Cathay Pacific 1H2016: market squirms at 80% profit drop. Cathay not in crisis; but must cut costs

The public did not react well to Cathay Pacific 1H2016 group profits dropping over 80%. Ironically there was little attention that the airlines have returned to being unprofitable amid factors ranging from strong competition to a USD576 million fuel hedging loss, greater than a year ago. Growth for the year is turning out to have only a minor adjustment: Cathay does not consider itself to be in crisis.

Despite squirms of supposed displeased investors and their questions about the future of CEO Ivan Chu, the actual two investors that matter are majority owners Swire and Air China. Their vision is one for the long term. Unlike airlines in the US or Europe, Cathay does not answer to the market and does not need to produce quarterly improvements. If the shareholders retain their vision and believe overcapacity is necessary to hold market share for the long term, then yield declines and unprofitability are uncomfortably accepted. The balance sheet is strong enough.

So the question is not if Cathay should address sagging yields and hedging losses, but rather whether Cathay can achieve its long term goal of being not just a premium airline but more importantly – a travel and lifestyle brand. There may not be an answer in this decade. Cathay may have the greatest self-assurance measured against the potential risk of traffic being siphoned from competitors. What is certain is that cost-cutting is needed, but remains elusive.

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