Cathay's nightmare scenario playing out


Cathay Pacific's worst nightmares are playing out, prompting another profit warning of "disappointing results" for the full year.

A tidal wave of bad news has swamped the carrier recently:

  • Falling passenger demand: Demand has fallen across the board, putting pressure on load factors as the airline continues its aggressive capacity expansion strategy;
  • Weak premium traffic: Cathay observed that: "Corporate travel volumes in all classes are of concern as corporate clients begin to impose stricter travel policies on their employees."
  • Cargo downturn: Cathay, which has invested heavily in building up its cargo operation, stated continued declines in cargo demand are expected for the remainder of 2008, "reflecting increased competition, overcapacity and, to a lesser extent, adverse currency movements";
  • Currency losses: Cathay observed that revenue has started to "weaken materially", reflecting in particular a significant strengthening of the US dollar (against currencies in which Cathay Pacific earns a significant portion of its revenue), as well as reduced premium demand and cargo volumes;
  • Fuel hedging losses: As at 31-Oct-08, Cathay faced unrealised losses on fuel hedging contracts estimated at USD361 million;
  • Cross-Strait services expansion: The trebling of cross-Strait services between the Mainland and Taiwan (with crucial weekday services and a direct flight path saving hours of flight time) will "add pressure" on passenger and cargo revenues, according to Cathay;
  • Weak aircraft market: Cathay recently stated it would sell some B777s to help raise additional cash, though it cautioned it may not be able to complete the transaction given the current difficult environment.

It all adds up to a scenario that significantly outstrips the crisis Cathay experienced during the SARS outbreak. This downturn could be potentially quite protracted.

But nowhere in its detailed profit warning statement did Cathay indicate it would be adapting its strategy. It only advised investors to "exercise caution" in dealing with the company's shares. Cathay's shares closed down 1.3% yesterday prior to the profit warning. Its cross-equity partner, Air China, had a good day in response to the cross-Strait service expansion, with the Beijing carrier's shares advancing 8.1%.

Asia Pacific selected carriers' daily share price movements (% change): 05-Nov-08

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