CX announces 2008 interim results

[CXYummyMummy]

Cathay Pacific records HK$(663) million profit in 2008 interim results.
Results

Cathay Pacific Airways today announced a loss of HK$663 million in its 2008 Interim Results. This compares to a profit of HK$2,581 million in the first half of 2007. The big change in the company’s financial performance was entirely due to the relentless rise in the cost of jet fuel in recent months.

Group turnover rose by 22.6% over the same period in 2007 to HK$42,448 million, with a significant increase in both passenger and cargo revenue. However, ever-increasing fuel prices completely undermined the airline’s business, with the average into-plane fuel price increasing by 60% to US$132 per barrel. As a result the fuel bill rose from HK$10.55 billion to HK$19.31 billion, a climb of 83%.

Fuel as a percentage of total operating cost rose to 45.3% for the first half of 2008, compared to 33.6% this time last year. Cost per ATK increased to HK$2.79 while the cost per ATK without fuel increased by 2.4% due to strong foreign currencies and inflation driving up operating costs . The steep rise in fuel prices was not matched by the increase in fuel surcharges. The fuel surcharges approved by the Hong Kong Civil Aviation Department in the first half were less than half of the increased fuel bill and were significantly behind those charged by major international competitors.

Passenger revenue for the Cathay Pacific Group increased by 21.9% to HK$25,566 million and the Group’s two airlines, Cathay Pacific and Dragonair, carried a total of 12.5 million passengers in the first six months of the year – a rise of 13.7% over the same period in 2007. This compares to a capacity increase of 14.3%. The overall passenger load factor rose by 1.9 percentage points to 80.0%. There was some softening in demand for premium travel in the latter part of the first half, though yield still grew by 4.1% to HK55.9 cents.

The amount of cargo carried by Cathay Pacific and Dragonair grew by 6.8% to 828,399 tonnes, with demand more robust than originally anticipated. The cargo load factor rose by 1.1 percentage points to 66.4% against a capacity increase of 6.9%. Yield fell 1.8% to HK$1.60 due to pricing pressures.

The Cathay Pacific Group continued to expand and modernise its fleet in the first half of 2008 with three more Boeing 777-300ERs, Extended Range, passenger aircraft arriving for Cathay Pacific plus two Airbus A330-300s. The current high fuel prices make it vital to operate the most efficient freighter fleet and in May the airline took delivery of the first of six Boeing 747-400ERF Extended Range Freighters which benefit from higher fuel efficiency. The Group also has 10 new-generation Boeing 747-8F freighters on order and at the same time has begun a programme to retire the older, more inefficient Boeing 747-200/300F “Classic” freighters in its fleet. Two have already left – one from Cathay Pacific and one from Dragonair.

The Cathay Pacific Group remains committed to further building Hong Kong’s position as a leading international passenger and airfreight hub and in the first half of 2008 undertook an important expansion of services to India. Cathay Pacific and Dragonair added a total of 27 more flights a week to and from the country, with two new destinations added – Bengaluru (Bangalore) and Chennai. The Group also announced that it will design, construct and operate a new cargo terminal at Hong Kong International Airport. Work on the project, to be operated under a 20-year franchise agreement, has already begun and the terminal will open in 2011 with an annual throughput capacity of 2.6 million tonnes.

In terms of product and service, more passengers are now benefiting from the ongoing rollout of new three-class cabin designs, which are now found on 28 of Cathay Pacific’s medium- and long-haul aircraft. The Group also opened new lounges in Beijing, Melbourne, Seoul and Shanghai as part of an ongoing commitment to improve passengers’ travel experience.

Cathay Pacific Chairman Christopher Pratt said: “Global aviation is making a painful adjustment to the new reality of US$100-plus oil. Cathay Pacific is reducing other costs where it can but there is a limit to how much cost can be saved before quality and brand are compromised. It is thus inevitable that fares for passengers and shippers will have to rise to reflect the new cost of operation. It is difficult to forecast with any degree of accuracy the extent to which these higher fares will reduce demand but thus far it has remained robust. Despite the current difficulties Cathay Pacific remains confident in its future. Hong Kong remains Asia’s premier aviation hub and Cathay Pacific’s superb international network affords unrivalled connectivity to and from China. The company’s priority at this time is to protect the integrity of this network. There will be some redeployment of capacity within the network but it is not envisaged that the company will withdraw from any destination it now serves.”

