Cathay Slumps On Earnings Miss: Shouldn’t Have Hedged Fuel

They closed down 7.68 percent at HK$15.38 per share, while the benchmark Hang Seng Index finished the day 1.31 percent lower.

These caused revenue to fall 0.9 percent to HK$50.39 billion from a year ago. “The short-term (currency) fluctuation is not going to upset the fundamentals”, Cathay’s chief executive officer Ivan Chu told a press conference.

“Strong competition, a significant reduction in fuel surcharges and a higher proportion of passengers connecting through Hong Kong put downward pressure on yield”, said chairman John Slosar.

While Cathay’s fuel bill shrank by 12 per cent to HK$16.6 billion in the first half, wrong bets made earlier on fuel price movement meant hedging losses amounting to a whopping HK$3.7 billion for the first half would continue to grow as long as oil prices stay low.

The plunge of oil prices by some 50 percent in the second half of last year incurred losses to airlines which had placed hedges against rising oil prices in previous years.

Passenger yields dropped 9.3 per cent in the first half from a year earlier, beyond the 5 per cent to 6 per cent decline expected by UOB Kay Hian Pte. and Malayan Banking Bhd. Premium class demand was robust on short-haul routes but was weaker than expected on some long-haul routes. Cargo yield dropped 11.1 per cent to HK$1.93, reflecting the drag of waning Chinese exports on the global air cargo market.

The company declared an interim dividend of 26 HK cents per share.

Cargo and mail carried by the two carriers increased 8% to 868,000 tonnes, with the cargo and mail load factor showing a marginal (0.9 percentage points) improvement year-on-year to 64.1%.

The airline’s capacity – the total number of passengers it could theoretically carry – was also up 6.4 percent compared with the same period last year, helped by new routes, while air cargo capacity increased by 8.9 percent.

Yet there are challenges. Then about US$3 trillion was wiped out from the country’s stock market since mid-June.

“Even without the yuan change, mainland China was becoming increasingly challenging for Cathay as visitors considered other destinations and alternative stopover hubs”, said Will Horton, a Hong Kong-based analyst at consultancy CAPA Centre for Aviation. “Among the positive stories of the month, demand into and out of India continued to be ahead of expectations and we also saw an upsurge in project shipments out of Western China, and Chongqing in particular”. That would be the biggest hit for any Asian carrier other than Singapore Airlines.