News
Cathay Pacific rebound: philosophy, not technology
February 22nd 2019
Cathay Pacific’s return to profit is good, but not as good as it may seem. Cathay’s core airline units still have much work to do. Yield growth is driven by a change in philosophy. Read More »
Cathay Pacific projects to post its first annual profit in three years with a 2018 profit of approximately HK$2.3 billion (US$290 million), reversing a 2017 loss of HK$1.3 billion (US$160 million). As the group posted a small loss in 1H2018, this implies a second half profit of approximately HK$2.6 billion (US$327 million). It is a turnaround but shows the airline still needs to improve.
The headline figures comprise two parts: first, Cathay’s well-known airline business. Second is profit share from subsidiaries and associates, notably Cathay’s 18% investment in Air China. This profit share significantly flatters the overall group position and offsets weak performance in the core airline business.
Cathay did not disclose profit composition or projections beyond the simple market-mandated trading update; full results are on 13 March. But the 2H2018 projected profit of HK$2.6 billion is slightly higher than the HK$2.3 billion recorded subsidiary and associate profit share in 2H2017. That profit share is weakening due to Air China and Air China Cargo’s weakening Chinese Yuan, even though business fundamentals and long-term opportunity remain strong.
So the HK$2.6 billion group profit implies the core airline units are also back in black, but at a low margin. With a company transformation underway and little reprieve from over-capacity, some allowance is to be given.
Cathay attributed the turnaround to tangible gains: improved passenger yield (load factor down 0.3pt) while cargo saw improved yield and load factor. Both units grew capacity.
The revenue management shift underpinning passenger yield growth is a change in philosophy and not technology. The mid-2010s saw weakening performance and loss of purpose, which prompted the commercial side to discount tickets and sell early in a bid to fill planes and guarantee cash.
CEO Rupert Hogg took the reigns and conveyed urgency to change but also that Cathay had underlying stability and a long-term premium advantage. Now tickets are not being as discounted or sold cheaply too early; Hogg instilled internal confidence. Yield gains offsetting load factor reductions validate Cathay’s premium strategy as passengers are willing to pay a premium.
Cathay’s profit projection was more than double analyst expectations, and saw stock rise 9%.
On the same day, Cathay released January 2019 traffic figures showing a strong uptick in RPKs (9.5%) and load factor (1.9pt). Commentary said yield growth was strong due to Chinese New Year starting earlier. Also a likely factor for yield growth at Cathay and HK Express was passengers not booking with Hong Kong Airlines due to sensationalist media coverage about loan repayment.
