CX Profit warning
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CX Profit warning
- 1 -
The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of
this announcement, makes no representation as to its accuracy or completeness and
expressly disclaims any liability whatsoever for any loss howsoever arising from or in
reliance upon the whole or any part of the contents of this announcement.
CATHAY PACIFIC AIRWAYS LIMITED
(Incorporated in Hong Kong with limited liability)
(Stock Code: 293)
Trading Statement
Profit Warning
Issue of Price Sensitive Information
The financial results of Cathay Pacific Airways Limited (“Cathay Pacific”) for 2008
are expected to be disappointing. Fuel prices have fallen substantially and this
provides welcome relief. However, two other factors are expected to affect the year’s
results adversely. These factors are weakness in revenue and losses on certain fuel
hedging contracts.
Background
This trading statement is released in the light of material changes in the trading
environment for Cathay Pacific since its interim results for the first half of 2008 were
announced on 6th August 2008. At that time, Cathay Pacific’s results continued to be
materially and adversely affected by the high price of fuel. The average price paid by
Cathay Pacific for fuel in the first half of 2008 was 60% above that paid in the first
half of 2007. At its peak in July 2008, the spot price for jet fuel was US$181.8 per
barrel. Since then the spot price has fallen to US$76.7 per barrel. This provides
welcome relief. However, two other factors are expected to affect the year’s results
adversely, and they are accordingly still expected to be disappointing. These factors
are weakness in revenue and losses on certain fuel hedging contracts.
Weakness in revenue
Revenue has started to weaken materially. This reflects in particular a significant
strengthening of the US dollar (against currencies in which Cathay Pacific earns a
significant portion of its revenue) and reduced first and business class travel and cargo
volumes in the current adverse financial and economic circumstances.
Adverse currency movements are expected to reduce passenger revenues in Hong
Kong dollar terms for the remainder of 2008. First and business class advance
bookings are showing year-on-year declines, while available capacity has increased.
Corporate travel volumes in all classes are of concern as corporate clients begin to
impose stricter travel policies on their employees. Demand for economy class seats is
also weaker than earlier in the year.
- 2 -
The most recent figures for cargo volumes and revenues show declines against the
comparable period in 2007. Continued declines are expected for the remainder of
2008, reflecting increased competition, overcapacity and, to a lesser extent, adverse
currency movements.
The full impact of the expansion of Taiwan-Mainland China cross-strait flights
remains to be seen, but can be expected to put additional pressure on passenger and
cargo revenues.
Losses on fuel hedging contracts
The purpose of entering into fuel hedging contracts (principally in the form of Brent
options) is to give a degree of certainty to the price of fuel and protection against price
increases. Under accounting principles generally accepted in Hong Kong, fuel
hedging contracts are marked to market through the profit and loss account. The
effect of marking these contracts to market is to transfer to the current accounting
period the fair value of the benefit gained or loss incurred from the contracts.
The recent rapid fall in the jet fuel price has caused mark to market losses to be
incurred on certain fuel hedging contracts. Along with many airlines, Cathay Pacific
enters into hedging contracts the economic effect of which is equivalent to entitling (i)
Cathay Pacific to buy fuel from the contract counterparties in future periods at
specified prices and (ii) the contract counterparties to sell fuel to Cathay Pacific in
future periods at specified prices. In any one hedging contract, the price at which
Cathay Pacific is effectively entitled to buy fuel will be considerably higher than that
at which the counterparty is effectively entitled to sell fuel.
The grant to counterparties of effective rights to sell fuel reduces materially the cost to
Cathay Pacific of hedging against increases in fuel prices. Depending on future
movements in the spot fuel price, the effect of the relevant hedging contracts is that
Cathay Pacific’s future effective cost of obtaining fuel could be higher than they
would have been if Cathay Pacific had not entered into them. It is Cathay Pacific’s
policy not to enter into hedging contracts which in the aggregate relate to volumes
which exceed its expected commercial requirements for fuel.
The fuel price has fallen below the level at which certain contract counterparties will
be effectively entitled to sell fuel at certain future dates up to 2011. Cathay Pacific is
required to account for the fair value of the difference between the spot price of fuel
and the price at which the counterparties are effectively entitled to sell in future
periods as mark to market losses. The result is a mismatch, in that the full benefit of
paying lower fuel prices for the hedged fuel will only arise in future periods.
