Cathay Pacific 2015 profit: USD1 billion fuel hedging loss obscures strategic weaknesses

A billion dollars is difficult to ignore. So with little surprise Cathay Pacific's HKD8.5 billion (USD1.09 billion) realised fuel hedging loss dominated the story of its 2015 annual results. Many of Cathay's peers - airlines in mainland China and the Gulf - are unhedged, but those that are hedged are generally coming off their most restrictive hedges in 2016. Yet Cathay has hedged twice as long as other airlines, so hedging losses will continue well into 2016. The hedging volatility is in contrast to Cathay being consistent and conservative elsewhere in the business.

Despite increasing profits, there is large concern over underlying business fundamentals. Cargo, accounting for a quarter of revenue, has been a depressed story for some years and is now worsening. Cargo's underperformance has demanded stronger result from the passenger business. Yet the passenger business faces increasing challenges as competitors embark on ambitious growth and Cathay's premium strategy fails to deliver sufficient passenger volumes and yields. Long haul premium demand is weakening and new destinations planned for 2017 are being postponed. A 6% decrease in total operating costs in 2015 was mostly passed on to passengers as yields dropped 11%. Ex-fuel costs grew 2%, lower than the 6% increase in capacity. Further cost savings will be as necessary as they are precious.