Gleam of hope for Cathay Pacific in stormy skies

Call it a black swan event. Hong Kong-based Cathay Pacific Airways, Asia’s largest international carrier, has posted its worst interim results for the first half of 2012 since the 2003 severe acute respiratory syndrome (SARS) outbreak and the 2008 global financial crisis in recording a HK$935 million (US$120.6 million) loss attributable to shareholders, a dramatic reversal of the HK$2.81 billion (US$359.9 million) six-month profit posted in the prior year period.

However, the oneworld alliance member is staying the course and making significant investments in its fleet, in-flight products and cargo facilities that promise to be state-of-the-art and ensure it will reap the most benefit from an eventual economic upturn.

The disappointing HK$935 million 2012 first-half loss was in contrast to the HK$122.5 million interim profit forecast by analysts in a Reuters poll. A toxic mix of high fuel cost, slumping cargo and softening yields significantly weighed on the bottom line of the world’s largest freight carrier.

“The combination of very, very high fuel prices and generally weak revenues is a big challenge for every airline in the world,” Cathay Pacific chief executive John Slosar said.

With the European sovereign debt crisis entering a new chapter in the first-half along with a snap Greek election denting business confidence which impacted the global economy, Cathay Pacific, which is heavily exposed to any volatility at its cargo business, is unquestionably being significantly affected by a cargo conundrum.

Cargo revenue in the first half of 2012 declined by 7.56% from HK$12.87 billion in 2011 first-half to HK$11.897 billion this year as the number of tonnes of cargo carried slumped by 9.8% from 836,000 tonnes in 2011 first-half to 754,000 tonnes in 2012 first-half. Freight traffic, measured in freight tonnage kilometres (FTKs), decreased by 10.1% year-over-year to 4.325 billion, outpacing a 4.3% year-over-year cut in cargo capacity, measured in available cargo and mail tonnage kilometres (ACTK), to 6.729 billion, thereby leading to a 4.1% decrease in cargo load factor to 64.3% in 2012 first-half from 68.4% a year ago.

Cargo yield nonetheless stabilised with a marginal 0.4% drop from HK$2.42 a year earlier to HK$2.41.

Its passenger business, meanwhile, is in a relatively better shape. Its passenger revenue grew by 9.2% from HK$31.8 billion in 2011 first-half to HK$34.7 billion in 2012 first-half, on a 8.6% increase in the number of passengers carried from 13.2 million in 2011 first-half to 14.3 million this year. Passenger traffic, measured in revenue passenger kilometres (RPKs), rose by 8% year-over-year to 52.35 billion, whereas passenger capacity in available seat kilometres (ASKs) rose by 6.9% from 61.1 billion in 2011 first-half to 65.35 billion this year, producing a 0.8% higher load factor at 80.1% from 79.3% a year earlier.

Though passenger yield increased considerably slower at 1.2% to 66.1 HK cents from 65.3 HK cents a year earlier, demonstrating the decline in business confidence has resulted in a deterioration in the traffic mix at the Hong Kong-based premium carrier.

“Premium class demand was strong at the beginning of the year. However, as employees of major corporations started to travel less in response to economic uncertainty, there was a reduction in the number of premium class passengers,” the airline said in a statement.

“In terms of the – there was a 1.2% increase in yield. It wasn’t too different between the two classes. Front end was marginally down, back end was marginally above that,” Cathay Pacific finance director Martin Murray commented.

Overall, revenue increased by 4.4% in the six-month period to HK$48.86 billion from HK$46.79 billion a year earlier, which was dwarfed by a 11.56% increase in operating expense from HK$44 billion last year to HK$49.1 billion this year, primarily driven by a staggering 23.5% increase in aircraft maintenance expense and a 9.9% increase in fuel costs, thereby producing an operating loss of HK$221 million in 2012 first-half, reversed from an interim operating profit of HK$2.8 billion for the 2011 first-half.

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Special items dragged first-half results down
However, Cathay Pacific’s 2012 first-half results were significantly dragged down by special items and it should have posted a small operating profit in 2012 first-half had there not been special items.

For instance, aircraft maintenance expense increased by HK$881 million, or 23.5% from HK$3.76 billion recorded a year earlier to HK$4.64 billion owing to increased shop visits by Rolls-Royce RB211 engines powering the gas-guzzling Boeing 747-400 fleet which are “hugely expensive”, according to Cathay Pacific chief executive John Slosar at a press conference presenting the 6-month results, as well as the maintenance expense incurred before selling 747-400BCF (Boeing Converted Freighter) freighters to Air China Cargo (ACC).

