Cathay business update
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Cathay business update
Challenges Mount For Cathay Pacific
Cathay Pacific is an airline under pressure these days. While the challenges it faces are not new, they are showing few signs of easing. And the accumulated weight of problems is starting to put a severe strain on the carrier’s financial health.
The most recent manifestation of Cathay’s concerns came in a profit warning for the six months through Dec. 31. However, many of the same issues have been highlighted by the airline since early in the year. Passenger revenue and yield are being squeezed by competitive forces, and there is also a range of other headaches such as long-running industrial action by pilots, cargo weakness, unfavorable fuel hedges and foreign exchange losses.
Of course, Cathay is not the only carrier facing such hurdles. Other major Asian airlines—including Singapore Airlines—have also reported troublesome indications of softening passenger demand this year.
Cathay’s net profit slipped by 82% to HK$353 million ($46 million) in the first half of this year. It was expected that the situation would improve in the second half, although the carrier has quashed such hopes. Instead, the financial situation has deteriorated further since the last earnings report
The outlook is not entirely bleak for Cathay, however. After all, it did manage to almost double its net profit at the group level in the last full year through Dec. 31, 2015. There are also some levers it can pull on the cost side, such as a wide-ranging review of its business that it launched earlier this year.
This was accompanied by a hiring freeze for nonoperational staff and a halt to most discretionary spending. Such efforts on the cost front are likely to be ramped up. Fleet changes that are underway will also help.
A shifting competitive environment is probably the airline’s major challenge, and potentially the most difficult to address. The familiar threat of the Middle Eastern carriers is hurting Cathay, as they capture an increasing share of long-haul connecting flows. The lucrative routes from Australasia to Western Europe are an example of an important Cathay market where the Gulf airlines have made large inroads.
The expansion of mainland Chinese carriers is also problematic. One of Cathay’s strengths has been the proximity of its hub to mainland China, and its extensive Chinese network. But the increasing ability of the major Chinese airlines to fly direct to markets such as Europe and North America is diluting the strength of the Hong Kong hub.
Forming stronger links with mainland giant Air China has been one response. A significant cross-shareholding between the two will allow Cathay to benefit financially from the growing strength of the Chinese carriers. Cathay can also reduce its reliance on connecting traffic by drawing more customers from Guangdong province, which has increasing ground links to Hong Kong.
On the other end of the scale, Cathay is confronted by the rapid growth of Asia’s low-cost carriers (LCC), a problem that will only escalate due to the massive orders these airlines have placed. The LCCs are making life difficult for the full-service carriers on intra-Asia routes, particularly as they increase their connecting capabilities and interline relationships. The rise of long-haul LCCs poses a separate dilemma in a market sector traditionally dominated by the full-service airlines.
Like some other Asian majors, Singapore Airlines has responded to this challenge by boosting its own portfolio of LCCs (AW&ST Oct. 24-Nov. 6, p. 36) . These subsidiaries are an important part of the group’s growth plans, and having just reached financial break-even, could eventually play a significant role in boosting earnings.
Cathay, however, has so far chosen not to follow this trend, betting that it can compete against the LCCs by leveraging its existing capacity inventory. It faces relatively little home-based LCC competition in Hong Kong, thanks in part to regulatory blocks, but must contend with increasing service into Hong Kong by overseas-based LCCs.
The rise of other Asian airports as rival connecting hubs is another troubling trend. Cathay has stressed that the congested Hong Kong International Airport must expand to stay ahead. The airline has been a strong advocate for plans to add a third runway, although this will not eventuate until 2023. Ticket fees for construction are already being levied.
Aside from competitive pressure, a major factor in the first-half revenue decline was the removal of fuel surcharges in Hong Kong, triggered by falling fuel prices. Currency weakness in many markets has also hurt on the revenue side.
At the same time, Cathay has not been able to take full advantage of the lower fuel prices due to its unfavorable fuel hedging positions. The airline’s fuel costs excluding hedging were down by 32% in the first half, although including the hedging losses, the saving was reduced to 20%.
Like many other Asian full-service carriers, Cathay has been grappling with a prolonged slump in the air freight sector. Cathay has been particularly exposed to this issue as it has a relatively large freighter fleet. There are some signs of improvement in this area, however, with cargo demand strengthening in August and September.
