Turbulence ahead for HK’s flag carrier: Analysts

20-Mar-2017 Intellasia | CNBC | 6:00 AM Print This Post

There will not be a big turnaround for Hong Kong’s Cathay Pacific this year, despite its best efforts to cut costs, analysts told CNBC.

On Wednesday, Cathay Pacific reported its first annual loss since 2008 of HK$575 million ($74 million) in 2016, compared to a profit of HK$6 billion the previous year, marking only the third full-year loss in seven decades.

The Hong Kong flag carrier cited factors such as the strong Hong Kong dollar, overcapacity and stiffer competition from mainland Chinese carriers. The carrier was ranked 2016′s safest airline in the world, according to the Germany’s JACDEC Institute.

“There’s no way to sugar-coat it, Cathay Pacific’s latest earnings were horrible and I expect it will be more of the same in 2017 as its revenues are under pressure from low yields,” Mohshin Aziz, regional aviation analyst and associate director at Maybank Kim Eng Securities.

Aziz added that a significant problem for Cathay Pacific is its fuel hedge.

“Most of (Cathay Pacific’s) competitors don’t have a fuel hedge, which allows them to flexibility to lower their ticket prices in the midst of oil price volatility, but Cathay doesn’t have that liberty,” he said.

Cathay made a decision in 2015 to protect itself against high oil prices with a four-year hedge on jet fuel, which cost them a loss of HK$8.46 billion ($1.09 billion) in 2016.

An internal memo sent by Chief Executive Ivan Chu on Thursday said the firm needed to simplify its headquarters office structure and will cut the cost of middle to senior management roles by 30 percent.

The Hong Kong carrier confirmed the memo’s contents and said that the cost-cuts were necessary because it “needs a leaner, simpler structure.”

The changes are set to be announced in June, but analysts are not optimistic about the carrier’s transformation efforts.

Most of the cost savings – an estimated HK$1.6 billion ($206 million) – will only be realised in 2018 because the Hong Kong carrier will likely book in retrenchment costs in 2017, K. Ajith, director of Asia transport research at UOB Kay Hian told CNBC.

The airline is taking a “step in the right direction … however we still do not expect the restructure exercise to be a game-changer,” Ajith said.

The headcount reduction will lower Cathay’s fixed cost structure, but not their variable costs, said Maybank’s Aziz.

“Cathay will have to downsize and let go of its misguided vision to serve all of North Asia,” Aziz said, adding that the company wants to continue to grow its capacity by 4 percent to 5 percent in 2017 despite the poor operating environment.

“Downsizing is not an admission of defeat; it’s just about being smart because mainland Chinese carriers are not going to slow down.”

http://www.cnbc.com/2017/03/17/turbulence-ahead-for-hong-kongs-flag-carrier-analysts.html

 


Category: Hong Kong

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