Airways Aviation News

- Revenues fell 22.6% to HK$67 billion
- Profit totals HK$4.7 billion
- 2009 operating profit totals HK$285 million
- Debt-to-equity ratio fell to 0.62
- Passenger yield fell 19.5%
- Profit more than doubles Airways Aviation News’ forecast

Cathay Pacific has reported a 2009 full-year profit of HK$4.7 billion (US$603 million), more than doubling Airways Aviation News‘ conservative forecast of HK$2 billion (US$256 million) (“Cathay Pacific may post 2009 full-year profit“, 23rd Feb 10).

Despite the result is exaggerated by a fuel hedging gains of HK$2.758 billion (US$354 million) and an one-off gain of HK$1.254 billion (US$161 million) from the sale of its 12.45% stake in HAECO (“Cathay announces HAECO stake sale, sale-and-leaseback deal with BOC Aviation“, 16th Sep 09), the Hong Kong-based carrier did manage to return to profitability with a 2009 operating profit of HK$258 million (US$33 million) at its core airline business.

However, the yield remains sluggish to improve, having recorded a 19.5% drop, improved marginally from 19.7% from the 2009 first-half. This unquestionably highlights the fact that the yield will take a very long road to recover its peak level in 2008.

Revenue fell by 22.6% to HK$67 billion (US$8.6 billion) from HK$86.6 billion.

Image Courtesy of Cathay Pacific

“While we welcomed the improvement in business in the latter part of 2009, we remain cautious about the prospects for 2010. Revenues and yields remain below levels experienced prior to the recent downturn and there has not yet been a sustained improvement in the premium passenger demand, which accounts for a significant part of our revenue,” Cathay Pacific chairman Christopher Pratt comments.

“That said, we have many things working in our favour which will help to put us in a stronger position if the current recovery in the world economy is sustained. We launched a number of projects and initiatives at the beginning of 2009 designed to improve further the way we do things, particularly for our customers. We have a united team that is the hallmark of Cathay Pacific. We have a superb international network and an unrivalled network into Mainland China through Dragonair. Our relationship with Air China will bring many benefits in the years to come and we operate out of one of the world’s premier aviation hubs, Hong Kong. We are deeply committed to our home city and remain highly confident about the future of Cathay Pacific,” Pratt reaffirms.

Cathay Pacific has taken prudent steps in response to the global economic slump, cutting capacity, as measured by Available Seat Kilometers (ASKs), by 3.7% while the passenger demand measured in Revenue Passenger Kilometers (RPKs) fell by 1.7%, thus pushing up the load factor by 1.7% to 80.5%.

Cathay Pacific has parked 5 B747-400 BCFs, 4 A340-300s and 1 B747-400 as well as wet-leasing 1 B747-400BCF to Air Hong Kong (AHK) during the year, but has since then reactivated 2 B747-400 BCFs and parked 1 additional 747-400, confirms Cathay Pacific spokeswoman Carolyn Leung.

Here is a summary for the fleet withdrawal:
2 747-400s (B-HKD, B-HUA)
3 747-400 BCFs (excluding 1 example leased to AHK; B-KAE, B-KAF reactivated)
4 A340-300s (B-HXL, B-HXM, B-HXN, B-HXO)

A point which is noteworthy is, the aircraft utilization rate decreases 2.6% to 11.2 hours per day from 11.5 hours, as the carrier receives additional 777-300ERs.

Airways Aviation News predicts that Cathay Pacific will continue replacing 747-400s with new, more fuel efficient 777-300ERs that can carry more revenue cargo. It is to receive 5 B777-300ERs and 2 A330-300s this year.

Looking forward, the yield picture is poised to continue its improvement throughout 2010, though the pace will be painfully slow.

Cathay Pacific is well-positioned and is due to sell 4 B747-400 BCFs to Air China Cargo under the agreement reached this late February (“Cathay Pacific to reap significant long-term benefits from latest cargo JV“, 25th Feb 10).

Image Owned by Airways Aviation News

However, Cathay Pacific has to be cautious of its Cost per Available Tonnage Kilometer excluding fuel which rises 5.8% to HK$2.00 from HK$1.89 this year.

But given Cathay Pacific’s superb track record in continuously lowering its cost, this does not pose a concern at this point.

