In a statement Wednesday, the blue-chip airline said its net profit for the six months ended June 30 was 347 million Hong Kong dollars (US$44.8 million) compared with a first-half net profit of HK$24 million a year earlier, when it faced weak demand for premium seats and a soft air-cargo market. The carrier didn't give a quarterly breakdown for its earnings.
Despite stronger first-half results, Cathay Pacific Chairman John Slosar said the operating environment for the carrier and the aviation industry as a whole remains challenging. "We face significant competition in our passenger business. This makes it difficult to maintain yields," Mr. Slosar said, noting that air-cargo business also remains problematic because of excess capacity.
Cathay Pacific's passenger yields, a key measure of airlines' profitability, dropped 3.5% to 66.6 Hong Kong cents in the first half, despite passenger load factor--or the proportion of seats filled on flights—rising 2.3 percentage points, to 83.6%. A lower yield reflects the airline's weaker pricing power as it seeks to increase market share amid tough competition.
The airline's comments underscored the competitive threat that premium Asian carriers such as Cathay Pacific and Singapore Airlines Ltd. face from highly aggressive budget airlines flying shorter routes.
In response, Cathay Pacific has been increasing frequency and adding destinations in the U.S., the Middle East and Europe. But competition from Gulf-based carriers such as Emirates Airline and Qatar Airways on long-haul routes has put pressure on ticket prices, despite signs of a gradual recovery of international air travel demand.
Barclays Research analyst Patrick Xu said he expects Cathay Pacific's yields to pick up on continued air traffic growth in the second half. Easing political unrest in Thailand would also help sustain yields, he added.
"Demand and yield was also affected by the unrest in Thailand. Our channel checks suggest local airlines believe a lift of martial law may be possible in October 2014 or January 2015, which should help the regional short-haul demand and yield," Mr. Xu said.
Citi Group analyst Michael Beer wrote in a note that Cathay Pacific's yields in both passenger and cargo operations could firm further in the second half on the back of "potential demand for business travel associated with a better macro outlook in the U.S. and Europe as well as better investor sentiment in China." The carrier's capacity discipline over the past 18 months and improving air cargo fundamentals heading into peak season would also buoy yields, he added.
The carrier's results were also weighed down by losses from affiliate Air China Ltd. and Cathay Pacific's cargo joint venture with the Chinese flag carrier. Combined losses from Cathay Pacific's affiliates, including Air China, widened to HK$265 million from HK$155 million a year earlier partly due to substantial foreign-exchange losses as the yuan depreciated against the Hong Kong dollar.
Cathay Pacific holds a roughly 20% stake in Air China and Air China, in turn, has a 30% stake in the Hong Kong carrier.
High fuel prices also hurt Cathay Pacific's profitability. In the first half, the airline's fuel costs, which accounted for 38% of its total operating costs, rose 5.2% to HK$19.95 billion from HK$18.97 billion.
Cathay Pacific, which also owns China-focused Hong Kong Dragon Airlines Ltd., said its first-half revenue rose 4.6% to HK$50.84 billion from HK$48.58 billion on improved demand for air traffic. The two airlines carried a combined 15.44 million passengers in the first half, a 6.5% gain from a year earlier. It recommended a first-half dividend of 10 Hong Kong cents, up from six cents a year earlier.
Source: Wall Street Journal by Joanne Chiu
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