Cathay Pacific breaks even

First-half earnings results for Cathay Pacific and Singapore Airlines confirm that the industry might be about to reach a cyclical bottom.

After a spring of consistently dire outlooks for the airline industry, Cathay Pacific Airways has turned a profit on one-time gains, while Singapore Airlines slipped further into the red.

Cathay Pacific's reported first-half operating profit rose nearly 400% year-on-year to HK$2.04 billion ($263 million) on HK$2.1 billion in unrealised mark-to-market fuel hedging gains. However, without the one-time boost, the airline nearly broke even with a loss of HK$60 million.

Conversely Singapore Airlines' earnings worsened in the first quarter. The airline's operating loss was S$319 million ($222.4 million) including one-time fuel hedging losses of S$287 million. Quarter-on-quarter Singapore's operating loss increased 91%, reflecting the airline industry's deteriorating state and the negative impact of the H1N1 virus on the region.

Cathay Pacific lost HK$760 million in the first half of last year, while Singapore made a profit of S$358.6 million in the same period.

"The global aviation industry, hit hard by soaring fuel prices in 2008, is now having to confront one of the most severe demand downturns in living memory," said Christopher Pratt, chairman of Cathay Pacific.

Traffic at both airlines continued to slump. Cathay Pacific's passenger yield fell a dramatic 19.7% during the first half, owing largely to double-digit declines in premium traffic. The airline struggled to reduce capacity in line with passenger demand, with capacity falling 2.1% while demand was down 4.2%.

In May, Cathay Pacific began implementing a previously announced system-wide 8% capacity cut.

Singapore Airlines managed to cut capacity more in line with demand. Traffic in the first quarter fell 4.5%, while capacity shrank 4.9% quarter-on-quarter; passenger yields, meanwhile, fell 5.5%.

Quarterly numbers for Singapore Airlines' premium passenger revenue, the bulk of airline passenger earnings, were not available, but a company employee said: "Premium yields are what can be expected in today's market."

According to the International Air Transport Association, premium traffic globally fell 20.6% in the first five months of the year. The numbers have been declining since May 2008.

Cathay Pacific shares closed down 6% at H$12.18 in Hong Kong yesterday, while Singapore Airlines' shares were flat at S$13.54.

"We think the airline industry could be close to a cyclical bottom," said Sam Lee, research analyst at Credit Suisse, in a report. He cited stabilisation in cargo demand, recovering business confidence and the bank's expectations the global economy will begin to recover in the second half as reasons. However, the H1N1 virus does remain a risk factor.

Both airlines showed their own respective month-on-month gains in June. Cathay Pacific's cargo traffic rose 2.9% and Singapore Airlines' passenger traffic 9%. Conversely, Cathay posted a 5.9% drop in passenger traffic and Singapore Airlines reported a 1.7% drop in cargo.

Worrying signs remain. Fuel prices rose in May at their fastest pace in 10 years, and despite some airlines having made money on fuel hedges this year, Pratt says, "the recent strengthening of fuel prices is a cause for concern".

The recovery of passenger demand very much hinges on the economic recovery of the region. Most analysts predict modest growth in the second quarter with stronger growth numbers emerging next year. But unexpected factors, such as an escalation in H1N1 infection or a slower than expected recovery in Western economies, could put a damper on these predictions.

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