Posted On: 06 Aug 2008

[CXYummyMummy]

Message from the Chief Executive
Posted On: 06 Aug 2008

Dear colleagues,

The extent of the impact high fuel prices are having on our business became very clear today. In our 2008 interim results we announced a loss of HK$663 million, which might seem hard to believe at a time when our revenues reached record highs. All the great work of the team has been eroded by a factor that is, to a large extent, out of our control.

These are certainly tough times for our airline – and of course for the industry as a whole. And things will stay tough if fuel prices stay at such high levels. True, there’s been a dip in the price of crude in the past couple of weeks, but jet fuel prices remain close to historic highs and we expect them to stay there for a while. We’ve seen a very sudden reversal from the record results of last year.

Our interim results show that that the revenue-generation aspect of our business remains very strong. Our performance on the passenger side, for example, was terrific, with revenue rising by almost 22% over the same period last year and passenger numbers up by 13.7%. Cargo did better than expected, too, with income up by 10.4% and tonnage rising by 6.8%. Well done the sales teams, who are rising to the challenge of pushing up revenue in the face of soaring fuel costs.

This example makes me confident about the long-term future of our airline – the strong team spirit we have here combined with fundamental strength of our business. We have strong finances, a great network, a powerful brand and intense customer loyalty, excellent product and service, an efficient fleet and a good order stream of aircraft. We operate from the world’s best airport in a city that’s a true aviation hub. These elements put us in a very good position to survive the current crisis – though we will need to work together as a team and share the pain if necessary.

The situation looks bleak right now but there will be an end to the crisis. At some point fuel prices will stabilise or even begin to edge down and meanwhile we will be raising fares to levels at which we can make profits – although of course we will still be offering some good deals to keep demand lively.

The important thing now is to ensure we’re ready to make the most of any opportunities that arise. That means working together to contribute as much as we can to the success of the company. We have been through crises before and we have always emerged stronger. Some airlines won’t survive the fuel crisis but Cathay Pacific can and will, as long as we all pull in the same direction. Our plan is to maximise the revenue-earning potential of our business. This means we must maintain our powerful network and make sure we continue to excel at service to our customers. Our aim is to keep our team together, as we have in previous difficult times.

Thank you all once again for your hard work in the first six months. Let’s hope we start to see an improvement in our fortunes in the second half. But let’s remember that while we can’t do much about fuel prices, 20,000 Cathay Pacific people working well together can make a big difference.



Best regards, Tony Tyler Chief Executive

[trevor123]

The money set aside for the US price fixing fines seems to make up a big part of that reported loss. Yet management don't seem keen to mention it. Strange.:confused:

[CXYummyMummy]

So Tony

Does this include your mistake of that $60 million for that price fixing? Where does fit into your profit/loss calculations?

Would it come out of your Management Bonus??? Because you certainly can't pass it onto the hard working girls/ & boys on the shop floor can you!:mad:

Meow!

[Humber10]

creative accounting eh? :}

[The Messiah]

I think it is a fair assumption that were it not for the price fixing and the profits that it generated (>60mil) the loss would have been far greater.

[sjj]

Well ladies and gents......it's time to assume the position. Try and find something to bite down on....it makes the pain easier to handle. (I hear it stings a bit when it goes in, but when it comes out.....lets just say it's not the worst feeling in the world!)

It's been said a thousand times, but I feel the need to say it again. Who thinks that there is even a remote chance that conditions won't deteriorate more. I won't even bother fantasizing about anything getting better!

I wasn't at CX during the last time the belts were tightened. (Was is SARS?). Could someone tell me if the whole leave without pay requests were preceded by a message from TT's equivalent that kinda looked something like the one below?

[jonathon68]

Standby for lots of CX CCD spin, to prepare the troops for no 13th month this year.:sad::sad:

[The Messiah]

SARS involved people not travelling to Hong Kong and a subsequent reduction in services. This is not anything like that. CX are still going to be flying aeroplanes full of people and will still need pilots to do it.

[sjj]

True it's very different, but I wouldn't say completely so.

I would reckon that it's still in the same ballpark. Higher costs eats into margins.... the company sacrifices some less profitable routes.... or, they cut services from 3 daily to 1 daily due to weakening demand....etc.

My point is, there's going to be a point that they need less from the people they have. Yes, that may never happen. It may even be very very improbable, but for the sake of the argument, humor me.

[ulaula123]

According report AHK made profit:ok:
I hope we will see pay increase;)

[EngineOut]

Correct me if I am wrong, but wasn't the fine US$60M, which is close enough to HK$470M, which is about 70% of the loss!

The Messiah, I agree, over the years I hear what you are saying!