Moreover, Cathay Pacific took a special charge, or write-down, of HK$247 million due to scrapping 1 Boeing 747-400BCF (Boeing Converted Freighter) during the 6-month period. Also weighing on the bottom line was a HK$416 million increase in aircraft depreciation to HK$4.4 billion from HK$4.1 billion due to faster aircraft retirements of the Boeing 747-400s and Airbus A340-300s.

“There was a HK$247 million write-off on one BCF, which is included in ‘others’ in the P&L account. The depreciation expense was HK$4.4 billion. The HK$416 million referred to is the reconciliation on page 15 from the 2011 operating profit to this year and merely reflects the increase. The additional depreciation includes the accelerated depreciation on the B747s that are being retired early. The 747 and 340s are included in the depreciation charge for the year,” Cathay Pacific finance director Martin Murray said in a reply to Aspire Aviation.

Furthermore, Air China Cargo (ACC) booked a just over HK$300 million loss for the 6-month period, in which Cathay Pacific holds 49% economic interest in the Shanghai-based cargo joint venture (JV) with Air China. This was partially offset by a HK$300 million profit sharing from Cathay Pacific’s 19.53% stake in Air China, only to be further dragged down by a HK$283 million impairment booked against Air China’s tax and pension provisions made in the Chinese flag carrier’s year-end results.

On the other hand, fuel costs increased by 9.9% net of fuel hedging gains from HK$18.6 billion in 2011 first-half to HK$20.4 billion in 2012 first-half owing to a 4.6% increase in average into plane jet fuel price at US$134 per barrel.

Cost per available tonnage kilometre (CATK) without fuel increased by 12.4% from HK$1.94 a year ago to HK$2.18 this year, whereas CATK including fuel rose by 11% from HK$3.35 last year to HK$3.72 in 2012 first-half, helped by a HK$391 million fuel hedging gain, 59.4% lower from 2011 first-half’s HK$962 million fuel hedging gain. Fuel nevertheless accounted for 41.6% of Cathay Pacific Group’s operating cost.

“In terms of group operating cost, as we mentioned before it looks on first reading quite alarming the increase in costs. You have to bear in mind that on the passenger side the ASKs [available seat kilometres] have grown at 6.9%. So a lot of the costs go up with your capacity. So costs of 6.9% then 4% average wage increase etc. explains quite a lot of this. You’ll see there fuel is by far the biggest cost at 41%, over 41% of our costs. That’s the net fuel after the hedging gain is up 9.9%, so a significant increase in our main costs,” Cathay Pacific finance director Martin Murray clarified.

Simply put, Aspire Aviation thinks Cathay Pacific is dodging the bullet now rather than later for the aircraft depreciation and aircraft maintenance costs due to the faster retirement of its gas-guzzling Boeing 747-400 and Airbus A340-300 fleets and should have broken even in 2012 first-half had there not been so many special charges. Excluding the write-down of HK$247 million in scrapping 1 Boeing 747-400BCF (Boeing Converted Freighter), HK$416 million in higher aircraft depreciation and HK$283 non-recurring charge due to Air China’s provisions, Cathay Pacific would have recorded a HK$11 million 2012 interim profit, or largely broken even.

Image Courtesy of Cathay Pacific

On course to break even for 2012 full-year
The second half is traditionally stronger for Cathay Pacific’s operations and the 2012 second half is poised to be much improved absent the special charges incurred in the first-half, as well as significantly lower aircraft maintenance expense.

Most importantly, the cost-saving measures that Cathay Pacific announced back in May will begin to have a positive effect on the carrier’s profitability in the second-half, especially in the fourth-quarter.

Cathay Pacific in May announced a string of cost-saving measures, including earlier retirement of 9 Boeing 747-400s, the grounding of 3 Boeing 747-400BCFs (Boeing Converted Freighters) as well as down-gauging capacity growth for the Cathay Pacific Group and its Cathay Pacific unit.

Passenger capacity growth, measured in available seat kilometres (ASKs), for the Cathay Pacific Group will be reduced to 3.2% from 7%, whereas the ASK growth at its Cathay Pacific unit will be reduced from 7% to 2%, while Dragonair’s ASK growth will be boosted to 9.2% from 7.3% as a result of robust growth in the Asia/Pacific region.