Unrealised mark to market losses on fuel hedging contracts incurred by Cathay
Pacific as at 31st October 2008 are estimated to be HK$2.8 billion. The unrealised
mark to market losses at the end of September were HK$630 million. It is important
to note that these are not cash losses. The amount of losses actually realised and
payable will depend on future movements in fuel prices. Up to 31st October 2008,
net realised gains on fuel hedging contracts were HK$150 million. To set the 31st
October 2008 mark to market figure in context, Cathay Pacific’s total expenditure on
fuel in 2008 is expected to be around HK$40 billion (and, if jet fuel prices had
remained at their July peak, would have been around HK$47 billion).
- 3 -
Investors are advised to exercise caution in dealing in shares of Cathay Pacific.
This announcement is issued by Cathay Pacific pursuant to Rule 13.09 of the Rules
Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.
Directors of Cathay Pacific
As at the date of this announcement, the Directors of Cathay Pacific are:
Executive Directors: Christopher Pratt (Chairman), Robert Atkinson, Ian Shiu, John
Slosar and Tony Tyler;
Non-Executive Directors: Philip Chen, Martin Cubbon, Henry Fan, James Hughes-
Hallett, Kong Dong, Vernon Moore, Robert Woods and Zhang Lan; and
Independent Non-Executive Directors: Peter Lee, Raymond Or, Jack So and Tung
Chee Chen.
By Order of the Board
Cathay Pacific Airways Limited
David Fu
Company Secretary
Hong Kong, 5th November 2008
The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of
this announcement, makes no representation as to its accuracy or completeness and
expressly disclaims any liability whatsoever for any loss howsoever arising from or in
reliance upon the whole or any part of the contents of this announcement.
CATHAY PACIFIC AIRWAYS LIMITED
(Incorporated in Hong Kong with limited liability)
(Stock Code: 293)
Trading Statement
Profit Warning
Issue of Price Sensitive Information
The financial results of Cathay Pacific Airways Limited (“Cathay Pacific”) for 2008
are expected to be disappointing. Fuel prices have fallen substantially and this
provides welcome relief. However, two other factors are expected to affect the year’s
results adversely. These factors are weakness in revenue and losses on certain fuel
hedging contracts.
Background
This trading statement is released in the light of material changes in the trading
environment for Cathay Pacific since its interim results for the first half of 2008 were
announced on 6th August 2008. At that time, Cathay Pacific’s results continued to be
materially and adversely affected by the high price of fuel. The average price paid by
Cathay Pacific for fuel in the first half of 2008 was 60% above that paid in the first
half of 2007. At its peak in July 2008, the spot price for jet fuel was US$181.8 per
barrel. Since then the spot price has fallen to US$76.7 per barrel. This provides
welcome relief. However, two other factors are expected to affect the year’s results
adversely, and they are accordingly still expected to be disappointing. These factors
are weakness in revenue and losses on certain fuel hedging contracts.
Weakness in revenue
Revenue has started to weaken materially. This reflects in particular a significant
strengthening of the US dollar (against currencies in which Cathay Pacific earns a
significant portion of its revenue) and reduced first and business class travel and cargo
volumes in the current adverse financial and economic circumstances.
Adverse currency movements are expected to reduce passenger revenues in Hong
Kong dollar terms for the remainder of 2008. First and business class advance
bookings are showing year-on-year declines, while available capacity has increased.
Corporate travel volumes in all classes are of concern as corporate clients begin to
impose stricter travel policies on their employees. Demand for economy class seats is
also weaker than earlier in the year.
- 2 -
The most recent figures for cargo volumes and revenues show declines against the
comparable period in 2007. Continued declines are expected for the remainder of
2008, reflecting increased competition, overcapacity and, to a lesser extent, adverse
currency movements.
The full impact of the expansion of Taiwan-Mainland China cross-strait flights
remains to be seen, but can be expected to put additional pressure on passenger and
cargo revenues.
