Cathay Pacific's difficult 2016: hedging loss, growth cuts, A350 delay, unions, 10 abreast response

Asia's flag airlines are a stately bunch. They have generally avoided the major public upsets of European and American peers while state or family/conglomerate ownership grants a long term mindset, and their renowned service casts a public halo. Cathay Pacific especially strives for continuity. Thus it is an upset when, as now, prospects for the year shift.

2016 was to be notable for Cathay, financially and strategically. Cathay expected further benefit from fuel as it came off hedges. Delivery of its first 12 A350s were to open new routes, restore frequencies and right size capacity. This has changed - but not because of the Chinese economy, as some will be quick to speculate. The continuing decline in fuel prices has likely seen Cathay's unrealised hedging losses increase (to approximately USD1 billion) with much to become realised losses. This is in an environment where mainland Chinese carriers are unhedged and other competitors have shorter hedging obligations, disadvantaging Cathay in an over capacity market.

Growth is expected to be cut owing to a further A350 delivery delay and pilot union "contract compliance" that greatly reduces flexibility and the ability to train new pilots, limiting expansion. These new challenges add to existing concerns over weak passenger and cargo yields, and a falling stock price.

Further integration with wholly owned Dragonair is still planned (possibly with a re-branding) while finally moving to 10 abreast 777 economy seating reduces unit costs but invites an unwelcome response from passengers.