Cargo will have its capacity, measured in available cargo and mail tonnage kilometres (ACTK), grow at 4% instead of 7%, whereas dedicated freighter capacity will have no growth instead of the original target of 3%.

Cathay Pacific will now take 3 Boeing 747-400s out of service in September 2012, 2 in March 2013, 1 in June 2013, 1 in September 2013, 1 in November 2013 and 1 in January 2014, for a total of 3 in 2012, 5 in 2013 and 1 in 2014. Cathay Pacific will now replace its 747-400s on long-haul routes with the fuel-efficient Boeing 777-300ER aircraft, which the airline says is 22% more fuel efficient per payload tonne than a 747-400, while limiting the 747-400s on intra-Asia routes.

“It’s quite complicated, but at the end of the day the simple answer is we didn’t move all the less fuel efficient aircraft out as early as you think. So all of the transfers that we’ve made of 777s from North America into Europe and European 744s going out have – and a fleet of whatever we are, hasn’t made as big a difference in the first half as it will do in the second half,” Cathay Pacific director of corporate development James Barrington explained.

In addition, Cathay Pacific now only has 3 Boeing 747-400BCFs freighters in its fleet, reduced from 7 earlier this year as 1 -400BCF was sold to Air China Cargo in July, 2 -400BCFs were parked and another -400BCF will be sold to ACC later.

In doing so, Cathay Pacific is likely to yield a material fuel burn saving in the second-half, as the Boeing 747-400 aircraft burns fuel to carry fuel over the long-haul, replacing the 747-400 with 777-300ER would have a proportionately bigger fuel saving. In particular, the cost saving for replacing the 747-400 with Boeing 777-300ERs on European routes would be even bigger, as the European Union emissions trading scheme (EU ETS) means every tonne of carbon dioxide (CO2) emissions is charged from the pushback of an aircraft at Hong Kong International Airport even when the aircraft is in foreign airspace and at foreign airport.

A 22% fuel burn saving that translates into 22% lower CO2 emissions per payload tonne would significantly reduce the emissions charge for European flights. As for grounding the 747-400BCF, the cost saving is more significant as not only the 747-8F is 16% more fuel efficient per payload tonne than the 747-400F and around 23% more fuel efficient than the 747-400BCF, the 747-400BCF is also maintenance-heavy which is very expensive. Grounding these maintenance-intensive, fuel inefficient 747-400BCF freighters and taking cargo capacity out of a soft market not only saves expensive fuel and maintenance costs, but also prevents further pressuring the cargo yields.

Furthermore, as Dragonair expands regionally which has resumed flights to Xi’an in April, Guilin and Taichung in May, as well as launched new services to Jeju and Clark in May and Chiang Mai in July, an increase in staff cost is inevitable.

Though Cathay Pacific has offered unpaid leave for its cabin crew in order to reduce staff costs as the carrier pares and reduces frequencies on long-haul routes, cancels all non-essential business travel, reduces expenditure on marketing and information technology (IT) as well as imposed a hiring freeze on ground staff.

“Although we’re continuing to recruit our crew for growth we also have an unpaid leave scheme, to try and make sure that we match the number of crew we need with the reduced flying we’ve got. And the amount of unpaid leave we’ve offered to our cabin crew has been 100% taken up. So on the cabin crew side certainly where the demand for unpaid leave is high. Sometimes when you have new crew coming in at the bottom of the pay scale and senior crew taking unpaid leave, it can sometimes end up as a minor cost reduction,” Cathay Pacific director of corporate development James Barrington said.

With these savings stemming from the retirement of gas-guzzling Boeing 747-400 passenger aircraft, grounding of 747-400BCF freighters, paring of capacity growth in long-haul market, Aspire Aviation believes a break-even for 2012 full-year results is achievable.

Image Courtesy of Cathay Pacific

Giving customers a reason to fly Cathay Pacific
A theme that Cathay Pacific management kept making at both the 2012 interim results analysts call and the press conference was “giving customers a reason to fly Cathay Pacific”.

Indeed, Cathay Pacific has made significant investment and tremendous improvements in its in-flight products, including the New Business Class that was recognised as the “World’s Best Business Class” by Skytrax in early July.

