruitful development at this stage.

In these uncertain economic times, it is not unexpected that the players will flip-flop somewhat, yet ironically it is a time that demands a more focused view of the future to move ahead. It is a gamble. And, of course, it helps when backed by a strong balance sheet.

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About David Leo
David Leo has more than 30 years of aviation experience, having served in senior management in one of the world's best airlines and airports. He continues to maintain a keen interest in the business, writes freelance and provides consultancy services in the field.

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