Cathay says premium travel slumping, prompting discounts

Bloomberg

Cathay Pacific Airways Ltd., Asia’s biggest international carrier, says it’s getting tougher to find premium fliers from Hong Kong.
The lack of first and business-class travelers from the Asian financial center — the worst since the global financial crisis days of 2009 — is such a dent on Cathay’s financials that analysts are asking whether Chief Executive Officer Ivan Chu needs to find a Plan B. After more than two years at the helm of the marquee Hong Kong airline — his two predecessors stayed for about three years at the top — Chu is under pressure to revive earnings that have slumped amid an expansion by his Chinese and Middle Eastern
rivals.
Cathay shares have lost about 27 percent of their value since Chu took over while passenger yields — the amount earned by carrying a person per one kilometer, and a key metric of profitability — slumped to their worst in seven years. With Chinese airlines offering more direct services to the U.S. and Europe from the mainland, Cathay’s Hong Kong hub is no longer critical. The carrier also reported Wednesday that it lost HK$4.49 billion ($579 million) from fuel hedges in the first half of the year.
“Everything is quite negative for them and their business model is ripe for change,” said Shukor Yusof, founder of aviation consulting firm Endau Analytics in Malaysia. “They need to review their hedging and focus on things that have contributed to growth. They should focus more on regional services.”
The carrier reported Wednesday an 82 percent drop in first-half net income. Passenger yields fell 10 percent to 54.3 Hong Kong cents as an economic slowdown in China hurt premium class demand and depressed corporate travel from Hong Kong to London and New York, Cathay said. Security concerns related to terrorism has also dented travel demand, Chu said in an interview with Bloomberg Television.
Hong Kong-based conglomerate Swire Pacific is the largest shareholder of Cathay, owning 45 percent of the Hong Kong-traded airline. Aviation brought in 20 percent of revenue last year for Swire, which reported a 27 percent drop in core profit to HK$3.55 billion in the first half of the year.
Cathay launched summer sales for premium class in May, offering as much as 30 percent discounts, in a bid to boost passenger load in low season of business travelers, Chu said.

Adverse Factors
There’s more pain to come. Chairman John Slosar said in a statement Wednesday that the business outlook “remains challenging” as the operating environment in the second half continues to face the same adverse factors.
“There’s not much we can do about the economic environment,” Chu said in the interview. “We hope it is a short-term issue rather than a long-term one. We are going to have very competitive fares.”
Chu was elevated to the top job in March 2014 after his predecessor was named chairman of the group in a reshuffle of top management. Chu, Slosar and Tony Tyler, the three most recent CEOs, all served as chief
operating officers.
Shares of the carrier had their biggest two-day loss in more than seven years. They fell 4.9 percent to HK$11.34 in Hong Kong Thursday, extending Wednesday’s 7.3 percent decline. Credit Suisse Group AG cut the stock to underperform from neutral, while UOB Kay Hian Pte and Bocom International Holdings Co. downgraded it to sell.
“We do not expect a recovery in profitability for the second half of 2016 and flag a likely lack of share-price catalysts in the near term,” Kelvin Lau, an analyst at Daiwa Capital Markets Hong Kong Ltd. said in an Aug. 17 note, maintaining a hold recommendation.
Strong History
Another change in management will do little to boost its earnings prospects, said Martin J. Craigs, chairman of Aerospace Forum Asia. It’s the nature of the airline industry to confront structural and cyclical issues such as the expansion by Chinese airlines and having to hedge fuel, he said, adding Cathay’s management is its “best asset.”
“Some of the problems Chu faces are structural, which he can’t really counter,” Craigs said. “All airlines experience external turbulence. Changing management won’t solve all the problems. Cathay has a strong history of getting through difficult times.”
Instead of counting on the premium segment, they should focus more on their unit Dragonair and boost their regional services to capture a market that is switching to rivals in China, said Endau’s Shukor.
“Chu needs low-cost, and that should be priority for him right now,” he said. “You have to price your fares more competitively, which they haven’t been doing.”
Cathay will add more flights to the U.K. and continue to make long-term strategic investments including in lounges, Chu said.
Butlers, Showers
Cathay’s yields have been under pressure as Air China Ltd., China Eastern Airlines Corp. and others offer more direct services from the mainland. That’s coming at a time when the Middle East’s ‘Big Three’ — Emirates, Etihad Airways and Qatar Airways — expand more into Asia and offer luxuries such as butlers and shower rooms.
“Cathay needs to change their business model from being a hub airline to a more point-to-point airline,” said Mohshin Aziz, an analyst at Malayan Banking Bhd. “But I don’t think that will happen in my lifetime.”