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August 11th, 2011:

Cathay profit dives 59pc on big rise in fuel costs

South China Morning Post — 11 August 2011

Lack of gains from disposals also blamed for lower earnings of HK$2.8 billion for the first half to June

High oil prices took a heavy toll on Cathay Pacific Airways (SEHK: 0293)’ half-year profit, which came in at just HK$2.8 billion, down 59 per cent on the same period last year, the airline reported yesterday.

Also contributing to the big drop in profit was the absence of any gains from disposals, compared with a HK$2.16 billion gain in the same period last year from the sale of investments in subsidiaries.

Fuel costs rose HK$6.46 billion or 41 per cent to HK$18.56 billion. The jet fuel price jumped 53 per cent on average to US$128 per barrel, but fuel hedging, which covered 30 per cent of fuel consumption in the year and 20 per cent next year, helped Cathay pocket HK$962 million in hedging gains.

The drop in profit has not deterred the carrier from rejuvenating its fleet. Cathay announced yesterday it had ordered 12 new aircraft for HK$25.6 billion. The latest order will raise the number of aircraft on order over the period to 2019 to 97 – 79 wide-bodied passenger planes and 18 freighters. The estimated cost for the total order book is HK$200 billion. Some of the new planes will replace older aircraft, resulting in a net increase of 37 per cent from an existing fleet of 170.

The latest order is for four Boeing 777-300 extended-range passenger planes and eight Boeing 777-200 freighters, which will be primarily used on regional and European routes.

On the commercial impact of the emissions trading scheme proposed by the European Union for next year, chief executive John Slosar said the extra cost would be passed on to passengers since the carrier was required to buy carbon credits to neutralise its emissions.

The scheme is part of the EU’s plan to cut emissions by 20 per cent from the 1990 levels by 2020. Cathay has described the scheme as discriminatory as it penalises long-haul carriers since the EU will charge flights to and from Europe, including non-EU areas.

“We are fully covered and have already bought the carbon credits for next year,” Slosar said.

He did not detail the costs and Cathay has yet to decide by how much each European ticket would be priced higher. European routes account for about 20 per cent of the airline’s total traffic.

Mainland carriers have said the emission scheme would cost them 800 million yuan (HK$973.44 million) next year, which translates to 300 yuan more for each ticket.

For the six months to June, Cathay reported a 15.9 per cent year-on-year rise in passenger ticket sales to HK$31.77 billion. Weakening cargo demand since April narrowed cargo sales growth to 7.7 per cent at HK$11.6 billion.

After an exceptionally good year in 2010, when the carrier enjoyed record earnings, soaring fuel prices and softening cargo demand have cast a cloud on the outlook for the remainder of the year.

If the recession in the global economy is sustained, cargo demand would continue to weaken, chairman Chris Pratt said. “But Hong Kong and Cathay are in quite a special place and as China continues to do well, we will benefit,” he said.

Aircargo news

In some quarters, capacity sharing partnerships between HKIA and airports in southern China have been advanced as an alternative to HKIA moving forward with plans to build a third runway. Cathay Pacific has been rather outspoken on the issue, pointing out quite reasonably that Shenzhen and Hong Kong have separate governments, border controls and administrative systems. They also have different currencies, immigration requirements and air services agreements, not to mention leading operators and stakeholders. “Even if the challenges outlined above could somehow be resolved, there’s no reason to think that the other PRD airport hubs would surrender their runway capacity to Hong Kong. All of the PRD airports are in competition and this is good for passengers and other users,” said Cathay in one statement.
As HKIA weighs up its expansion options, the truth of the matter is that competition between Hong Kong and its Mainland rivals is fierce now and will intensify in the coming decade.
As previously reported here, the Pearl River Delta region of southern China produces over 25 percent of the country’s exports and is responsible for more than 10 percent of national industrial output. Over the last decade HKIA has retained its dominance of air cargo uplift from the region, a dominance that helped it become the world’s leading cargo airport in 2010. But its cross-border rivals of Guangzhou (CAN) and Shenzhen (SZX) are making inroads.
CAN saw volumes rise almost 20 percent in 2010 to 1.14m metric tons, helping the airport retain its status as the 21st largest cargo airport globally, according to figures from Airports Council International. Shenzhen, meanwhile, is now the 24th largest and one of the fastest growing cargo airports in the world, handling some 809,363 tons in 2010, a year-on-year gain of 33.6 percent.
Both airports have ambitious plans to expand by building additional runways and already boast the presence of major hubs operated by leading carriers – UPS at SZX and FedEx at CAN. The two logistics majors have been highly vocal about the service benefits that have been possible since the hubs were established. Both airports are now also improving service levels, supported by strong investment in hinterland infrastructure from regional and federal authorities. Alwyn Mendonca, (left) Managing Director for South China and Hong Kong at GAC, said these efforts are now bearing fruit. In the past, 90 percent of GAC’s airfreight cargo was handled at HKIA because it was the most cost-effective option, especially since GAC builds its own units in Hong Kong.
“However,” he added, “we are gradually seeing more cargo moving directly through Guangzhou and Shenzhen as customs in Southern China becomes more efficient. For every shipment, we carefully evaluate all options to find the best, and most cost-effective, way to get the cargo to its final destination.
“There has been considerable improvement in customs services at both CAN and SZX in the past few years. Paperless export declarations are now a reality for some general cargo, depending on the commodity, and it is now possible to complete the process within a day.”
Christian Hein, Vice President for air freight Product Management in the Asia Pacific at Schenker, said improved customs services were seeing more cargo directed to CAN and SZX, a trend he predicted would accelerate.
“There are more domestic and international carriers calling into these two airports now and they offer good connections overall,” he added.
“There are increasingly more customers requesting us to operate directly out of these two airports due mainly to their proximity to manufacturing operations, and to a certain extent, an increasingly influential and sizeable consumer market. “Though the fuel surcharge level is higher than Hong Kong, the overall freight rate all-in is still competitive.”
Robert Timmerman, (right) Area Manager Greater China at Panalpina, said that although airfreight rates were attractive from mainland airports, add-on fuel and security surcharges ultimately aligned pricing with HKIA.      “The fact is that the carrier portfolio in both Shenzhen—mainly served by Jade Airlines to date, and Guangzhou, which sees a diversified portfolio going forward, combined with the expanding China Southern fleet including Boeing 777 freighters—will allow us to provide direct lift from and to Mainland China to support the growth.
“Hong Kong, however, will retain its strengths in view of the local trading solutions available and successfully conducted for years.
“A dilemma going forward related to airlifting through Mainland airports are the restrictions related to second customs’ bond transfer. This cannot be conducted at present. If the Logistics Provider could build Aircraft ULDs themselves this would substantially increase control and thus reduce exposure on damages.” Andy Weber, (left) President of Kuehne + Nagel Asia Pacific, said CAN and SZX still lacked sufficient route coverage, flight frequency and airport cargo handling options, but had a speed advantage over HKIA in terms of accessing factories in the PRD because of overland transit times.
“Buyers increasingly demand high-speed delivery of products or components, and the time lost can constitute a competitive constraint,” he explained.
“This would suggest that Hong Kong’s future as a key air-cargo hub will heavily depend on its capability in providing speedy intermodal transports by land, sea or air between Hong Kong International Airport and the factories in South China.”
The final word on competition between HKIA and southern Mainland China rivals goes to Hein: “An additional runway [at HKIA] would definitely enhance competitiveness. Nevertheless, the competition between HKIA and other South China regional airports is keen and will remain so for years to come.”