HK protests/Cathay Pacific: air strike

HK protests/Cathay Pacific: air strike

Local protests in Hong Kong just went international. Cathay Pacific pilots and cabin crew went on strike this week, joining thousands of Hong Kong airport employees. The airline cancelled more than 100 flights. First-half results to June released on Wednesday did not reflect this. But they did reveal that the China-US trade tussle had taken its toll.

The good news was that Cathay managed a $172m net profit in the first half, and passenger numbers even increased. But the biggest impact of protests on inbound travel, which started intensifying in July, will come later. Even so, passenger yield, the average airfare per mile, fell. Premium class travel, up early in the year, declined in the second quarter. Worse, labour costs, already above peers, increased further. Lower fuel prices, which at 28 per cent is the biggest portion of total operating costs, made the biggest difference to earnings.

Most concerning is a 11 per cent decline in cargo revenues. Cathay is the biggest cargo airline in the region. A fall in both volumes and yields is troubling as cargo, more than a fifth of total revenue, has long helped offset volatile passenger traffic. Sales at Air China Cargo, 49 per cent owned by Cathay, have suffered too.

Cathay’s share price has fallen a quarter since April, when Hong Kong violence spiked. Yet it trades at 10 times forward earnings, a premium of a third to regional peers, including Air China, and more than 50 per cent over global peers that do not face political risks. And its valuation does not reflect a deteriorating financial position. Net borrowings have increased by a third.

Headwinds are building. Forward bookings are down. US dollar strength, which cut into first-half earnings, has intensified since. It cannot compete on price with the mainland airlines. Recent concerns over monitoring passengers on flights through cameras and recording in-flight entertainment use does not help its image.

As the turmoil shows no sign of abating, the worst is yet to come for earnings in the second half. It is too early to travel on Cathay.

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