[Yeager]

NO matter how much profit the illegal "price fixing" has generated - its was illegal and wrong.
To put this bad corporate conduct into a different perspective than what it is, is simply pure low moral and ethics.
It speaks for it self that the CEO and Board of Directors are not mentioning the influence of the 60M USD fine in their public reports! Corporate conduct is something created for the man on the floor - not the ones up in the hirachy. :ok:

[ULRequalsSLEEP]

messiah,
the fine was for years of price fixing, not just the price fixing for first half 2008. So I think it would be a fair assumption that without the fine, the loss for first half 2008 would have been much smaller. Either that or we have to assume that the price fixing led to profits in excess of over $60million US every six months and the US kindly only fined CPA less than six month's worth of cargo price fixing profit!

[The Messiah]

To put this bad corporate conduct into a different perspective than what it is, is simply pure low moral and ethics
I don't think anyone is defending their corporate conduct on moral or ethical grounds. This discussion is only about the bottom line.

the fine was for years of price fixing, not just the price fixing for first half 2008.
Thanks I didn't realise that. So that extra profit share we got last year might have been due to their price fixing. Maybe those who feel morally abhorred may want to give theirs back.

[Busbert]

Don't forget that everyone will be expecting 6% pay rise over and above any payscale increment to cover the galloping inflation... :ok:

[Sleeve_of_Wizard]

It doesn't gel with me either. No way can this company cry a loss. Fuel hedged, Pax surcharges beyond the ridiculous, and breaking revenue records every week.......... mmm.......... seems to me a plan to buy back it's shares nice and cheap. From 1st half profit of 2 point whatever billion last year, to now, don't tell me the fuel bill has been 3 Billion,............

[sjj]

Interesting, Sleeve!

I love a good conspiracy theory. Your one though, is actually believable! I never thought about it that way, but the company really does have lot to gain by reporting a loss like that. They can effectively kill about a dozen birds with that stone.

And we, my friends......are birds.......

[SMOC]

There was an article in the paper about the silver lining for CX and other airlines regarding it's low(er) share price.

CX will make the usual killing in the second half of the year, cry foul about the first half and say what wonderful work has been done to have this fantastic turnaround. However things are not looking rosy for 2009 so will have to continue to work hard! :=

[trevfly]

Not a good time to be at the bottom of the seniority :E

[mr did]

So no mentioned of fuel hedging profits. Does that go to the Burmuda Swire account?

[BlunderBus]

the (just) 9 billion HK$ increase in revenue about covers the increase in fuel..so with that out of the way and assuming a zero balance in that department..why is the airline not up there with last years' profits figures?
the increase in staff,overflights,handling etc came to less than 1 billion hk.
of course throwing 60 million USD at the FAA didn't help..
but with fuel surcharges and increased fares..i don't see a half billion dollar loss with the 'stated ' increase in fuel bill.:rolleyes:

[anotherbusdriver]

The company owes us all (employees and shareholders) an explanation as to where in the loss statement the US$60M (HK$468,000,000) is being accounted for.
The claims they are making are fraudulent and misleading to the public and employees if they are covering up this fine by using fuel costs as a smokescreen.
We all have a right to know exactly where/ how this $468,000,000 fine is being accounted.

[Humber10]

'minority interests' seems to be a winner for the company, with a loss from one year to the next year....

Yeah, it's hard to believe such a large loss when load factors have been so high. 79-80% LF as a breakeven is pretty damm high....

anotherbusdriver ; It's not fraud, it's called Creative accounting... :}

[gtbilly]

If you look at the share repurchase scheme, you will realize that Cathay bought back shares worth around 150,000,000 HKD.... and those shares were cancelled. Also, if you look at the depreciation on assets owned, that is 1,551,000,000 HKD. Depreciation is not a cash expense! so our actual cash flow is hugely positive.... maybe Cathay is learning from the US airlines. Post big losses, and then renegotiate with all of your suppliers and employees.... fortunately, we understand what they are doing.

The 60 million was not thrown at the FAA. It was given to the Department of Justice, for wrongdoings of cathay. Of course, that is why we have a risk management department, to take risks that pay off!

[Hiro Nakimura]

mr did,
the fuel hedging is mentioned on page 6 of the interim report!

blunderbus,
I don't know what to say - I know its really hard, but if you get one of those calculators that has a + and a - button, add the revenues and fuel recoveries, take away the expenses, you end up with a minus number - or in accounting language, a loss.
I hope you don't work out your fuel load as scientifically as CX's profit?

gtbilly,
where to begin???? Shares bought and cancelled have no net effect to other shareholders. If CX held the $148million as cash, then each share would be worth that fraction of a cent more each. By buying the shares and then canceling them, the remaining shareholders are left with the exact same amount of money!
Yes depreciation is a non cash expense - but it is used to help apportion, over time, the cost of replacements. If they didn't depreciate then yes it would make a profit - and then 10 years from now where does the money come from to buy the new aircraft and how was it accounted for?
Stick to flying planes and leave the abacus alone for a little while!

anotherbusdriver,
its in the interim report - try reading it if your attention span will allow it!