Cathay Pacific’s New Business Class has a seat pitch of 82 inches and seat width of 21 inches which could be increased by another 6.5 inches when converted into a fully lie-flat bed with an ottoman. Its 82 inches seat pitch is 49% larger than Singapore Airlines’ 55 inches and has struck the perfect balance between seat pitch and width which enables business class passengers to put their arms on the armrests comfortably whereas SIA’s 34 inches width makes it difficult to put an arm on the armrests comfortably, Aspire Aviation understands.

The New Business Class is available on 30 aircraft at the end of June and will be available on 47 and 64 aircraft by the end of 2013 and 2014, respectively.

The Premium Economy Class which offers passengers a real upgrade with priority boarding, champagne, better catering, extra baggage allowance and 38 inches of seat width and 19.5 inches, was launched during the 2012 first-half.

Premium Economy Class will also be rolled out aggressively with 48 aircraft being installed with the enclosed cabin that provides a private environment by the end of 2012, up from 15 at the end of June. 86 aircraft will be installed with Premium Economy Class by the end of 2013.

As the premium economy product is being aggressively rolled out, how much will the well-received product improve the profitability is an interesting item to watch.

A premium economy class is designed to be a long-haul product that extracts consumer surplus (total use value – total exchange value, the amount of a good one is willing to forego in order to obtain all of the amount of another good – total exchange value) from those who are willing and able to pay twice the economy class fare, in exchange for better seats, services and in-flight catering, yet are unprepared to pay for a full business class fare whose fare is triple or quadruple the economy class fare.

Provided that a premium economy class be structured properly, it should minimise the trade-down from business class to economy class while maximise the upgrade from economy class by utilising a powerful revenue management system (RMS) with price differentiation. This is paramount as the number of premium travel continues to decline to just over 8% in a paradigm shift that sees the premium travel never rebounding to the 9% pre-global financial crisis level, according to Geneva-based industry body International Air Transport Association’s (IATA) latest premium traffic monitor.

Cathay Pacific made clear that it will not offer free upgrades for economy class passengers to premium economy class, and by pricing the lowest-priced Premium Economy Class seat as not much more expensive than the highest-priced Economy Class seat, the carrier should be able to entice to the highest-paying economy class passenger to pay a small premium to enjoy a real upgrade. Similarly, by pricing the highest-priced Premium Economy Class seat as not meaningfully cheaper than the cheapest available Business Class seat, the airline should be able to minimise any revenue dilution resulting from a trade-down.

After all, Premium Economy Class is a long-haul product whose price elasticity of demand is much higher than Business Class and Cathay Pacific seems to have done a superb job in distinguishing the two products while establishing a niche in Premium Economy Class that helps extract a revenue premium. This bodes well for Cathay Pacific as it carries a large number of origin and destination (O&D) traffic to and from China, where an expanding middle class would be willing and able to pay for better seats and services.

Much akin to the well-received Premium Economy Class product, the New Long-haul Economy Class is being rolled out aggressively across Cathay Pacific’s fleet, with 42 aircraft being installed with the New Long-haul Economy Class by the end of 2012, quadrupled from just 13 aircraft at the end of June. By the end of 2013, 64 aircraft will be fitted with the much-improved product, whose significantly thicker cushioning, touchscreen inflight entertainment system (IFE) and a small storage space below the television screen, made it very well-received by passengers.

What is more, Cathay Pacific is prepared to up the ante, making further product enhancement in this very difficult global economy. According to Aspire Aviation‘s sources at the Hong Kong-based carrier, Cathay Pacific is going to roll out a New Regional Business Class featuring fully lie-flat seats this October, possibly along with a New Regional Economy Class that is standardised with the New Long-haul Economy Class seat.

This would be in line with the airline’s strategy in investing in its products heavily, such as the reopening of The Wing business class lounge in January this year.

Limited competition
Instead of dumping capacity and cutting fares, Cathay Pacific’s response towards potential future competition is to further differentiate its products and services such that travellers would be prepared to accept to pay a premium for flying Cathay Pacific, or in the airline’s term, “giving customers the reason to come back to Cathay Pacific”.

Acting in favour of Cathay Pacific is the fact that there is going to be limited competition in the foreseeable future in Hong Kong.

First of all, Hong Kong Airlines is arguably in a crisis plagued by management and operational issues. The HNA Group subsidiary in which the Mainland China’s 4th-largest carrier holds 46% of shares, has seen its air operator’s certificate (AOC) being limited to 20 aircraft by the Hong Kong Civil Aviation Department (HKCAD) until it can demonstrate it has the “necessary equipment, organisation, staffing, maintenance and other arrangements to secure the safe operation of a larger aircraft fleet”.