Losses on fuel hedging contracts
The purpose of entering into fuel hedging contracts (principally in the form of Brent
options) is to give a degree of certainty to the price of fuel and protection against price
increases. Under accounting principles generally accepted in Hong Kong, fuel
hedging contracts are marked to market through the profit and loss account. The
effect of marking these contracts to market is to transfer to the current accounting
period the fair value of the benefit gained or loss incurred from the contracts.
The recent rapid fall in the jet fuel price has caused mark to market losses to be
incurred on certain fuel hedging contracts. Along with many airlines, Cathay Pacific
enters into hedging contracts the economic effect of which is equivalent to entitling (i)
Cathay Pacific to buy fuel from the contract counterparties in future periods at
specified prices and (ii) the contract counterparties to sell fuel to Cathay Pacific in
future periods at specified prices. In any one hedging contract, the price at which
Cathay Pacific is effectively entitled to buy fuel will be considerably higher than that
at which the counterparty is effectively entitled to sell fuel.
The grant to counterparties of effective rights to sell fuel reduces materially the cost to
Cathay Pacific of hedging against increases in fuel prices. Depending on future
movements in the spot fuel price, the effect of the relevant hedging contracts is that
Cathay Pacific’s future effective cost of obtaining fuel could be higher than they
would have been if Cathay Pacific had not entered into them. It is Cathay Pacific’s
policy not to enter into hedging contracts which in the aggregate relate to volumes
which exceed its expected commercial requirements for fuel.
The fuel price has fallen below the level at which certain contract counterparties will
be effectively entitled to sell fuel at certain future dates up to 2011. Cathay Pacific is
required to account for the fair value of the difference between the spot price of fuel
and the price at which the counterparties are effectively entitled to sell in future
periods as mark to market losses. The result is a mismatch, in that the full benefit of
paying lower fuel prices for the hedged fuel will only arise in future periods.
Unrealised mark to market losses on fuel hedging contracts incurred by Cathay
Pacific as at 31st October 2008 are estimated to be HK$2.8 billion. The unrealised
mark to market losses at the end of September were HK$630 million. It is important
to note that these are not cash losses. The amount of losses actually realised and
payable will depend on future movements in fuel prices. Up to 31st October 2008,
net realised gains on fuel hedging contracts were HK$150 million. To set the 31st
October 2008 mark to market figure in context, Cathay Pacific’s total expenditure on
fuel in 2008 is expected to be around HK$40 billion (and, if jet fuel prices had
remained at their July peak, would have been around HK$47 billion).
- 3 -
Investors are advised to exercise caution in dealing in shares of Cathay Pacific.
This announcement is issued by Cathay Pacific pursuant to Rule 13.09 of the Rules
Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.
Directors of Cathay Pacific
As at the date of this announcement, the Directors of Cathay Pacific are:
Executive Directors: Christopher Pratt (Chairman), Robert Atkinson, Ian Shiu, John
Slosar and Tony Tyler;
Non-Executive Directors: Philip Chen, Martin Cubbon, Henry Fan, James Hughes-
Hallett, Kong Dong, Vernon Moore, Robert Woods and Zhang Lan; and
Independent Non-Executive Directors: Peter Lee, Raymond Or, Jack So and Tung
Chee Chen.
By Order of the Board
Cathay Pacific Airways Limited
David Fu
Company Secretary
Hong Kong, 5th November 2008
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How fortunate for CX. Due to international accounting standards they get to realise a $2.8 billion loss on the end of year profit and loss statement due to the fact that they partially hedged fuel for the next 3 years at the extreme upper end of the recent fuel price highs. Add to that the cargo fines for the first half, and no doubt a few more to come in various jurisdictions, and CX will no doubt make a very small profit, although more likely a small loss for the year.
Due to this small profit/loss 13 month will will be scrapped saving CX $350 million odd dollars on the CX wage bill.
The best part for CX is that being accounting loses, they don't lose any physical money on the hedging loses.
Sounds like a win-win for CX to me.
Due to this small profit/loss 13 month will will be scrapped saving CX $350 million odd dollars on the CX wage bill.
The best part for CX is that being accounting loses, they don't lose any physical money on the hedging loses.
Sounds like a win-win for CX to me.
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