Cathay Pacific sees red

The airline's profits plunge 222% to a record $1.1 billion annual loss mainly due to fuel hedges.

Hong Kong-based Cathay Pacific Airways fell deep into the red in 2008 during one of the most volatile years on record for the global airline industry.

The airline reported a record annual loss of HK$8.6 billion ($1.1 billion) for 2008, representing a 222% drop on the HK$7 billion profit it made in 2007. A HK$7.6 billion unrealised mark-to-market loss on the fuel hedges led to Cathay Pacific falling into the red. A rapid decline in cargo and passenger revenue during the second half also contributed to its misfortune.

The earnings were roughly in line with or below analysts' estimates. After the announcement Wednesday, Cathay Pacific's shares closed up 5.8% at HK$7.41 on the Hong Kong stock exchange.

Leading Cathay Pacific's losses were fuel hedges. Last year the airline paid an average of $132 per barrel on a fuel bill of 38.3 million barrels. The market price for oil peaked near $145 per barrel in July before falling to near $40 by the end of the year.

"Having made a painful adjustment to high fuel prices, the aviation industry now has to adjust to a severe economic downturn," says Christopher Pratt, chairman of Cathay Pacific. "If fuel prices remain at their present levels, further losses on fuel hedging contracts will be incurred. Up to the end of February, unrealised mark-to-market losses on fuel hedging of HK$1.9 billion have been incurred in 2009."

According to Cathay Pacific, its Brent oil hedge contracts for 2009, 2010 and 2011 will only break even with oil at $75 per barrel. At $45 per barrel the airline will lose $1.4 billion over the three-year period as compared to the $1.1 billion loss in 2008.

A barrel of Brent oil closed at $43.96 on Tuesday, down $0.17.

Ironically, Cathay Pacific chief executive officer Tony Tyler called falling oil prices a "glimmer of good news" in a January statement to employees on falling passenger traffic.

In January, despite the early Chinese New Year holiday -- normally a boon to the region's airlines -- growth in Cathay's monthly revenue per passenger kilometre (RPK) slid to a meagre 1.2% on top of available seat kilometres (ASK) growth of 4.7%. In January 2008, Cathay Pacific posted RPK growth of 17.8% and ASK growth of 10.2%.

Commenting on falling revenue, Tyler says there is a "pronounced drop in revenue streams", and the "numbers of passengers actually paying proper first and business class fares is now very low, whatever the on-board loads may look like".

Analysts predicted a significant loss at Cathay Pacific after the airline issued a profit warning in January. Citi analyst Anil Daswani estimated the 2008 loss at HK$11.2 billion, and put a sell rating on the airline. Daswani said the airline's January numbers showed "no sign of recovery".

Hong Kong's heavy integration into the global economy made it one of the first Asian countries to fall into recession last year. As the city's dominant airline, Cathay Pacific, along with its sister airline, Dragonair, carry roughly half Hong Kong International Airport's passenger traffic, making the group especially susceptible to the city's economic woes.

On top of the city's falling into recession, Hong Kong's large banking and financial industry is bearing the brunt of the global economic crisis. Already the sector has seen numerous layoffs and budget reductions. This is additional bad news for Cathay Pacific which relies on the sector for one third of their passenger revenues.

¬ Haymarket Media Limited. All rights reserved.
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