Cathay Pacific Airways, Asia's No.3 carrier, surprised the market with a net loss for the first half on Wednesday as soaring fuel prices and a one-off fine more than offset firm passenger demand.
Cathay, which owns regional carrier Dragonair and has an 18.1 percent stake in mainland carrier Air China, and other Asian airlines are struggling this year as soaring fuel costs and easing demand for first and business class travel eat into profits.
Last month Cathay issued a profit warning and said its average jet kerosene price rose 60 percent in the first half from the same period last year.
On Wednesday, the firm said its total six-month fuel bill soared 83 percent to HK$19.31 billion ($2.47 billion), and fuel as a percentage of total operating costs rose to 45.3 percent from 33.6 percent during the reporting period.
"Global aviation is making a painful adjustment to the new reality of $100-plus oil," Cathay chairman Christopher Pratt said in a statement.
"The industry will not survive in its current form," he added. "Cathay Pacific is reducing costs where it can but there is a limit to how much cost can be saved before quality and brand are compromised and the service proposition to the customer is changed beyond recognition."
Hong Kong's largest carrier posted a net loss of HK$663 million ($84.95 million) for the January-June period, versus HK$2.58 billion in profit a year earlier.
The result was far worse than expectations. Of analysts polled by Reuters, three had forecast a profit on average of HK$913 million, while UBS had expected Cathay to post a loss of HK$400 million.
The results took into account a $60 million fine for cargo price-fixing charges leveled by the U.S. Department of Justice.
A Gloomy Year
In late July, Hong Kong's Civil Aviation Department said Cathay Pacific could increase fuel surcharges from HK$171 ($21.90) to HK$231 on short-haul flights and from HK$710 to HK$924 on long-haul flights.
The new surcharges could offer relief to Cathay's margins in the second-half of 2008, Goldman Sachs analysts said in a research note.
Still, the International Air Transport Association (IATA) issued a gloomy outlook in June, forecasting a $6.1 billion loss for the industry in 2008 -- a sharp turnaround from the $4.5 billion profit it predicted in April -- blaming sky-high fuel prices.
Cathay's passenger revenues climed 22.6 percent to roughly HK$42.4 billion for the first half. But analysts say slowing demand is also a major concern as companies reel from U.S. economic woes and cut back on travel budgets for globetrotting executives.
Cathay and Dragonair carried 12.5 million passengers in the first half, up 13.7 percent from the same period last year, although there was "softening" in first and business class demand.
The carrier's full-year net profit is expected to fall 44.4 percent to HK$3.9 billion, according to 9 analysts polled by Reuters.
However, UBS analyst Damien Horth told Reuters on Wednesday he now expects the firm to "break even" for the year.
"Clearly it is a very challenging environment for the whole industry," Horth said.
"But I think Cathay is well-positioned in the long run given its strong network in China, and the strength of its hub," he added.
Shares in Cathay tumbled 25 percent during the first half of 2008, lagging a
20.5 percent loss on Hong Kong's benchmark Hang Seng Index.