Meanwhile, Cathay Pacific is very likely to make a decision on whether to launch a premium economy class or not within the next few months (“Will Cathay launch a Premium Economy product?“, 4th Mar 10), according to Airways Aviation News‘ knowledge with the matter.

In conclusion, 2010 is poised to be a busy year for Cathay Pacific, with routes to Moscow and Milan being launched and flight frequencies being restored to pre-crisis level.

Coupled with its pending partnership with Air China Cargo, and further taking into account the rising oil prices in which Cathay can at least record no financial impact or a small fuel-hedging gain, Cathay Pacific is undoubtedly going to have a successful and prosperous 2010.

As Hong Kong flag carrier Cathay Pacific is going to report its 2009 full-year result (“Cathay Pacific may post 2009 full-year profit“, 23rd Feb 10) next Wednesday, 10th March, the carrier is still evaluating the Premium Economy Class product but may be a step closer to making a decision, Airways Aviation News has learned.

Cathay Pacific sent letters to the members of its frequent flyer program Marco Polo around early January, writing:

“With your help we can serve you better. At Cathay Pacific we care about what you think – and we listen. That’s why we would appreciate it if you would tell us more about a product offering which Cathay Pacific is evaluating.“

The letter also attached a picture of a Premium Economy Class seat on another airline.

Responding to Airways Aviation News‘ query, Cathay Pacific spokeswoman Carolyn Leung stresses, “It is part of the study process on our products, no decision has been made yet”.

Image Courtesy of Cathay Pacific

However, according to Airways Aviation News‘ source who works for the carrier, that Cathay Pacific had attempted to launch Premium Economy Class a few times even before the global financial crisis hit but the plan failed to materialize.

The source adds that the likelihood for Cathay Pacific to launch a Premium Economy Class this time around is very high, as there is a paradigm shift in the industry which sees companies cutting travel budget and that the premium traffic may never return to the pre-crisis level, International Air Transport Association (IATA) warned last month.

Airways Aviation News forecasts a decision on launching a Premium Economy Class is going to be made in a few months’ time, as the carrier has been very careful in evaluating in whether to launch a Premium Economy Class or not, and with good reasons.

“The modelling project has provided a number of ideas relating to product trends, hub development and ancillary revenue opportunities. We are studying these in detail and will devise our action plans in the coming months,” Cathay Pacific spokeswoman Carolyn Lueng told Airways Aviation News.

First of all, Cathay Pacific doesn’t need to rush in making a decision since its premium demand is strong, although the yields derived from premium traffic are still under a considerable amount of pressure. Put it simply, yield but not volume is now the only concern for Cathay Pacific.

Moreover, launching an all-new Premium Economy Class requires significant initial investment and is a long-term commitment, rather than a reaction to short-term volatility.

Not only does this require a completely new design for the seat with a supplier, this also requires the retrofitting of its existing long-haul fleet which has just completed an overhaul last year. In addition, the retrofitting is costly as the AOG (Aircraft On Ground) time means lost revenue, plus the retrofitting cost itself.

Airways Aviation News‘ source laments that an all-new design may take a little more than a year to develop at the earliest and that Cathay Pacific is highly unlikely to drop its First Class, as the carrier has been performing well in First Class and will remain as a premium carrier in the future, should the carrier decide to launch one.

The Premium Economy Class will only be a complement to the existing products but the carrier is likely to shrink its Business Class and First Class in order to accommodate the new cabin.

Launching a new Premium Economy Class, should it become a reality in the foreseeable future, will position Cathay Pacific very well as it can maximize revenues while retaining its flagship First Class and Business Class products.

A Premium Economy Class can very well provide additional revenue streams for Cathay Pacific as those people who can afford to fly Premium Economy but not Business Class are likely to shift to the more expensive cabin as the middle-class in some of Cathay Pacific’s most important markets – China, India, Middle East, etc is booming.

Image Courtesy of Cathay Pacific

Furthermore, a Premium Economy Class can be offered as an upgrade for Cathay Pacific’s loyal frequent flyers.

Coupled with the business travelers who used to but no longer fly Business Class, a Premium Economy Class at Cathay Pacific is poised to be a very lucrative market and has the potential to further lure premium passengers from other carriers, thus making Cathay Pacific even more competitive.