[broadband circuit]

I've been scratching my head and trying to re-arrange the letters of Kim Jong Phil to arrive at Hiro Nakimura. I just can't work it out.

Can you please explain how you came up with that handle Phil.

[Hiro Nakimura]

broadband
Unlike GMA, I do know that increasing retirement age will increase time it takes to command. So I guess I can't be him! I just get frustrated with many of the stupid comments made by some of our peers!

[Truckmasters]

why not read the swire pacific interim results that were also released to the HKEC at about the same time.

If you read the interim results on the HKEC (not the blurb on the company website) you can see quite clearly that this loss includes a charge for the 60 mil USD fine.

Interestingly in Swire Pacific - The aviation division made a profit of 10 Million. Think carefully about the increased costs in the CX report e.g. increased maintenance costs etc.

think about the fact that the maritime division (they also use fuel/oil don't they?) reported good business conditions

also note that by making a loss the accountants have taken the tax bill from a substantial bill to a refund of 10 million.

Think about the depreciation of retiring some classics - reduces the asset size, and also about cash paid up front for assets e.g new 777's, 330's, 744 freighters. also reduces cash available and reduces profit/ increases the loss.

Looks like convenient and legal accounting to me.

[wowpeter]

If you look at the share repurchase scheme, you will realize that Cathay bought back shares worth around 150,000,000 HKD.... and those shares were cancelled. Also, if you look at the depreciation on assets owned, that is 1,551,000,000 HKD. Depreciation is not a cash expense! so our actual cash flow is hugely positive.... maybe Cathay is learning from the US airlines. Post big losses, and then renegotiate with all of your suppliers and employees.... fortunately, we understand what they are doing.

The 60 million was not thrown at the FAA. It was given to the Department of Justice, for wrongdoings of cathay. Of course, that is why we have a risk management department, to take risks that pay off!

hahaha... someone beat me to it on the share buy back... I was chatting with my friend and reading the detail interim report. I notice that HKD148 million share buyback as well... hahaha... As for the depreciation and cash flow... the huge depreciation on asset is quite normal for an airline, airplane cost a lot of money afterall... also airline by nature is always a cash flow positive business (unless you are in a lot of sh*t and bleeding cash at a unbelievable rate), as we received the ticket purchase well before we have to deliver the service to passenger. So I don't think we need to worry about the company not having money to pay us! CX is still very healthy, especially when we are still asset positive... if you look at many US carriers where they are actually asset negative, that is scary...

So now the big question with regards to 13th month, I wonder how the company is going to spin it? If you deduct our HKD148 million share buy back and the HKD468 million DOJ charges from our net losses of HKD663 million... you will notice that we have only make a loss of HKD47 million. so things might not be as bad as it looks but by no mean good for CX standard.

[wowpeter]

Interestingly in Swire Pacific - The aviation division made a profit of 10 Million

I think that's probably from the dividend pay out... a valid question to ask is, why are we still paying dividend when we are losing money? Management will probably tell you, "We need to pay dividend to keep our stock price from free falling"... but if you look at our latest stock price, it is at HKD14 per share... it has already free fall from our 52 week high of HKD22 per share. With our shareholders funds per share at HKD12.2 per share... CX stock price can't really go any lower before it became a bargain stock (ie: stock price lower than what the company is actually worth per share [in terms of net asset/share]). I will say at HKD14 per share, it is already a pretty good deal already... But I guess the dividend payout is to keep the big shareholders happy? :)

[broadband circuit]

Interestingly in Swire Pacific - The aviation division made a profit of 10 Million. Think carefully about the increased costs in the CX report e.g. increased maintenance costs etc.

Good point indeed! I would be very interested to see how much other clients (ie non-Swire airlines) pay for Swire products & services at Swire companies, including, but not limited to, HAECO, CPCLS, HATS, HAESL, the Xiamen engineering joint venture whose name I can't remember, etc etc

I'd bet my provident fund that CX, and probably KA, pay significantly more to these companies than they need to, thus simply moving the cash & profits to other Swire companies, where the profit can be skimmed off out of the spotlight with much less fuss.