Turbulence up ahead for Cathay Pacific Airways?

Cathay Pacific reports being badly hit by high fuel costs. Plans to reduce frequencies of several long-haul routes is already underway.

In a news release, Cathay Pacific Airways issued a trading statement to the Hong Kong Stock Exchange advising that its financial results for the first half of 2012 are “expected to be disappointing”.

In response to the changing market conditions and challenging business environment, the group is readjusting the capacity of both Cathay Pacific and Dragonair by reducing capacity on some long-haul routes while increasing capacity and introducing six new destinations in its regional network.

Since the airline announced its annual results in March, fuel prices have remained high, the cargo business, despite a temporary improvement in March, has shown no sign of a sustained recovery and pressure on Economy Class yields has continued. There has also been some softening in yield in the premium cabins.

Cathay Pacific Chief Executive John Slosar said: “We previously warned that 2012 is looking even more challenging than 2011 and we were therefore cautious about prospects for this year. In response to the challenging environment we face, we are reducing costs where possible, including through a reduction of capacity. The airline’s financial position remains strong which will enable us, despite the current difficult trading conditions, to maintain the quality of our products and services and to continue with our long-term strategic investment in the business.”

Mr Slosar added: “This is not just a Cathay Pacific problem; it is clearly an industry-wide issue, and continued high fuel prices in particular are hitting airlines hard across the globe. We have no option but to take concerted action to adapt to this volatile operating environment. We need to do this to protect our business in the short-run and to protect the Cathay Pacific team.”

The airline has announced a raft of measures to reduce costs that will include adjusting both passenger and cargo capacity, deploying more fuel-efficient aircraft on long-haul flights, speeding up the retirement of its older Boeing 747-400 aircraft, and putting a hiring freeze on new or replacement ground staff. At the same time it is offering voluntary unpaid leave for cabin crew from June and introducing cost-saving measures such as cancelling non-essential business travel for staff and reducing its marketing and IT spend.

On the passenger side, the Cathay Pacific Group as a whole will see its capacity growth reduced to 3.2% from the targeted 7% this year. The capacity growth for Cathay Pacific will be reduced to 2% from the targeted 7%. The airline’s network will remain intact but frequencies on some long-haul routes to North America and Europe will be reduced in response to high fuel costs and depressed yields. The airline has already made some ad hoc cancellations in May, primarily to Taipei, Shanghai and Japan – and these will continue in June.

The Group will retain its focus on expanding capacity within the region, with Dragonair’s capacity set to grow by 9.2% against a target of 7.3% as a result of the launch of new destinations and increased frequencies on regional and Mainland routes.

For cargo, Cathay Pacific will now target 4% growth in total (freighters plus passenger aircraft bellies), down from the original target of 7%, while there will be zero growth in freighter capacity compared to the 3% originally targeted for 2012. Ad hoc cancellations will continue to be made to match market demand.

In terms of fleet deployment, the airline will put its newer, fuel-efficient Boeing 777-300ERs on more routes, including flights to San Francisco and Paris. There are no plans to cancel or defer aircraft orders and Cathay Pacific is still on track to take delivery of 15 new planes this year, with six already in operation.

Given the persistently high price of aviation jet fuel, the retirement of the Boeing 747-400 fleet will be speeded up. The airline currently operates 21 747-400 passenger aircraft but three of these will now be retired this year, with five more leaving in 2013 and one more in early 2014, which will bring that fleet down to 12 aircraft.

In the cargo fleet, Cathay Pacific currently operates 25 wide-body freighters, including five new, fuel-efficient Boeing 747-8Fs. As it takes delivery of three more 747-8Fs this year and two next year, the airline will take three Boeing 747-400BCFs out of service this year as a near-term capacity-management measure.

While it puts these short-term cost-saving measures in place to address the current business situation, the airline will continue with a number of long-term strategic developments and investments. These include 93 fuel-efficient aircraft with a value of HK$190 billion for delivery by 2019, a new HK$5.7 billion cargo terminal at Hong Kong International Airport due to begin operations in early 2013, and inflight product and lounge investments valued at HK$3 billion.