Having a strong and very good management team, Cathay Pacific will put its mouth in where the money is and eventually launch a Premium Economy Class, albeit a small portion of its loyal customers are conservatives who would like the carrier to remain purely premium.

Ironically enough, Airways Aviation News‘ another source, a Cathay Pacific pilot who wishes to remain unidentified since the talks are private, says “it seems like CX has no plan in implementing the  premium economy concept” and emphasizes that there is no urgency to launch one since the flights are quite full.

So, will Cathay launch the premium economy class and “put its mouth in where the money is”? Well, only time can tell.

Commenting on the matter, aviation analyst Saj Ahmad from GLG Group says:

“If Cathay Pacific moves to start premium economy, it’ll put pressure on other competitors in terms of pricing, routing and product differentiation. Cathay hasn’t rushed into this market and by doing so it has the benefit of hindsight to evaluate what and where it should be pricing its potential new product.

With the focus moving to the rear of the cabin, competition is hotting up, premium economy may command more changes than first or business class – we’ll see continued growth here for years to come.”

With the announcement of forming a cargo joint venture in Shanghai with Air China, Cathay Pacific is well-positioned to reap substantial long-term benefits from this joint venture based in one of world’s most rapidly-growing aviation market.

The cargo joint-venture will be based on the existing Air China Cargo (ACC) platform, exploring the maximum growth potential while keeping its cost at a minimum.

Under the framework agreement that is signed today, Cathay Pacific will invest RMB$1.669 billion (US$244 million) and acquire a 25% equity stake through a wholly-owned subsidiary Cathay Pacific China Cargo and a 24% economic interest through funding from an offshore trust.

“The restructuring of ACC’s shareholding comprises two major aspects. First, through fleet expansion, we efficiently set the platform for future growth. Secondly, two strong partners team up with complementary strengths to enhance our competitiveness. Given the solid cooperation foundation between Air China and Cathay Pacific, ACC will fully capitalize on both companies’ existing brand strengths and shareholders’ support, to capture business opportunities, maintain leadership position in the market, and contribute to the development of the Beijing and Shanghai aviation hubs,” Air China Chairman Mr Kong Dong said.

Image Courtesy of Daryl Chapman

“We are very excited about this joint venture which further enhances our strong and deepening strategic partnership with Air China. The joint venture airline will provide the two most important cargo-generating regions in the Mainland with two highly competitive and efficient home-based carriers – Cathay Pacific in the Pearl River Delta and ACC in the Yangtze River Delta,” Cathay Pacific Chairman Christopher Pratt said.

“Both regions will remain competitive relative to other export zones elsewhere in the world. As a strong home-based cargo airline with a firm foothold in the Yangtze River Delta, ACC will ensure an efficient capture of cargo movements that may otherwise divert to rival hubs in the region. It makes good sense for Cathay Pacific and Air China to team up for this joint venture.” Pratt added.

Meanwhile, Cathay Pacific is to sell 4 Boeing 747-400 BCFs (Boeing Converted Freighters) and 2 spare engines to Air China Cargo under the deal, reaffirming Airways Aviation News‘ long-held belief that Cathay will sell its 747-400 BCFs to the cargo joint venture.

“They [the 4 B747-400 BCFs] are not the parked ones, or recently unparked [reactivated] ones. These aircraft are currently in active service,” Cathay Pacific spokeswoman Carolyn Leung further elaborates.

Cathay Pacific reactivated 2 Boeing 747-400 BCFs with registrations B-KAE and B-KAF lately due to a sustained strong cargo demand. Cathay Pacific recently posted a 25% and 31.1% growth in Freighter Tonnage Kilometers (FTKs) in December 2009 and January 2010, respectively (“Cathay Pacific may post 2009 full-year profit“, 23rd Feb 10).

Not only does this joint venture position Cathay Pacific well in the future to reap long-term benefits, it is also a win-win proposition to both Air China and Cathay Pacific.

Having ordered 3 Boeing 747-400 BCFs in 2008, selling 4 B747-400 BCFs to Air China Cargo will offer commonality to its flight crew and an opportunity for the carrier itself to build a cargo fleet in a timely fashion that cannot be achieved by ordering new-built freighters.

