Things get worse before better at Cathay

April 6, 2017, © Leeham Co.: Cathay Pacific Airways faces a loss this year after posting its first loss in eight years last year.

Analysts following the Hong Kong-based airline see another loss, with declining revenues and pricing pressure from competition.

Fundamental Deterioration

Morningstar, in a report issued last month, characterized CX’s 2016 results as an “ongoing fundamental deterioration.”

CX missed Morningstar’s full year estimate by HK$1bn (US$128.7m) on a 9.4% drop in revenue.

Airbus A350-900.

“The under-performance was largely driven by nearly 9.2% and 16.2% year-on-year declines in passenger and cargo yield, respectively,” Morningstar wrote in a note last month.

Fuel hedging and maintenance costs were higher, the research firm notes.

“We expect the pressure to persist into the near future, driven by another 2%-3% annual yield decline in 2017-18, on top of a marginal drop in overall load factor.”

Getting worse before better

“Things will get worse before they get better,” Morningstar predicts. The firm predicts a loss for Cathay of more than US$70m this fiscal year.

Competition from Chinese carriers as more service is added to international routes.

Morningstar is skeptical of management targets for cost cuts.

Disappointing results

Daiwa Capital Markets called the 2016 results “disappointing.” The outlook for FY2017 “remains challenging.”

Daiwa notes that passenger yield in the first two months of FY17 failed to recover, “mostly due to weak premium-class demand and sharply falling yields of long-haul routes.”

Cathay launched a three year “transformation program” to cut costs, Daiwa writes. Nevertheless, Daiwa forecasts operating margin to decline to 1% in FY2017.

Daiwa has a Sell rating on CX stock.

Transformation Plan “material”

HSBC Global Research, on the other hand, believes the transformation program will be “material.”

“The company plans to transition to a leaner and more agile organization structure.” New routes will be added and money-losing ones dropped.

CX plans to cut staff costs by a whopping 30% at its headquarters.

The research firm sees a “difficult” first half in FY2017.

HSNC has a Hold on the stock.

Airbus, Boeing

Cathay has 21 Boeing 777-9s, 11 Airbus A350-900s and 26 a350-1000s on order. It’s taken delivery of nine A350-900s directly from Airbus and two on lease.

11 Comments on “Things get worse before better at Cathay

  1. Cathay should drop their Boeing order for 777-9s, and go for more A350-1000 instead. With an average loadfactor of 85 percent, the smaller model should be good enough. Fuel Savings would be enormous,like getting a brand new Airbus(discounted price tag) for free, every two years or so!

    • China Eastern – one of the competitors relevant to this story – has 29 A359’s and 10 789’s on the way.

    • @Horgiman…please tell us how “Fuel Savings would be enormous,like getting a brand new Airbus(discounted price tag) for free, every two years or so!”.

      • I´ve found an article from 2013 at AirInsight under the title“The super Twin Battle“ and made some (wild,wierd) assumptions!Adapted to todays basics,fuel cost is just 50 percent, one roundtrip(two 6000nm flights) will save $ 13.000 on an A350! So I multiplied this by 300(one full year of deployment),multiplied by 21 copies or planes, and finally multiplied it by 2(years).This saves an incredible amount of money, approx. $163 million!Of course,I know that my conclusion is a bit silly, incomplete and unprofessional, but Cathay Pacific has to face stiff competition in a challenging environment,the cargo market is under heavy pressure.too! In the real world,artificial manufacturer projections doesn`t count that much!And finally, there is a 30-35 tonnes weight difference between the two planes!

  2. Maybe they should just sell the operation?

    CP is part of Swire Group and that is usually not in long term group interests (no money to be made) being owned as part of something else.

    No agility and the Airline business is a bad ROI.

    Set my Airline Free

    It seems to be very poor management issue.

  3. Being caught between the ME3, and Singapore on one side, and the China mainlands on the other, is a no win situation.

  4. I dont see yield being helped by going to ten wide seating in 777s. Pax hate it, theyll need to undercut everybody else on price to sell this.

  5. On an unrelated topic, sorry, but Boeing share price is a popular topic here, if news that only 29 of 60 Tomahawks made it to target I would expect the F18 line to be finished, if a Tomahawk cant survive I doubt if a non stealth aircraft can.

    Assuming Russian claims get supported, of course

    • I’m sure that the US BDA of this strike is relying heavily on info from the Russian MoD.

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