Cathay Pacific profit lags estimates on fuel-hedging loss

Cathay Pacific Airways Ltd. signage is displayed as travelers stand at the company’s check-in area at Hong Kong International Airport in Hong Kong

Cathay Pacific Airways Ltd., Asia’s largest international airline by passengers, reported profit that lagged analyst estimates as losses from fuel hedging masked gains in passenger numbers.
Net income rose 20 percent to HKD3.15 billion (USD406 million) in the year ended December, Hong Kong-based Cathay said in a stock exchange statement yesterday. That compared with the HK$3.49 billion average profit estimate in a Bloomberg survey of 16 analysts. Sales at HK$106 billion matched estimates.
Cathay had a HK$911 million loss from hedging its fuel purchases as last year’s sudden crash in oil prices left several Asian carriers holding bets made when crude oil prices were around $100 a barrel. Facing intense competition from Middle East carriers like Emirates and Etihad, Cathay said passenger numbers increased 5.5 percent last year to 31.57 million, as the airline added flights to the U.S. and more travelers came from Northeast Asia.
“This is a fairly robust set of results, but the issue is the size of the realized hedging loss,” said Geoffrey Cheng, BoComm International’s head of transportation and industrial research.
Cathay shares closed down 0.6 percent yesterday at HK$16.94 in Hong Kong trading.
Several Asian carriers were projected to suffer paper losses as last year’s sudden crash in oil prices took them by surprise. Carriers will have to account for those hedges or pay charges to unwind contracts prematurely.
Cathay said it also has HK$12.5 billion in unrealized losses on its fuel hedges, which will remain in place until 2018.
Cathay’s “annual fuel costs actually went up year on year, instead of decreasing, which is primarily due to their fuel hedging losses,” said Ajith Kom, director of Asia transport research at UOB Kay Hian in Singapore. “The key is whether they can take advantage of current low prices.”
Cathay Chief Executive Officer Ivan Chu told Bloomberg TV yesterday afternoon that the airline is happy with its current hedging position, and that the oil-price decline has been a net positive for Cathay.
Oil’s plunge and airlines’ hedging losses are a reprise of 2008 and 2009, when Cathay, Chinese carriers and Singapore Air all reported millions of dollars in losses because of their bets on fuel. Singapore Airlines Ltd. last month reported S$216 million ($156 million) in fuel-hedging losses for 2014.
Cathay Chairman John Slosar said at a yesterday afternoon news briefing that the full benefit of lower oil prices will be felt only this year, and the airline will continue to hedge its fuel purchases “where it makes sense.”
Martin Murray, Cathay’s finance director, told reporters the carrier has hedged 61% of its fuel needs for this year at $95 a barrel and 60% of its 2016 needs at $85 per barrel. That proportion falls to 50% in 2017 at $89 a barrel and 37% at $82 per barrel in 2018, Murray said.
Passenger yield, which measures money earned from carrying travelers each kilometer and is a key indicator of an airline’s performance, fell 1.8 percent to 67.3 Hong Kong cents, the company said in its earnings statement. Yield from carrying cargo and mail declined 5.6 percent to HK$2.19.
Cargo demand is beginning to pick up for carriers across Asia. Cathay was one of the five biggest airlines in the world in terms of freight carried in 2013.
Last year “saw the first significant boost in volumes since 2010, a trend we expect to continue this year,” Tony Tyler, IATA director-general and chief executive, said March 10.
Cathay currently operates cargo services to 45 freighter destinations around the world. It launched new freighter services to Calgary, Mexico City and Phnom Penh last year, and started a specialized air freight service for wine.
Chief Executive Chu said when he took over last year that he planned to ramp up investments in new products. In the past year, Cathay has announced it’s investing in a U.S.-based sustainable biofuel developer to help it achieve carbon-neutral growth from 2020.
Cathay also is retiring its Airbus Group NV A340-300s as part of a fleet modernization program that’s seeing the airline replace older, less-efficient planes with newer models from Airbus and Boeing Co. Cathay currently operates 147 aircraft, with an average fleet age of 8.09 years. Clement Tan, Bloomberg