As for Cathay Pacific, it will operate a much more efficient freighter fleet as it sells these 4 B747-400 BCFs to Air China Cargo while it receives the first of 10 ordered ultra-fuel efficient B747-8F freighter in early 2011.

While some aviation analysts may be correct in pointing out that Cathay Pacific may have more to gain than Air China under this deal, it is significant for them to appreciate that Air China also needs Cathay Pacific’s strong international cargo network and its experience in helping them to succeed.

However, even Cathay Pacific itself acknowledges that without establishing such a joint venture, cargoes may transit through hubs like Shanghai instead of Hong Kong. And in doing so, the potential competitive threat posed by Shanghai and Taipei is lessened.

Image Owned by Airways Aviation News

Moreover, this joint venture signals much more cooperation is in the pipeline. Cathay Pacific states that “it is likely that the joint venture will forge strong inter-line arrangements with Cathay Pacific Cargo” and “the most likely form of co-operation would be through interline and block space arrangements to destinations that the other party doesn’t serve”.

Cathay Pacific is indeed very smart in forming this cargo joint venture, particularly it can strengthen its cooperation with Air China and ensure that it has a strong foothold in the world’s third-largest aviation market at a gain.

The sale of 4 B747-400 BCFs is worth RMB$1.924 billion, more than offset the acquisition cost of RMB$1.669 billion.

Cathay Pacific spokeswoman Carolyn Leung confirms that the RMB$1.669 billion acquisition cost excludes the gain from the sale of 4 B747-400 BCFs, but added:

“Not necessarily [that Cathay will record a gain]. The sale prices are subject to an adjustment mechanism based on remaining useful life and conditions of aircraft and engines as at the delivery date of respective aircraft, the exact impact is subject to changes,” Leung explains.

With this very attractive deal being finalized, Cathay Pacific can now look forward to reaping significant benefits from closer cooperation in the future, and yes, there is much more to come.

Commenting on the matter, aerospace analyst Saj Ahmad from FleetBuzz Editorial.com says:

“This move not only cements Cathay’s position as prime freight operator in the region, it also now has access to the fastest growing freight market in the world. Through divestment of its older 747s to the new venture, Cathay is already gearing up for new 747-8Fs from next year to further expand its cargo capabilities which will filter through to its venture with Air China and reap huge benefits.”

Having posted a HK$812 million (US$104 million) 2009 first-half profit, Airways Aviation News expects the Hong Kong-based carrier to post a full-year 2009 profit.

Airways Aviation News forecasts Cathay Pacific to post a HK$2 billion (US$256 million) 2009 full-year profit, largely attributable to the unrealized mark-to-market fuel hedging gains, while reflecting a comeback in both passenger and cargo traffic from 3rd quarter onwards and a particularly strong one in the 4th.

The passenger traffic has not seen a significant drop-off over the prior year, with the Revenue Passenger Kilometer (RPK) decreasing 1.7%, and in fact it started increasing sustainably from November toward the year-end, an encouraging trend that continues to the foreseeable future.

Image Courtesy of Cathay Pacific

However, yield but not volume really counts. The passenger yields decreased by 19.7% for the first-half 2009. Airways Aviation News predicts a 17% decrease in passenger yield for full-year 2009, taking into account a gradual improvement in yields in the second half.

Meanwhile, the cargo traffic in real terms bottomed in May 2009, and the decrease has been narrowing from 26% in January to around 13% in April, then decreased by around 5% in the following months.

A meaningful rebound was seen from October onwards, and increased sharply by 25% in December, mainly attributable to the gradual improvement in the global economy, and a very late re-stock before the Thanksgiving Day and Christmas holidays by American and European retailers after selling their inventories in earlier months. The pickup led to a 3-fold increase in the average price compared to the low base seen in early-2009.

The cargo pickup held up so well that Cathay Pacific reactivated 2 of 5 parked Boeing 747-400 BCFs (Boeing Converted Freighters), registered B-KAE and B-KAF.

For example, the cargo flights to Miami recorded a 90% load factor on US-bound leg while recording a 70% load factor on the Hong Kong-bound return leg.

“The cargo is picking up so well that I have no doubt in the increase in the near future as we move closer to holiday seasons,” Airways Aviation News‘ source, who works for the carrier, said.