“With a very rapid expansion of aircraft fleet in recent years, the Civil Aviation Department considers that it is time for Hong Kong Airlines to catch up with its current fleet size by consolidating their existing operations,” Hong Kong civil aviation regulator said in a statement.

As a result, Hong Kong Airlines has decided to phase out its 5 Boeing 737-800s from its fleet, according to a South China Morning Post report.

“[This] will also be in line with our strategy to keep a simple aircraft type in the company,” Hong Kong Airlines president Yang Jian-hong conceded.

“We are wholly supportive of the decisions made by the Civil Aviation Department in relation to conditions related to our AOC (air operator’s certificate). These are sensible for a company at our stage of growth. Given the current economic conditions, and the profitability of our regional routes, we believe that we now have the optimal fleet to continue to build a business focused on Asia/Pacific, certainly in the short term,” Hong Kong Airlines insisted.

This is in stark contrast to the aircraft order the airline currently has, including firm orders for 10 Airbus A380 superjumbos, 15 A350-900s and 24 and 7 outstanding orders for A320s and the A330-300s, respectively, as well as a memorandum of understanding (MoU) for 30 Boeing 787-9 Dreamliners, 2 787-8 VIP, 6 777F freighters and 10 747-8I Intercontinentals that are yet to be firmed up.

In the meantime, Hong Kong Airlines has decided to suspend the all-business class A330-200 “Club Premier” and “Club Classic” flights to London Gatwick from 10th September onwards, an operation which Aspire Aviation warned in November 2011 as unfeasible and unsustainable (“Hong Kong Airlines assumes big risk in ambitious expansion“, 28th Nov, 11).

“We believe that a regional model focused on Asia/Pacific is most appropriate for Hong Kong Airlines at this stage of our growth. Our key focus will be building our regional network and strengthening our business across China, Southeast Asia, Japan and Korea. As part of this decision, we will suspend our long-haul flights to London from 10 September 2012 until further notice,” Hong Kong Airlines president Yang Jian-hong said in a statement.

According to a South China Morning Post report last week, the all-business class flight costs HK$3 million to operate on each flight and incurs a daily loss of HK$1-2 million and a monthly loss of around HK$10 million, as Hong Kong Airlines was often forced to cancel the flights due to insufficient demand.

Following the suspension of this route that was plagued by low passenger loads at around 30%, high break-even load factor (BELF) owing to a high cost per available seat kilometre (CASK) and low yield, lack of a strong frequent flier programme, lack of flight frequencies, low aircraft utilisation and the choice of London Gatwick, which is 81 kilometres (50 miles) from the Canary Wharf business district, whereas London Heathrow is 36km (22 miles) away, or 20 minutes closer than London Gatwick; Hong Kong Airlines is studying routes to Brussels and Barcelona, both are equally unrealistic as the former is too thin to solely rely on business traffic to support whereas the latter is unfeasible as the Spanish economy is in a tailspin with unemployment above 24%.

In Aspire Aviation‘s opinion, Hong Kong Airlines needs to restructure its management and lay out a clear vision as a volume carrier carrying traffic to and from China, similar to Dubai-based Emirates focusing on origin and destination (O&D) traffic between Australia and Europe, instead of setting its sights on overtaking and outgrowing Cathay Pacific, only to have found to be living under the shadows of it.

Image Courtesy of AFP/Getty Images

On the other hand, Jetstar Hong Kong would create a whole new kind of competition in the low-cost sector (“Jetstar Hong Kong stirs up a storm“, 2nd Apr, 12). The US$198 million joint venture (JV) with China Eastern Airlines (CEA) will commence its operations in mid-2013 with 3 Airbus A320s, pending regulatory approval, promises to lower fares by 50% and stimulate air travel demand.

However, the yield cannibalisation and the competition arising from Jetstar Hong Kong are likely to be limited for Cathay Pacific. While Jetstar Hong Kong aims to expand its fleet to 18 A320s by 2015 and capture a 6%-7% capacity share by then, Hong Kong remains a strong premium hub, with 11.1% of all seats in Hong Kong being business class seats versus a global average of 4.6%, according to the Centre for Aviation.

