On Wednesday, Cathay Pacific announced further losses of around HK$263 million ($33.5 million). Analysts believe the Cathay Pacific loss is the product of rising fuel costs and demands to offer more luxury touches. So will the airline ride out of this turbulence unscathed?
Cathay Pacific is the world’s tenth largest airline in terms of sales, and fourteenth largest in terms of market capitalization. The airline is one of the founding members of the Oneworld alliance and has won the “World’s Best Airline” award four times in twenty years. However, no airline is immune to the current economic forces in the world. And with trends in Asian air travel moving at a different speed to those in the west, keeping up with the times can be tough.
This became especially apparent this week as the Hong Kong flag carrier announced unexpected loss for the first six months of the year. The news sent its shares to an eight-monthtumble on Wednesday. Now investors are questioning the carrier’s projections for a better performance in the second half of the year. But even as the company admitted to the HK$263 million loss, some analysts were estimating that number could be much higher.
What’s behind Cathay Pacific losses?
We’ve been hearing a lot lately about fuel price woes around the world. Every airline has been hit, but some worse than others. Those who were fortunate enough to hedge enough fuel, will ride out more easily. But others, such as Norwegian, who decided to bet on fuel prices going down have hit the skids. While I don’t know what percentage of fuel Cathay Pacific hedge, apparently it wasn’t enough.
In addition, Cathay Pacific profit planning has been affected by changing market expectations. Her main competitors, Emirates, Singapore, Malaysia, Etihad and Qatar have all been upping the luxury stakes. To stay in the game, Cathay Pacific has introduced costly and exclusive elements such as the Foster and Partner designed First Class cabin and a Business Class amenity kit. On the other side, lower-cost Chinese carriers are expanding into Asia and offering more luxury touches.
However, this is not the first downturn the airline has faced. Before a more satisfactory 2107, the company saw back-to-back losses. Cathay previously pledged to cut 600 staff to fight off losses, and now it is looking like even more could go under its “transformation program” of restructuring.
Can Cathay Pacific profit margins turn?
But that said, all is not lost. The Cathay Pacific loss may be large but many market forces could swing it back. Passenger numbers have been improving and the cargo business remains strong. While the dollar is strong – trade and sanctions between the US, China and the Middle East are in flux which turns things on their heads. Investors don’t like losing money, but sometimes an airline looks like a good place to take shelter in a storm.
If the US does continue to place trade tariffs on Chinese products, this will hurt Cathay Pacific, one of the biggest cargo carriers in the East. However, most analysts agree, the current US administration is unlikely to continue to uphold these tariffs in the fourth quarter. The run up to Christmas is typically a time when Chinese products are in high demand in the US. Suppliers in the US will also be keen to stockpile before the next wave of tariffs begins.