Another factor in posting the full-year profit is prudent capacity cut, having cut the passenger capacity, measured by Available Passenger Kilometer (ASK), by 3.7%, outpacing the 1.7% decrease in RPK. On the cargo side, tonnage fell by 7.1% while the cargo capacity was slashed by 13.1%.

This was achieved through the withdrawal of passenger and cargo aircraft throughout the year, which is summarized below:

Cathay Pacific
2 B747-400s (B-HKD, B-HUA)
4 A340-300s (B-HXL, B-HXM, B-HXN, B-HXL)
4 B747-400 BCFs (inc. 1 wet-leased to AHK, B-KAE & B-KAF reactivated)

Dragonair
2 A330-300s
1 A320

On the other hand, Airways Aviation News expects the carrier to break even or post a small operating loss for 2009.

Looking forward, Cathay Pacific is going to increase capacity slightly in 2010 as it takes delivery of 4 B777-300ER and 1 A330-300.

Cathay Pacific will increase the flight frequencies on routes to Seoul, Jeddah and Sapporo, as well as Toronto, Los Angeles and San Francisco, whereas direct flights to Milan will be launched in March.

“Overall, things are looking positive with passenger business building up to the Chinese New Year peak and cargo continuing to perform well. There are also improvements on front-end bookings. The big issue is what will happen in the rest of the year, and while things look fairly solid at the moment there is still a great deal of uncertainty about what will happen on the economic front,” Cathay Pacific spokeswoman Carolyn Leung commented.

As mentioned earlier on this site, Cathay Pacific may make a decision this year on launching flights to Chicago and Tokyo Haneda Airport.

Exclusive: Cathay may announce new flights to Moscow, Milan (9th Nov 09)
Exclusive: Cathay considers scheduled flights to Haneda (11th Jan 10)

In a BBC interview, Cathay Pacific CEO Tony Tyler confirmed that “several new routes are in our radar, including Moscow which has been on our plan for some time” (“Cathay confirms plans to launch Moscow flights“, 10th Feb 10)

Meanwhile, a cargo joint venture in Shanghai will be set up with Air China hopefully within this week.

People familiar with the matter confirm Airways Aviation News’ long-held belief Cathay Pacific will transfer 5 or 6 old B747-400 BCFs that may include the parked ones to the joint venture while Cathay Pacific starts receiving the new ultra-efficient 747-8F in 2011.

Moreover, Airways Aviation News has learned that several new measures are in place as a result of Cathay Pacific’s business model review.

However, whether Cathay Pacific will launch the premium economy class or not remains uncertain.

“The modelling project has provided a number of ideas relating to product trends, hub development and ancillary revenue opportunities. We are studying these in detail and will devise our action plans in the coming months,” Leung explained.

Image Owned by Airways Aviation News

Cathay Pacific 2009 full-year traffic statistics
*versus the same month in prior year

January 2009
No. of passengers carried: 2,092,669 (+2.4%)
Passenger load factor: 79.5% (-2.8%)

No. of tonnes of cargo carried: 101,154 tonnes (-26%)
Cargo load factor: 59.1% (-4.5%)

February 2009
No. of passengers carried: 1,809,188 (-7.4%)
Passenger load factor: 76.6% (-1%)

No. of tonnes of cargo carried: 100,906 tonnes (-16.7%)
Cargo load factor: 64.7% (+0.1%)

March 2009
No. of passengers carried: 2,096,011 (-3.2%)
Passenger load factor: 79.1% (-3%)

No. of tonnes of cargo carried: 129,628 tonnes (-13.7%)
Cargo load factor: 67.9% (-0.3%)

April 2009
No. of passengers carried: 2,251,526 (+8.8%)
Passenger load factor: 82.6% (+3.2%)

No. of tonnes of cargo carried: 123,179 tonnes (-13.3%)
Cargo load factor: 65.7% (-1.9%)

May 2009
No. of passengers carried: 1,950,344 (-7.5%)
Passenger load factor: 75.8% (-1.6%)

No. of tonnes of cargo carried: 121,966 tonnes (-13.3%)
Cargo load factor: 68.2% (+1.2%)

June 2009
No. of passengers carried: 1,738,413 (-18.1%)
Passenger load factor: 76.8% (-4.5%)