Importantly, Jetstar Hong Kong would likely face capacity constraints and air traffic rights restriction. Hong Kong International Airport (HKIA) will see its air traffic movement (ATM) reaching its full capacity of 68 movements per hour and the 2-runway airport would reach its saturation point in 2020 before the 3rd runway becomes operational by the end of 2022. With Cathay Pacific and Dragonair having a 27.1% and 17% capacity shares at Hong Kong International Airport (HKIA) in 2011 and all low-cost carriers (LCCs) accounting for just 5% capacity share including a 0.5% share by all Jetstar Group airlines, how to achieve a 6%-7% capacity share in 2 years’ time with scarce slots remains an unanswered question.

If anything, Jetstar Hong Kong is likely to see its operations limited to secondary, low-yield routes to those smaller Chinese cities in order to protect the “Big Three” on trunk routes to Shanghai and Beijing. With Airport Authority Hong Kong (AAHK) reiterating there will not be any discounts in landing and parking fees for LCCs in recent weeks, the lack of a low-cost terminal and the low passenger yield will mean Jetstar Hong Kong being a high cost, low-yield operator engaged in a stiff price competition with Hong Kong Airlines, while Cathay Pacific flies above the pack with lucrative corporate contracts.

“Honestly Hong Kong is full of competitors of which Hong Kong Express is just one. So I think we take notice of all competitors and Hong Kong Express is by no means the biggest, but it’s, on the routes that it operates it’s a good competitor. And it positions itself in the market different from Cathay, but we still have to compete with them,” Cathay Pacific director of corporate development James Barrington said.

“As far as Jetstar goes, to my knowledge they don’t yet have an AOC. But if they are successful we’ll have to compete with them as well. But I think it’s too early to tell whether or not they will or won’t be successful in their sellout,” Barrington questioned.

As the aviation business is a very volatile, yet a capital intensive or high fixed-cost one, a good airline must look beyond the current pains and keep investing in its success formula.

For Cathay Pacific, whether there will be a material uptick in its cargo business in the fourth-quarter of this year still remains to be seen and largely hinges on the potential launch of just-in-time delivery of high-value electronic goods such as an Apple Inc.’s iPhone 5 and the health of the global economy.

Yet Cathay Pacific is doing everything it can to ensure it is ready for an eventual economic pickup amid unparalleled opportunities for the Hong Kong-based carrier.

It has kept investing in its in-flight products and a fleet renewal programme with 101 new aircraft orders in its backlog, as well as a state-of-the-art HK$5.9 billion dedicated Cathay Pacific Cargo terminal due to open in January 2013.

The HK$5.9 billion dedicated cargo terminal is noteworthy as it significantly improves the competitiveness of Cathay Pacific Cargo by drastically reducing the cargo processing time from 8 hours currently to just 3 hours, according to Cathay Pacific chief operating officer (COO) Ivan Chu at a press conference to reporters.

Aspire Aviation believes Cathay Pacific should permanently replace its remaining 3 747-400BCFs with the 8 777F freighters on order as the 777F burns 15% and 24% less fuel per payload tonne than the 747-400F and 747-400BCF, respectively, while carrying a similar amount of payload. The 777F freighter can fly 4,900 nautical miles (nm) with 102 tonnes of payload whereas the 747-400BCF has a range of 4,091nm with 107.8 tonnes of payload.

This will right-size Cathay’s cargo business while utilising the 777F to launch more new non-stop cargo routes whose business cases were previously unjustified, as US Federal Express’ (Fedex) experience of the 777F has shown, while connecting to more inland Mainland China cities such as Zhengzhou which it currently serves and possibly Tianjin.

Image Courtesy of Cathay Pacific

Standardising the Cathay Pacific Cargo and Air China Cargo (ACC) fleets on the 777F and the 747-8F over time would create cost synergies as both carriers have large 777 and 747 fleets and could save training and maintenance costs by joint procurements of aircraft parts and more.

“Old, fuel-inefficient airplanes is a tough business model. We’ll have to look at that to see what is the right way forward in terms of the fleet,” Cathay Pacific chief executive John Slosar told Bloomberg.

In terms of its passenger fleet, Cathay Pacific has the best aircraft orders mix in its order backlog, including 22 Airbus A350-900s and 26 A350-1000s in addition to 22 undelivered Boeing 777-300ER aircraft that will form an ultimate 50 strong 777-300ER fleet.

