Cathay Pacific Profit Plunges: WSJ

Updated March 13, 2013, 11:41 a.m. ET

By JOANNE CHIU

The Wall Street Journal

HONG KONG—Hit by pricing pressures in its premium cabins and continued cargo weakness, Cathay Pacific Airways Ltd. posted its worst annual results since the financial crisis, with net profit dropping 83% last year.

'In the finance business, we saw less travelers,' said Chief Executive John Slosar.

The sharp earnings decline came even as the airline carried a record number of passengers, underscoring challenges faced by many Asian full-service carriers—historically some of the world's most profitable—as competition intensifies.

The region's premium airlines increasingly are being squeezed on both ends, with the proliferation of low-cost carriers pressuring fares for short-distance economy-class seats, while the rapid growth of luxury airlines in the Mideast erodes market share on long-distance first- and business-class travel.

Adding to the headwinds is the persistently high price of fuel, which now accounts for some 60% of operating costs on a long-haul flight.

Cathay Pacific's net profit fell to 916 million Hong Kong dollars (US$118.1 million) from HK$5.50 billion in 2011. It was the airline's worst earnings figure since the airline posted an HK$8.7 billion net loss for 2008.

Excluding income from fuel surcharges, passenger yields—a key measure of average fares—were off 3.5%, with yields for first- and business-class cabins down more sharply, according to the carrier, which is based in Hong Kong. The passenger count was up 5% to a record 29 million.

Revenue rose slightly, to HK$99.38 billion from HK$98.41 billion.

A factor in Cathay Pacific's performance this year will be corporate clients, analysts said. If such customers start returning and boost premium demand, that could lead a turnaround. The airline reported a pickup in demand in January and February, and it continues to invest in upgrading services with new business-class cabins and airport lounges.

The airline, like rivals Singapore Airlines Ltd. and Qantas Airways Ltd. has been struggling with reduced demand for first- and business-class seats as financial institutions cut staff and travel budgets.

"Certainly in the finance business, we saw less travelers as banks restricted travel demand," Cathay Pacific Chief Executive John Slosar said at a news conference. But he described the sluggish market as more a cyclical downturn than a systemic change in corporate-travel preferences.

"I don't think we've seen the end of [the premium business] quite yet," he said. The airline has seen premium demand growing in developing markets such as mainland China, he said.

Singapore Airlines last month reported a 15% drop in net for the nine months ended Dec. 31 as the carrier coped with a weak premium segment. Australia-based Qantas reported weak operating performance for its fiscal first half, which ended Dec. 31.

Cathay Pacific, which is controlled by conglomerate Swire Pacific Ltd. was less upbeat about its cargo business—which accounts for more than a quarter of the company's revenue but continues to be a drag on earnings. With the global economy still weak, the air-cargo market remains depressed with no clear signs of a sustained recovery, though the carrier said it believed that demand eventually would return.

"The quick and efficient movement of critical goods by air makes modern life possible," said Chris Pratt, Cathay Pacific's chairman. "There is no placing that genie back in the bottle."

The carrier's 2012 earnings also were hit by lower profit contributions from Air China Ltd. of which Cathay Pacific owns 19.3%, as well as from losses at its cargo joint venture with the Chinese flag carrier.

Cathay Pacific said the combined contributions from associates, including Air China, slid to HK$641 million from HK$1.72 billion a year earlier. The company cited higher fuel costs and unfavorable exchange-rate movements.

Source:  http://online.wsj.com