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Cathay Pacific Results Strong, Guidance Gloomy

Reuters
Wednesday, 5 Mar 2008 | 3:38 AM ET

Cathay Pacific Airways, Asia's No. 3 carrier, posted a forecast-beating 85 percent jump in second-half profit on Wednesday on surging passenger demand and higher ticket prices but the global credit rout has dimmed its outlook for 2008.

Cathay, which bought rival Dragonair for HK$8.22 billion ($1.06 billion) in 2006, is battling a gloomy forecast this year as analysts predict the U.S. credit crisis will cause companies and consumers to cut spending, resulting in a slowdown in global business and personal travel.

Last month, The International Air Transport Association (IATA) said global air passenger traffic growth slowed to 4.3 percent in January from 6.7 percent in December, and warned of turbulence ahead.

Premium cabins account for roughly 40 percent of Cathay's revenue, according to Merrill Lynch. A looming cutback in international business travel as banks incur massive writedowns amid fears of a U.S. recession could spell trouble ahead, analysts said.

"We see Cathay Pacific as one of the most exposed to a downturn, given its focus on the long-haul, premium and air cargo markets, which are our main areas of concern," Merrill Lynch analysts wrote in a research note ahead of the results.

Cathay, Asia's largest airline by market value after Air China and Singapore Airlines reported HK$4.4 billion in second-half profit, up 85 percent from HK$2.4 billion in the same period last
year, according to Reuters calculations based on previously reported figures.

The result beat an average forecast of HK$3.35 billion, according to Reuters Estimates.

Full-year earnings soared 72 percent to a record-breaking HK$7.02 billion. That result beat an average forecast of HK$5.93 billion by 11 analysts according to Reuters Estimates.

Cathay carried a record 17.8 million passengers in 2007, up 6.2 percent from last year, with passenger revenue up 17 percent at HK$39.3 billion.

But cargo revenue growth -- which the firm has been fighting to expand -- rose just 10 percent to HK$13.2 billion. The results for the whole of 2007 are the first to include a full-year's contribution from Dragonair.

More Dark Clouds

Adding to U.S. recession concerns in 2008 are soaring jet fuel prices and an oversupply of seats.

CLSA predicts overall fuel costs will rise 18 percent. That could account for HK$32 billion, or 39 percent, of Cathay's 2008 costs, CLSA said in a research note.

Soaring jet fuel prices peaked at $117 a barrel in November.

Cathay is expected to add 11 percent seat capacity in 2008, including 35 percent in North America, which could crimp yields.

In December, the firm said it had agreed to buy eight Airbus A330 aircraft for a catalogue price of $1.7 billion, mainly to serve in the Asia Pacific region.

The booming economies in China and India might be able to soften the blow of a downturn, analysts say.

Roughly 60 percent of Cathay's revenues are derived from outside Hong Kong and China, however.

Last month, the carrier purchased 15 million shares in Air China, raising its stake to 18.1 percent from 17.5 percent.

Cathay publicly supported the failed bid made by Air China group in January for a tie-up with its rival China Eastern.

Shares in Cathay -- which is 40 percent controlled by Hong Kong conglomerate Swire Pacific -- climbed 4.8 percent during the second half, lagging a 27.7 percent rise on the benchmark Hang Seng Index.

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