Hong Kong's Cathay Pacific to report H1 net profit up 23-41

They said the major drivers in the Hong Kong-based airline's earnings for the period were strong passenger demand and earnings from its minority stake in Chinese flag carrier Air China.

They noted, however, that Cathay's results may be weighed down somewhat by the weak performance of its cargo business.

Cathay Pacific increased its stake in Air China to the current level of 17.64 pct from 10 pct following a complex five-party agreement in June last year which provided for Cathay to acquire the remaining 82.21 pct of regional carrier Dragonair.

In exchange for Air China's exit from Dragonair, the mainland Chinese airline took a stake in Cathay, and it now holds a total of 17.45 pct. Cathay, in turn, expanded its interest in Air China.

Morgan Stanley said in a research report that it expects Cathay to report first-half net profit of 2.36 bln hkd, up 41 pct year-on-year, driven by the full benefits of the integration into its operations of Dragonair and the earnings contribution that it received for its minority interest in Air China.

"The first half traffic performance continued to underscore a strong passenger market due to tight capacity, particularly for the premium travel market," the US investment house said.

Morgan Stanley, however, noted that Cathay's cargo operation has been hit by excess capacity and weak air cargo demand on the routes it serves.

It said that it expects the combined group passenger yield for Cathay and Dragonair to be exceptionally strong, serving as a key factor in driving up its operating revenues for the first half.

"The extremely tight capacity and reduced threat from Gulf carriers launching aggressive capacity to the Asia/Pacific market will keep passenger yields firm this year despite declining fuel surcharges," Morgan Stanley said.
Meanwhile, Merrill Lynch estimated Cathay's first half earnings to come in at 2.05 bln hkd, up 23 pct from the same period last year.

"We believe that Cathay has already begun to extract significant revenue and cost synergies from its stake (in Dragonair), while a downsizing by mainland airlines of their Hong Kong routes will also have helped," it said.

Merrill Lynch said that aside from looking at the benefits of its acquisition of Dragonair, investors may also pay close attention to the softness in Cathay's air cargo business.

The US investment house expects Cathay's full-year earnings to get a considerable boost from its passenger forward booking system, especially premium traffic.

"This should help drive pricing higher and push net income to a record 5.5 bln hkd in the full year," it said.

But Merrill Lynch said it expects Cathay to report flat operating margin for the first half, dragged down by lower profitability at Dragonair.

Morgan Stanley said it expects Cathay to declare an interim dividend of 0.24 hkd per share, up from 0.20 hkd a year ago, while Merrill Lynch expects the interim dividend to remain unchanged.