The Chairman of the Cathay Pacific Group said that rising fuel costs, fierce competition in the Middle East and emerging lean travelling by executives due to the financial crisis have contributed to the losses in first half of 2012.
Following is the text of the Chairman Christopher Pratt’s letter addressed to the shareholders at the announcement of the half yearly interim financials of the Group.
“Loss per share was HK23.8 cents as compared to the earnings per share of HK71.4 cents in 2011. Turnover for the period rose by 4.4% to HK$48,861 million. In May 2012 Cathay Pacific issued a trading statement to the Hong Kong Stock Exchange to the effect that its interim results would be disappointing. That proved to be the case. In the first half of 2012, Cathay Pacific’s core business was significantly affected by the persistently high price of jet fuel, passenger yields coming under pressure and weak air cargo demand. These factors are common to the aviation industry as a whole. Airlines around the world are being adversely affected by the current business environment. Our profits from associated companies, including Air China, also showed a marked decline. In response to these challenges, we introduced measures designed to protect our business. These included schedule changes and capacity reductions, the withdrawal from service of older, less fuel-efficient aircraft, a recruitment freeze and the introduction of voluntary unpaid leave for cabin crew. At the same time we kept our network intact and have not allowed cost reductions to compromise our brand or the quality of our service. We also continued with our major investments in new aircraft and new products, in-flight and on the ground, and with the building of our own cargo terminal at Hong Kong International Airport. Such investments will benefit our business in the long term. Fuel is our most significant cost. Fuel prices remained historically high during the period (although they decreased significantly at the end of the period) and this had a major impact on our operating results. In the first six months of 2012, the Group’s fuel costs (disregarding the effect of fuel hedging) increased by 6.5% compared to the same period in 2011. Fuel accounted for 41.6% of our total operating costs. Managing the risk associated with high and volatile fuel prices remains a key challenge. Our fuel hedging programme helps to mitigate the impact of fuel price fluctuations. However, with the fuel price remaining high for the past two years, our realised profit from hedging activities in the first half of 2012 fell by 59.4% compared to the same period in 2011. In the first six months of 2012, our passenger business was affected by pressure on yields against the background of increased fuel prices and higher operating costs. Revenue for the period was HK$34,713 million, representing an increase of 9.2% compared to the same period in 2011. Capacity increased by 6.9%. We carried a total of 14.3 million passengers in the first six months, which is a rise of 8.6% compared to the same period in 2011. The load factor rose by 0.8 percentage points. Yield increased by 1.2% to HK66.1 cents. The premium class load factor was adversely affected, with employees of major corporations travelling less. The high cost of fuel made it more difficult to operate profitably, particularly on long-haul routes operated by older, less fuel-efficient, Boeing 747-400 and Airbus A340-300 aircraft. Our cargo business was affected by continued weak demand in major markets. Cargo revenue for the first half of 202 was down by 7.6% to HK$11,897 million compared to the same period in 2011. Yield was down by 0.4% to HK$2.41. Capacity was down by 4.3%. The load factor was down by 4.1 percentage points to 64.3%. Demand for shipments from our two key markets, Hong Kong and Mainland China, was well below expectations, though the introduction of new hi-tech consumer electronics products in March caused a temporary improvement. Capacity was adjusted in line with demand. On the positive side, we continued to develop new markets where demand warranted doing so, introducing freighter services to Zhengzhou in Mainland China in March and to Hyderabad in India in May
Six Airbus A350-900 aircraft were ordered in January. In August, we agreed to acquire 10 Airbus A350-1000 aircraft and to convert 16 previously ordered Airbus A350-900 aircraft into Airbus A350-000 aircraft. The Cathay Pacific Group will take delivery of 9 aircraft in 2012. This will improve the operational efficiency of the fleet. Nine of these aircraft were delivered in the first six months of the year: two Airbus A320-200s, two Airbus A330-300s, four Boeing 777-300ERs and one Boeing 747-8F freighter. At 30th June 2012 we had 92 aircraft on order for delivery up to 2019. In view of their high operating costs when fuel prices are high, we intend to accelerate the retirement of our Boeing 747-400 passenger aircraft. Three of this fleet of 21aircraft will be retired this year, five in 2013 and one in 2014. We withdrew three of our Boeing 747-400BCF converted freighters from service in order to reduce costs. One of these aircraft has since been retired from the fleet. The third of four Boeing 747-400BCF converted freighters being sold to Air China Cargo, our cargo joint venture with Air China, was transferred in July, leaving one aircraft remaining to be sold. In May, we announced our intention to reduce some passenger services on transpacific routes. This will enable fuel-efficient Boeing 777-300ER aircraft to operate on routes currently served by older less fuel-efficient Boeing 747-400 aircraft. We remain committed nevertheless to maintaining our network and have increased some services in Asia, where demand is relatively robust and fuel accounts for a smaller portion of operating costs. Cathay Pacific added frequencies on routes to Singapore, Malaysia, Taiwan, Japan and Thailand in March. Dragonair added frequencies on routes to secondary cities in Mainland China. Dragonair also introduced or resumed flights to six destinations – Xi’an, Guilin, Clark, Jeju, Taichung and Chiang Mai – and will introduce flights to Kolkata and Haikou later in the year. We continue to improve our products and services in the air and on the ground. In April we introduced a new premium economy class, with significantly better seats and service than those in economy class. By the end of June the new seats had been installed in 15 of our long-haul aircraft. By the end of 2013 the new seats are scheduled to have been installed in 86 aircraft. In April we started to introduce new long-haul economy class seats, which have been well received by passengers. We continued to install our popular new business class seat. By the end of June, they had been installed in 30 long-haul aircraft. In July, we were honoured to be named World’s Best Business Class in the 202 World Airline Awards organised by Skytrax. On the ground, refurbishment of the Level 7 business class lounge at The Wing in Hong Kong International Airport was completed in January 2012. Renovation of the first class lounge at The Wing is expected to be completed in the fourth quarter of 2012.Air China remains a key strategic partner. In March we announced the establishment of a new ground-handling company, Shanghai International Airport Services Co., Limited. This joint venture between Cathay Pacific, Air China, the Shanghai Airport Authority and Shanghai International Airport Co. Ltd. will provide airport ground-handling services at Shanghai’s two international airports, Pudong and Hongqiao. Aviation will always be a volatile and challenging industry and our business will continue to be subject to factors, including economic fluctuations and fuel prices, which are beyond our control. The cost of fuel is the biggest challenge, although the recent reduction in the fuel price will, if sustained, provide welcome relief. We will continue to take whatever measures are necessary to protect the business, managing short-term difficulties while remaining committed to our long-term strategy. Our financial position remains strong and we are in a good position to deal with our current challenges. We will continue to invest in the future, using our core strengths – a superb team, a strong international network, exceptional standards of customer service, a strong relationship with Air China and our position in Hong Kong – to ensure the continued success of the Cathay Pacific Group.