No. of tonnes of cargo carried: 123,860 tonnes (-10%)
Cargo load factor: 59.1% (-4.5%)

July 2009
No. of passengers carried: 2,080,329 (-9.9%)
Passenger load factor: 83.5% (-0.9%)

No. of tonnes of cargo carried: 133,233 tonnes (-6.7%)
Cargo load factor: 72.6% (+6.6%)

August 2009
No. of passengers carried: 2,210,068 (+3.8%)
Passenger load factor: 84.1% (+5.7%)

No. of tonnes of cargo carried: 131,732 tonnes (-6.3%)
Cargo load factor: 72.0% (+6.1%)

September 2009
No. of passengers carried: 1,840,082 (-2.0%)
Passenger load factor: 80.2% (+7.9%)

No. of tonnes of cargo carried: 133,301 tonnes (-5.8%)
Cargo load factor: 74.4% (+7.9%)

October 2009
No. of passengers carried: 2,010,739 (-3.9%)
Passenger load factor: 82.3% (+6.8%)

No. of tonnes of cargo carried: 143,290 tonnes (-0.8%)
Cargo load factor: 76.7% (+10.8%)

November 2009
No. of passengers carried: 2,007,773 (+1.5%)
Passenger load factor: 82.0% (+6.3%)

No. of tonnes of cargo carried: 141,799 tonnes (+7.6%)
Cargo load factor: 76.8% (+12.3%)

December 2009
No. of passengers carried: 2,216,131 (+6.0%)
Passenger load factor: 82.0% (+6.3%)

No. of tonnes of cargo carried: 144,000 tonnes (+25.0%)
Cargo load factor: 78.6% (+15.7%)

Summary for 2009
*versus 2008

Revenue Passenger Kilometer (RPK): 89,440,308,000 (-1.7%)
Available Passenger Kilometer (ASK): 111,666,437,000 (-3.7%)
Passenger load factor: 80.5% (+1.7%)
No. of passengers carried: 24,557,992 (-1.6%)

Exactly two months since Airways Aviation News firstly reported that Cathay Pacific may announce new flights to Moscow, the Hong Kong-based carrier confirms today.

Airways Aviation News exclusively reported earlier that Cathay Pacific may launch new flights to Milan, Moscow and Chicago (“Exclusive: Cathay may announce new flights to Moscow, Milan“, 9th Nov 09), of which flights to Milan will be launched on 28th March (“Cathay confirms plan to launch Milan flight“, 4th Dec 09).

Cathay Pacific says the new thrice-weekly service will be launched this summer, pending regulatory approval.

“Moscow has been on our radar screen for some time now. This planned addition to our network underlies Cathay Pacific’s commitment to develop new markets, and our ongoing work to strengthen Hong Kong as one of the world’s leading international aviation hubs,” Cathay Pacific Chief Executive Officer (CEO) Tony Tyler says.

“We expect Moscow will develop quickly as a prime destination for business and leisure travellers from this part of the world.

“Our strong network will enable us to offer great connections for travellers from Moscow through the Hong Kong hub to our Southeast Asian destinations and to Mainland China with our sister airline Dragonair.

Image Owned by Airways Aviation News

“Travel demand between the two cities is showing substantial growth thanks in no small part to the visa-free access enjoyed by passport holders of the HKSAR and the Russian Federation,” Tyler elaborates.

The new flights will be operated by Airbus A340-313X, according to the airline’s statement.

As Cathay Pacific CEO Tony Tyler puts it, this announcement is not surprising at all; however, whether this new plan no longer includes flights from Moscow to Manchester which it used to back in 2006.

According to Airways Aviation News‘ knowledge with the matter, the business case for launching flights from Moscow to Manchester seems to have weakened.

Needless to tell, it would be a wise decision not to launch the Moscow – Manchester flight itself since Cathay Pacific’s oneworld partner British Airways (BA) already operates connection flights on the Moscow – London Heathrow – Manchester route.

Not only exploring a new codesharing agreement with British Airways to place the CX code on the former’s connection flights provides convenience to travellers and serve Cathay very well, this also significantly reduces the business risk by not operating the flights itself as there is currently no direct flight between the two cities.

Meanwhile, Airways Aviation News still believes a decision will be made this year on whether to launch flights to Chicago and Tokyo Haneda Airport.