Labor relations have been another complicating factor. Cathay’s pilots have been conducting “work-to-rule” industrial action since December 2014, due to a dispute over contract terms. This campaign has affected the airline’s operational flexibility, and management has previously stressed the importance of resolving the issue as soon as possible.
A tentative agreement reached in June appeared to solve the dispute, but pilots subsequently voted to reject it. The industrial action will continue while the airline and pilots’ union make another attempt at an agreement.
Despite its list of challenges in other areas, Cathay remains committed to fleet modernization plans that should improve its efficiency. The carrier has now taken delivery of five of its 22 Airbus A350-900 orders, and all are expected to be delivered by the end of 2017.
Cathay is also phasing out older fleet types. It retired its last Boeing 747-400 passenger aircraft in October, and its five remaining Airbus A340s are due to leave by next year. On the cargo side, Cathay is set to retire its last remaining 747-400BCF this year.
Cathy Pacific's Challenges Intensify | Airlines & Airports content from Aviation Week
Cathay Pacific is an airline under pressure these days. While the challenges it faces are not new, they are showing few signs of easing. And the accumulated weight of problems is starting to put a severe strain on the carrier’s financial health.
The most recent manifestation of Cathay’s concerns came in a profit warning for the six months through Dec. 31. However, many of the same issues have been highlighted by the airline since early in the year. Passenger revenue and yield are being squeezed by competitive forces, and there is also a range of other headaches such as long-running industrial action by pilots, cargo weakness, unfavorable fuel hedges and foreign exchange losses.
Of course, Cathay is not the only carrier facing such hurdles. Other major Asian airlines—including Singapore Airlines—have also reported troublesome indications of softening passenger demand this year.
Cathay’s net profit slipped by 82% to HK$353 million ($46 million) in the first half of this year. It was expected that the situation would improve in the second half, although the carrier has quashed such hopes. Instead, the financial situation has deteriorated further since the last earnings report
The outlook is not entirely bleak for Cathay, however. After all, it did manage to almost double its net profit at the group level in the last full year through Dec. 31, 2015. There are also some levers it can pull on the cost side, such as a wide-ranging review of its business that it launched earlier this year.
This was accompanied by a hiring freeze for nonoperational staff and a halt to most discretionary spending. Such efforts on the cost front are likely to be ramped up. Fleet changes that are underway will also help.
A shifting competitive environment is probably the airline’s major challenge, and potentially the most difficult to address. The familiar threat of the Middle Eastern carriers is hurting Cathay, as they capture an increasing share of long-haul connecting flows. The lucrative routes from Australasia to Western Europe are an example of an important Cathay market where the Gulf airlines have made large inroads.
The expansion of mainland Chinese carriers is also problematic. One of Cathay’s strengths has been the proximity of its hub to mainland China, and its extensive Chinese network. But the increasing ability of the major Chinese airlines to fly direct to markets such as Europe and North America is diluting the strength of the Hong Kong hub.
Forming stronger links with mainland giant Air China has been one response. A significant cross-shareholding between the two will allow Cathay to benefit financially from the growing strength of the Chinese carriers. Cathay can also reduce its reliance on connecting traffic by drawing more customers from Guangdong province, which has increasing ground links to Hong Kong.
On the other end of the scale, Cathay is confronted by the rapid growth of Asia’s low-cost carriers (LCC), a problem that will only escalate due to the massive orders these airlines have placed. The LCCs are making life difficult for the full-service carriers on intra-Asia routes, particularly as they increase their connecting capabilities and interline relationships. The rise of long-haul LCCs poses a separate dilemma in a market sector traditionally dominated by the full-service airlines.
Like some other Asian majors, Singapore Airlines has responded to this challenge by boosting its own portfolio of LCCs (AW&ST Oct. 24-Nov. 6, p. 36) . These subsidiaries are an important part of the group’s growth plans, and having just reached financial break-even, could eventually play a significant role in boosting earnings.
Cathay, however, has so far chosen not to follow this trend, betting that it can compete against the LCCs by leveraging its existing capacity inventory. It faces relatively little home-based LCC competition in Hong Kong, thanks in part to regulatory blocks, but must contend with increasing service into Hong Kong by overseas-based LCCs.
