Being at the forefront of the global economic recovery, Cathay Pacific posted a record-breaking first-half profit of HK$6.84 billion (US$877 million) on top of an 8.5% increase in the number of passengers carried and a staggering 24.4% increase in number of tonnes carried to 872,000 tonnes. By all accounts, this result was simply unrivalled by most of its peers like British Airways which has been suffering from significant yield erosion and is unlikely to return to sustained profitability at anytime soon.
Cathay Pacific achieved a 16.5% profit margin on an underlying operating profit of HK$4.96 billion. Achieving a profit margin surpassing 10% is itself a black swan event for the global airline industry and it is indeed an extraordinary feat when the Hong Kong-based carrier nevertheless posted a HK$4.7 billion profit last year, a time when the global airlines were bleeding red ink everywhere. Revenue rose 33.7% to HK$41.337 billion from HK$30.921 billion and passenger yields, as measured by Revenue per RPK earnt, rose by 17.5% and cargo yields rose 36.1%.
Meanwhile, Cathay Pacific has signed a non-binding Letter of Intent (LoI) for 30 A350-900s and intends to purchase an additional 6 777-300ERs to support its expansion and partly replace its ageing fleet.
“[The A350-900 will replace] some of the older 747-400s and A340-300s, but not all as the orders are also for fleet growth,” said Cathay Pacific’s Carolyn Leung.
Cathay Pacific Airbus A350-900 Rendering
Image courtesy of Airbus
The US$7.82 billion A350 deal at list prices is viewed by many people as a devastating blow to Chicago-based Boeing.
Indeed, given the US$4.5 million commitment fee paid to Airbus, Cathay Pacific will firm this LoI up while the 787-9 stands a slim chance to win over Cathay Pacific. However, Cathay’s order is a significant testament to Boeing’s point-to-point, frequency based strategy, in which it will deploy those 30 A350-900s to secondary cities in Europe and the US where demand is insufficient to fill larger planes, chief executive Tony Tyler said in a Bloomberg interview.
Separately, Tyler also made clear that the airline is not looking to order the A380-800 either, which Airbus argued “hub-to-hub” is “big point-to-big point”, only to have it refuted by Cathay Pacific due to its insufficient Revenue Cargo Volume from which the carrier derives significant revenue.
According to airline sources, new destinations being looked at and evaluated include Munich, Madrid and Chicago.
“The major Chinese airlines watch Cathay very closely, as well they should. This is a big win for Airbus and the A350,” Airbus Chief Operating Officer (COO) John Leahy stated.
Most importantly, Cathay Pacific has been able to secure significant discounts from Airbus for the A350-900s, with which they can “maintain the balance” between Airbus and Boeing.
In doing so, the airline is preserving its bargaining power over any future aircraft purchases. This bargaining power is considered to be critical in Cathay’s procurement process and was the determining factor in this contest.
Notwithstanding this primary factor, given the larger size of the 314-seat A350-900, it nonetheless fits Cathay’s network better than the 787-9 does since the A340-300s and 747-400s that it replaces accommodate 283 and 379 passengers respectively.
“In our network, it [A350-900] just works better. The availability of the aircraft is good for us as well,” Cathay Pacific chief executive Tony Tyler explained.
Cathay Pacific has flexibility to switch to other variants in the A350XWB family but considers the A350-900 to be complementary to the 777-300ERs.
“Yes [the LoI carries flexibility to switch to other A350 variants],” Cathay Pacific spokeswoman Carolyn Leung reaffirmed.
“The A350-900 will be the backbone of our long-haul, mid-size fleet, complementing the wide-body, ultra long-haul 777-300ERs,” she added.
Despite the A350-900 being more fuel efficient, notwithstanding the current weight and development issues on the early build versions, the 777-300ER can still carry more payload – the 777-300ER has a Maximum Takeoff Weight (MTOW) of 775,000lbs, whereas the A350-900 only has 590,800lbs. This complementary strategy was reaffirmed by the biggest 777-300ER customer – Emirates’ chief executive, Tim Clark.
“They [Boeing executives] think it’ll take out the 777-300ER. People like me are saying ‘It’s not going to do that. And as your largest customer, don’t worry about it,’” Emirates chief executive Tim Clark commented.
Looking Ahead Despite there will be an increase in capital expenditure in the next few years due to the construction of HK$5.5 billion cargo terminal, this project will lower the cargo handling cost and provide substantial savings over the longer term as Cathay Pacific Cargo continues to be one of the biggest cargo carriers in the world.
Similarly, Cathay’s strong balance sheet which has just seen its net borrowings decreasing 24.6% and net debt-to-equity ratio decreasing to 0.40 times, its latest purchase of the A350-900 and 777-300ER that is worth HK$75 billion will ensure that Cathay will have significantly lower operating cost of its future fleet.
What’s more, there seems to be an unstoppable wave of recovery at Cathay Pacific, with solid forward bookings.
“We can look forward to the next six months with some confidence,” Cathay Pacific chief executive Tony Tyler said.
“Forward bookings are looking very good for the rest of the summer. Cargo is looking good for the rest of the year,” he added.
On the other hand, should Cathay decide to launch the Premium Economy Class later this year, as its chief executive Tony Tyler recently told Bloomberg that “there are pretty strong arguments for it”, the airline is unquestionably well-positioned to tap into this new opportunity and win business from competing carriers.
There has been a widening gap between the segments of Business Class and Economy Class, launching a Premium Economy Class will enable Cathay Pacific to maximise its revenue streams through discriminatory pricing of the Revenue Management System (RMS).
“No decision is made yet,” Leung cautioned.
In conclusion, Cathay is indeed a booming business and as the lyrics of its theme song go, “I can fly, I can fly, I can spread my wings out wide and touch the sky…”
- Daniel Tsang
