U.S. News

Cathay's Net Up 23%, Warns of Fuel Swings in 2007


Cathay Pacific Airways, Asia's third-largest carrier, posted a better-than-expected 24% rise in net profit on Wednesday but warned that fuel price volatility could weigh in 2007.

Analysts say the airline -- which bought smaller rival Dragonair for HK$8.22 billion (US$1.05 billion) in 2006 -- will realize some HK$1.6 billion in annual profits from its tie-up with the other Hong Kong carrier, through layoffs and increased revenue from China.

And Asia's largest airline by market value after Air China and Singapore Airlines is expected to maintain fuel hedging levels at 40%, but did not comment on its hedging activity for 2007.

"We expect competition to remain keen in 2007 and the high, volatile fuel price will continue to have a major impact on our business," chairman Christopher Pratt said in a statement.

"We will work to optimize the significant commercial opportunity provided by our purchase of Dragonair.

Shares of Cathay rose 2.33% in morning trade on Wednesday ahead of its results announcement. Its stock is down 1.67% this year.

Cathay began booking results from Dragonair as well as from a stake in Air China in 2006. It posted a net profit of HK$4.09 billion ($524 million) for the year ended December 31, compared with HK$3.3 billion a year earlier.

The earnings result beat an average forecast of HK$3.75 billion by 13 analysts, according to Reuters Estimates.

"It's higher than expected, and comes mainly on the back of passenger yield," said Jim Wong, a Hong Kong-based analyst for BNP Paribas.

It is still unclear if Cathay can sustain similar passenger yield going forward, Wong added.

Passenger Revenue Rises

The firm's passenger revenue increased by 10.9% to a record HK$33.6 billion (US$4.3 billion), and cargo rose by 7.2% to 1,199,000 tons, the company said.

Fuel costs increased due to an 18.5% rise in the average fuel price to US$86 per barrel and a 5.8% increase in consumption to 29 million barrels, the company said.

Asian airlines had been expected to scale back their hedging this year -- through swaps or options, for instance -- as prices retreat from 2006 highs.

Oil prices climbed toward $61 a barrel on Wednesday, drawing strength from forecasts for a drop in gasoline inventories in the United States. A Reuters poll of analysts forecast U.S. oil at $61.37 this year and at $59.89 for 2008.

Cathay -- which is 40%-controlled by Hong Kong conglomerate Swire Pacific -- also plans to set up a cargo venture with partner Air China this year.

The mainland carrier -- which has won approval to increase its stake in Cathay to 17.5% -- would hold 50% of the tie-up and Cathay the remainder.