Cathay Pacific's yield to bottom out in 2H14 amid decline in first half results

The lower yield was due to competition.

Cathay Pacific has recently reported its 1H14 results, and the earnings came in lower than Bloomberg consensus, but marginally better than Barclays’ expectations.

According to a release from Barclays, although the yield was down y/y due to competition, it is expected to bottom out in 2H14, driven by a number of factors.

The report stated that 1H14 EPS was HK$0.088 vs a median consensus estimate of HK$0.117 (compiled by Bloomberg), amid Barclays’ expectation of a small loss.

The main surprise, the report said, was the lower-than-expected aircraft maintenance as a result of the retirement of older aircraft.

Passenger yield was -3.5% y/y in 1H14 due to y/y lower yields across the board, except in Europe where yield was +2.5% y/y as capacity to Europe was reduced y/y and premium economy seats were introduced to the European routes in 1H14.

Meanwhile, cargo yield was -6.9% y/y as over-capacity remains a concern and has made it difficult to increase rates, although volume was strong with RFTK +11% y/y and cargo load factor +0.8ppt y/y to 63.2%.

Here's more from Barclays:

Passenger yields to bottom out. We expect the passenger yields to turn positive y/y in 2H14 and going forward, driven by four factors:

Load factor at three-year high: The decline in yield in 1H14 was not futile, in our view. It helped raise the load factor by 2.3ppt to 83.6% in 1H14. This suggests fairly strong underlying demand, and the increased load factor implies incrementally stronger pricing power for the company.

Fewer new routes to open in 2H: The company launched new services to Newark and Doha in 1H14, which typically involves promotional fares and requires a ramp-up period. In contrast, the company is only opening one new route to Zurich in December. The other capacity increases will be in the form of additional frequencies to existing destinations like Los Angeles and Chicago, which typically doesn’t affect yield as much as new launches.

Political unrest to ease: Demand and yield was also affected by the unrest in Thailand. Our channel checks suggest local airlines believe a lift of martial law may be possible in October 2014 or January 2015, which should help the regional short haul demand and yield.

Accelerated retirement of A343s: The company plans to retire four of its A343s by end-2015E and another seven by end-2017E. That should reduce the capacity pressure on long hauls and help underpin long-haul yield.