The rise of other Asian airports as rival connecting hubs is another troubling trend. Cathay has stressed that the congested Hong Kong International Airport must expand to stay ahead. The airline has been a strong advocate for plans to add a third runway, although this will not eventuate until 2023. Ticket fees for construction are already being levied.
Aside from competitive pressure, a major factor in the first-half revenue decline was the removal of fuel surcharges in Hong Kong, triggered by falling fuel prices. Currency weakness in many markets has also hurt on the revenue side.
At the same time, Cathay has not been able to take full advantage of the lower fuel prices due to its unfavorable fuel hedging positions. The airline’s fuel costs excluding hedging were down by 32% in the first half, although including the hedging losses, the saving was reduced to 20%.
Like many other Asian full-service carriers, Cathay has been grappling with a prolonged slump in the air freight sector. Cathay has been particularly exposed to this issue as it has a relatively large freighter fleet. There are some signs of improvement in this area, however, with cargo demand strengthening in August and September.
Labor relations have been another complicating factor. Cathay’s pilots have been conducting “work-to-rule” industrial action since December 2014, due to a dispute over contract terms. This campaign has affected the airline’s operational flexibility, and management has previously stressed the importance of resolving the issue as soon as possible.
A tentative agreement reached in June appeared to solve the dispute, but pilots subsequently voted to reject it. The industrial action will continue while the airline and pilots’ union make another attempt at an agreement.
Despite its list of challenges in other areas, Cathay remains committed to fleet modernization plans that should improve its efficiency. The carrier has now taken delivery of five of its 22 Airbus A350-900 orders, and all are expected to be delivered by the end of 2017.
Cathay is also phasing out older fleet types. It retired its last Boeing 747-400 passenger aircraft in October, and its five remaining Airbus A340s are due to leave by next year. On the cargo side, Cathay is set to retire its last remaining 747-400BCF this year.
Cathy Pacific's Challenges Intensify | Airlines & Airports content from Aviation Week
Joined: Mar 2016
Posts: 134
Likes: 0
From: America
ALL the management at this airline are responsible for its downfall! They are so corrupt that they will blame everything on the pilot's. Look up "moral turpitude". I do not think I have seen such nonsense in all my life. I have nothing but contempt and disdain for these people.
The lies coming from the third floor are truly something. You would think things would change but honestly they never will. The bases carrot is being thrown around by SL (Flight crew services delivery). The fleet offices are now telling the new SOs that they are going to get screwed in the DEFO deal.
Moral turpitude is a legal concept that refers to "conduct that is considered contrary to community standards of justice, honesty or good morals.[1]
The concept of "moral turpitude" might escape precise definition, but it has been described as an "act of baseness, vileness, or depravity in the private and social duties which a man owes to his fellowmen, or to society in general, contrary to the accepted and customary rule of right and duty between man and man."[3]
The lies coming from the third floor are truly something. You would think things would change but honestly they never will. The bases carrot is being thrown around by SL (Flight crew services delivery). The fleet offices are now telling the new SOs that they are going to get screwed in the DEFO deal.
Moral turpitude is a legal concept that refers to "conduct that is considered contrary to community standards of justice, honesty or good morals.[1]
The concept of "moral turpitude" might escape precise definition, but it has been described as an "act of baseness, vileness, or depravity in the private and social duties which a man owes to his fellowmen, or to society in general, contrary to the accepted and customary rule of right and duty between man and man."[3]
Joined: Mar 2008
Posts: 1,542
Likes: 5
From: London
Interesting article in the SCMP today regarding a new executive being named for HK Airlines. It's obvious that they, and the money behind them, are determined to crash the CX party in the biggest way. They plan a doubling of fleet in the next two years. To put that in another context: anyone joining now is almost assured of a command within that same two years. Sure beats flogging around at CX with similar pay and no benefits. Getting a command 8-10 years quicker than you would at CX is nothing to sneer at. The difference in earnings would quickly overcome any initial advantage in the CX package. Not to mention, they will inevitably improve their own package to attract and retain qualified staff. Let the games begin.