While Cathay Pacific does and will take hits on its balance sheet in even retiring the 747-400s and A340-300s earlier, renewing its fleet is a very sound strategy going forward given the fuel efficiency gains that these new long-haul twin-engine aircraft offer, as the 777-300ER is 22% more fuel efficient than a 747-400 and the 350-seat A350-1000 is 17% more fuel efficient than the 777-300ER, according to Cathay Pacific.

“This morning we got board approval for 10 new additional A350-1000s that will come through in 2020. This is important to us because these new fleet are much more fuel efficient. They’re about 17% less fuel burn than the 777[-300ERs], the A350-1000s,” Cathay Pacific finance director Martin Murray commented.

Indeed, Cathay is extremely well-positioned for future growth with this fleet and has plenty of time to evaluate its options, as the proposed 407-seat 777-9X will offer the Hong Kong-based carrier a growth opportunity over the 365-seat 777-300ER while burning 21% less fuel per seat than the 777-300ER (“Boeing chooses largest wingspan for 777X“, 26th Jul, 12) without compromising its frequency-based business model. Another aircraft of interest to Cathay sooner rather than later would be the double-stretched 323-seat Boeing 787-10X Dreamliner which burns 25% less fuel than an A330-300 with a range of 6,700-6,750nm (nautical miles), as Cathay needs to retire its oldest Airbus A330-300 aircraft which has been the backbone of its regional fleet when the 787-10X enters into service in 2018.

“We’ve no future plans at this moment [to acquire more new aircraft],” Cathay Pacific chief executive John Slosar clarified, however.

Last but not least, Cathay Pacific is very well geographically located at the doorstep of China, the world’s second-largest economy and Guangdong province with a 2011 nominal gross domestic product (GDP) of US$838.6 billion even larger than Turkey, coupled with a HK$9.8 billion capital expenditure backed by a fundamentally strong balance sheet with a HK$20.2 billion liquid funds and a low debt-to-equity ratio at 55%, or 0.55 times, it is now riding through turbulence for a bright blue sky ahead with a strong and profitable growth.

“We are in a better position than many other airlines now because, thanks to prudent fiscal management, we have a healthy cash position. This is helping us to manage our way through the current situation and also to continue making those investments which will make us stronger and more successful in the future,” Cathay Pacific chief executive John Slosar said in a note to its employees.

“The outlook for the rest of the year is still unclear, and short-term uncertainties and challenges certainly remain. We all know that the second half of the year is traditionally stronger for Cathay Pacific, and it’s encouraging that our summer peak has been in line with expectations so far (typhoons aside!). The peak periods for business travel and cargo usually begin from September, but with no broad-based economic expansion in sight, we cannot as yet predict what kind of pick-up in our business we will see, so stay tuned.

“But whatever happens in the rest of 2012, the Cathay Pacific team is still absolutely world class and working together we can continue to remain optimistic about the long-term future,” Slosar reassured.

In this challenging and volatile business, staying the course and having a clear vision are instrumental to an airline’s long-term success. It is exactly the same core pillar behind Cathay Pacific’s past success, current success and a future one, too that will undoubtedly prove the sceptics and naysayers wrong time and again.

Read Cathay Pacific chief executive John Slosar’s “Message From Chief Executive” >>

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  2. No mention at all Daniel of any VLA order. Has this been put to bed or is still under consideration at CX.

    1. Hi Dale,

      From my understanding, no.

      John Slosar also said it has no plan to acquire more new aircraft at the moment.

      I think it makes a lot of sense in not evaluating & ordering the VLAs - A380 or 747-8I. They're expensive & are not suitable for the current market conditions.

      For Cathay, the 777-300ER + A350-1000 offer the best choice in boosting flight frequencies & saving 22% + (22% + 17% for A350-1000) for replacing 747-400, while the 22 A350-900s offer Cathay opportunities to launch new long-haul thin routes.

      I can't see a future of VLAs in Cathay's fleet. If anything, the 407-seat 777-9X offers a perfect upgrade/growth path with a larger revene cargo volume, without compromising frequencies.

      The 787-10X should also be suitable for replacing A330-300s.

      But these airplanes - 777-9X & 787-10X, will only enter service by mid-2019 & 2018 at the earliest.

      So a long, long way off.

      Improving regional & long-haul products, replacing 747-400s with 777-300ERs & improving profitability are the most important things for Cathay right now, in my opinion.

  3. [...] An interesting post which explains what 380Flyer said: I always enjoy those articles posted on that [...] Reply
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