BEIJING: Cathay Pacific Airways Ltd. slumped to a surprise loss on surging fuel expenses and past hedging contracts gone awry, challenging Chief Executive Officer Rupert Hogg’s efforts to turn around the carrier that faces increasing competition from mainland Chinese airlines.
The premium carrier reported a net loss of HK$263 million (US$34 million) for the six months through June, according to a statement on Wednesday. That compares with a loss of HK$2.05 billion a year earlier and the median estimate for a profit of HK$140 million in a Bloomberg News survey of five analysts.
That is a setback for Hogg, who’s been steering a three-year transformation program since taking over as CEO in May 2017 to help turn around the Hong Kong-based carrier after two annual losses. Hogg has scaled back oil-hedging contracts that have caused a drag on profitability, while cutting jobs and improving services in business-class cabins to lure back the premium traveller, one of his key focuses to shore up earnings.
“Our airlines usually perform better in the second half of the year,” Chairman John Slosar said in a letter to shareholders. “We expect this to be the case in 2018,” he said, adding fuel costs are set to rise while hedging losses will decline.
Cathay Pacific and Cathay Dragon paid 32% more for fuel, the biggest expense for carriers in Asia, as a 19% surge in Brent crude during the period weighed on costs. Fuel-hedging losses were at HK$653 million, though they narrowed from HK$3.24 billion a year earlier.
Under Hogg’s transformation program to tackle competition, Cathay Pacific has taken steps to improve its cabin offerings by providing wider choice of meals in business-class cabins on long-haul flights, added newer and more fuel-efficient aircraft to its fleet and started services to more destinations.
Also, at the back end of the aircraft — the economy class — the carrier is trying to boost revenue by adding another row of seats on its Boeing Co. 777 planes. The change will result in a 3-4-3 configuration, in line with the industry standard adopted by many premium carriers, although legroom would remain the same, Cathay said in March last year.
“We believe we are on track to achieve our objective of achieving sustainable long-term performance for our airline businesses,” Slosar said. “I am confident in our future.”
Some of those measures seem to be yielding results. Passenger yield — a key metric of profitability measured by the money earned from carrying a passenger per kilometre — rose 7.6% in the first half from a year ago to 55.4 Hong Kong cents, helped by increasing demand for its premium products. Cargo and mail yield jumped 16% to HK$1.93. Both the figures are their highest since 2015.
The carrier reported a profit of HK$792 million in the second half of 2017, although earnings from investments in associates including Air China Ltd. boosted those numbers. Cathay Pacific owns 18% of China’s flag carrier.
Cathay Pacific’s loss doubled to HK$1.26 billion in 2017 as the emergence of Chinese carriers such as Air China, China Southern Airlines Co. and China Eastern Airlines Corp. took the sheen off Hong Kong as a transit hub.
Cathay Pacific has said that it plans to increase passenger capacity by 4% to 5% a year, at least until the Hong Kong airport’s third runway starts operating, and will increase frequencies on the most popular routes.