Cathay Pacific profits soar, but economic concerns cloud outlook
Cathay Pacific reported a stellar earnings performance in 2007, but the environment, particularly in the cargo sector, will be more difficult in 2008. With its aggressive fleet expansion plans, Cathay is one of the region’s carriers most exposed to an economic downturn, in both cargo and premium travel markets.
Operating profit surged by almost half last year, thanks to the benefits of its takeover of Dragonair and a strong economic environment, which saw passenger yields return to pre-Asian Financial Crisis levels a decade ago.
Comparing Cathay’s yields indexed back to 1996, cargo has experienced a slow and steady decline since the 2000 peak, while passenger yields have been remarkably resilient this decade following big declines in the 1990s. CEO, Tony Tyler, stated the cargo market, particularly in Japan, was “soft last year and remains soft”. He blamed the loss of volumes to marine shipping, which offers more competitive rates than air in this era of high fuel prices, and warned this trend “may continue”.
The cargo segment is a key concern going forward and it is not surprising that plans announced in Jun-06 to launch a freight JV with Air China in Shanghai by the end of last year have quietly slipped off the radar.
Meanwhile, Cathay continues to take a back seat in the battle for control of China Eastern Airlines, confirming only that it would support Air China’s approaches to the Shanghai-based carrier. Neutralising competition in the important Hong Kong-Shanghai sector will be increasingly important for Cathay as competition in the North Asian region intensifies in the year ahead.
If the US downturn does spread to Asia, moves to rationalise capacity in the region could intensify. For Air China and Cathay, controlling China Eastern could therefore become pivotal.