Cathay Pacific’s cargo earnings shrink due to overcapacity

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Cathay PacificHong Kong-based Cathay Pacific Airways reported that cargo revenue for the first half of 2014 was HK$11.663 billion (US$1.504 billion), a rise of 3.4 percent compared to the same period in the previous year.

But cargo yield for the group’s two airlines, Cathay Pacific and Dragonair, decreased by 6.9 percent to HK$2.17 per share year-over-year.

Capacity increased by 10.8 percent, while the load factor rose by 0.8 percentage points to 63.2 percent.

Overall, the Cathay Pacific group’s profit swelled to HK$347 million (US$44.76 million) for the first six months of 2014, compared to a profit of HK$24 million in the first half of 2013.

Earnings per share were HK8.8 cents compared to earnings per share of HK0.6 cents for the corresponding period in the previous year. Turnover for the period rose by 4.6 percent to HK$50.84 billion.

A number of factors had a significant negative impact on the group’s business in the first six months of 2014, said the company in an August 13 official release. “The principal adverse factors were reduced passenger yield, continued weakness and over-capacity in the air cargo market, the continued high fuel price, and a weak performance from an associated company, Air China.”

Overcapacity in the cargo industry remains a major concern and has made it difficult to increase rates, noted the company. The airlines continued to manage capacity in line with demand in the first half of 2014. More cargo was carried in the bellies of passenger aircraft, reflecting increased use of Boeing 777-300ER aircraft.

Fuel remained the group’s most significant cost. “In the first half of 2014 fuel costs increased by 5.2 percent compared to the same period in 2013. In the same period, hedging activities resulted in a gain of HK$1.024 billion. A significant amount of this gain is unrealized. Cathay Pacific continues to increase fuel efficiency by modernizing its fleet. It is also focused on controlling costs,” the company stated.

The carrier continues to modernize its fleet. In the first six months of 2014 it took delivery of five new aircraft: two Boeing 777-300ERs, two Airbus A330-300s, and one Airbus A321-200 (for Dragonair). Two Boeing 747-400 passenger aircraft were retired during the period.

As part of agreements entered into with The Boeing Company in 2013, the airline is selling its six Boeing 747- 400F freighters back to Boeing through 2016.

In the first half of 2014, the company planned the accelerated retirement of 11 Airbus A340-300 aircraft. Four of these aircraft will be retired by the end of 2015 and the remaining seven will be retired by the end of 2017.

At June 30, 2014, it had 90 aircraft on order for delivery by 2024. In the second half of 2014, Cathay Pacific and Dragonair will take delivery of 11 new aircraft. Two of them were delivered in July, and two of them were scheduled to be delivered in August. Four Boeing 747-400 passenger aircraft will be retired, with two of them retired in August.

The group recorded a loss from Air China in the first half of 2014. Air China’s results were adversely affected by a difficult operating environment and substantial foreign exchange losses caused by the depreciation of the renminbi.

Cathay Pacific chairman John Slosar said: “The operating environment for the Cathay Pacific Group—and the aviation industry as a whole—remains challenging. We face significant competition in our passenger business. This makes it difficult to maintain yields. The air cargo business remains problematic because of excess capacity. Intense competition similarly puts pressure on yield.”

But he said business is expected to be better in the second half of 2014 as the company continues to strengthen its passenger network and connections. Moreover, “we expect our new freighter fleet and new cargo terminal to allow us to compete successfully in the air cargo market in the long term.”

Photo: Aero Icarus