Call it a black swan event. For the Hong Kong-based Cathay Pacific Airways with its roots dated back to 1946, not only did it manage to maintain its nearly perfect record of profitability in every single year but two, it also made a staggering record annual profit of HK$14 billion (US$1.8 billion) in 2010, only two years after its biggest loss in 2008 amid the plummeting air travel demand owing to the global financial crisis along with fuel-hedging losses as oil price went in the wrong direction.

As a matter of life in the aviation industry, however, soaring oil prices have again become a major concern to the ongoing global economic recovery and threaten to lower the Hong Kong-based carrier’s profit level in 2011.

The airline posted a 2010 full-year profit of HK$14.048 billion (US$1.8 billion), more than doubling last year’s profit of HK$4.69 billion figure, whereas revenue increased by 33.7% to HK$89.5 billion from HK$66.9 billion a year ago, producing a glamourous profit margin of 15.7%, a 8.7 percentage points increase over last year’s figure.

This is a glamourous feat as Cathay Pacific chairman Christopher Pratt acknowledges the fair possibility of Cathay Pacific becoming the world’s most profitable airline in terms of net profit for 2010, which is still very notable even if the biggest Arabian carrier, Emirates Airline, is able to post an even bigger profit that paints a rosier picture.

Image Courtesy of Hartsfield Photography

Importantly, Cathay Pacific recorded an unprecedented 50.1% increase in its cargo revenue to HK$25.9 billion and cargo yields flew sky-high to HK$2.33 which represents a 25.3% increase over the prior year, propelling it and its base, Hong Kong International Airport (HKIA), to become the world’s largest freight carrier and airport, respectively. The number of tonnes of freight carried surged 18.1% to 1.8 million tonnes despite a 15.2% increase in capacity, producing a cargo load factor of 75.7% which is in stark contrast to the shocking double-digit cargo traffic decline still fresh in airline executives’ minds not too long ago.

Similarly, the picture has been rosy on the passenger business as well. Passenger yield soared by 19.8% to HK61.2 cents on a 9.1% increase in the number of passengers carried to 26.8 million and a proportionately less capacity increase of 4.1%, leading to a 2.9% year-over-year jump in load factor to 83.4%.

Though the Cathay Pacific Group results have been partially skewed as it recorded a HK$2.17 billion one-off gain by selling its stakes in Hong Kong Air Cargo Terminals (HKCTL) and a HK$868 million gain from the “deemed disposal” of Air China’s share, which was a result as its Beijing counterparts issued additional shares and hence diluted Cathay Pacific’s shares in the Chinese flag carrier.

Meanwhile, the bright picture facing Asia’s fifth-biggest carrier by market value (at press time) is not without concerns, however.

“The rapid turnround in our business from the lows of 2008 and much of 2009 to the record highs of 2010 is very welcome. It is also indicative of the volatile nature of our business. We cannot afford to be complacent. Our results would be adversely affected, and very quickly so, by a return to recessionary economic conditions. Demand is at present expected to remain strong in 2011, but this expectation could be undermined if the current (or any higher) level of oil prices were to reduce global economic activity,” Cathay Pacific chairman Christopher Pratt cautioned.

He could not be possibly more correct.

Cathay Pacific’s total fuel cost skyrocketed by 40.4% and Brent oil prices jumped in London to as high as US$120 a barrel amid political turmoil in the Africa/Middle East region in the early months of 2011.

Coupled with a 4.5% and 12% increase in its flight attendants and pilots’ monthly salaries, Cathay Pacific will be facing a considerable amount of pressure on its 2011 profit (“Cathay Pacific to face pressure on 2011 profit“, 18th Jan 11).

Notwithstanding these challenges that lie ahead of the carrier, Cathay Pacific nevertheless has a proven track record of managing its costs as well as capacity prudently while exploring the huge Chinese market which Hong Kong is at its doorsteps which stands ready to reap the benefits of a burgeoning Chinese economy and thereby realises Cathay Pacific’s fullest potential.

A clear example of these prudent management practices can be seen by its newly-announced orders for 15 additional Airbus A330-300s and 10 additional 777-300ERs, in addition to leasing two more A350-900s from International Lease Finance Corporation (ILFC), with a view to replacing the 22 ageing Boeing 747-400s and 11 A340-300s in its fleet.

While one may argue that Cathay Pacific has a lot of investments going on, including the HK$5.5 billion in the construction of a new cargo terminal and a HK$1 billion upgrade in its Business Class cabin (“Cathay’s new business class to bring its premium brand to new heights“, 13th Dec 10), the 91 outstanding aircraft orders that worth HK$185 billion are the most natural and effective hedge to high oil prices without the unusually high risk that fuel hedging programmes carry.

“Our plan is to retire our 21 Boeing 747-400 and 11 Airbus A340-300 aircraft before the end of the decade as we take delivery progressively of new generation aircraft that will provide much greater fuel and operating cost efficiencies. This is important both for environmental reasons and from a financial perspective as fuel remains our greatest single cost,” outgoing Cathay Pacific chief executive Tony Tyler commented.

“Cathay Pacific has ambitious plans moving forward and we need to ensure that we have a highly efficient and environmentally friendly fleet to meet those plans,” Tyler stressed.

As Cathay Pacific is due to receive 3 new A330-300s, 6 brand-new Boeing 747-8F freighter and 6 Boeing 777-300ERs which deliver a 22% fuel burn saving versus the 747-400, it is now mulling to order 14 additional new aircraft which Aspire Aviation‘s source indicates the Boeing 777-300ER is a frontrunner due to its relative availability which may allow the oneworld-member carrier to speed up its fleet renewal plan.

Furthermore, with its strong balance sheet and a staggering but welcoming 40.9% drop in net borrowings which led to a nose-dive in its debt-to-equity ratio to an unrivalled level of 0.28 from last year’s 0.62, obtaining financing would likely be easy and the financing cost to fund Cathay Pacific’s ambitious expansion is very likely to be cheap.

“The airline industry is challenging and unpredictable. We will continue to manage our finances prudently and will strive to keep costs firmly under control. Many good things happened in 2010. I am confident that these, together with our core strengths of a capable and committed team, a superb international network, the quality of our product and services, our strong relationship with Air China and our position in Hong Kong, one of the world’s great international aviation hubs and a key gateway to Mainland China, will help to ensure the continued success of the [Cathay Pacific] Group,” Cathay Pacific chairman Christopher Pratt lamented.

In conclusion, with Cathay Pacific’s prudent management practices in finance and capacity, coupled with its strong balance sheet and unlike its some of its peers that are ridden by debt, cheap financing will be readily available for Cathay Pacific’s ambitious expansion in its network, as well as its fleet replacement plan.

Put it simply, sky will hopefully not be the limit for Cathay Pacific.

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