Cathay Pacific has a lot going for it: higher ticket prices, strong cargo loads, and more passengers. But the carrier is still losing money thanks to high fuel costs. That’s a huge red flag in this era of aviation growth.
Rupert Hog became CEO in May 2017 and has embarked upon a painful restructuring that seeks to reduce unnecessary jobs while improving cabin services. His strategy has thus far proven effective in tightening the belt while not bludgeoning service levels. On the contrary, the carrier recently announced positive enhancements to its business class soft product.
But Cathay Pacific is still feeling the effects of its failed fuel hedging gamble, which once again helped to make the carrier unprofitable for the first six months of the year. Fuel expenses are up 32% for Cathay Pacific this year and the fuel hedge program alone is no the sole source of blame. Rather, Cathay Pacific appears unable to profit with fuel at these levels during the slow season: the hedging just made it worse. Hedging losses were only HK$653MN this year compared to HK$3.24 billion last year.
> Read More: The Real Reason Cathay Pacific is Losing Money
Of course Cathay Pacific Chairman John Solar promises his airline is “on track” toward sustainable, long-term profitability, but let’s just assume everything goes Cathay Pacific’s away. First, more seats on the 777 (economy will go from 3-3-3- to 3-4-3). Second, more capacity (4-5% annual growth) gearing up for the opening of Hong Kong AIrport’s third runway. Third, more fuel efficient aircraft. Fourth, a more competitive soft product in premium cabins.
All of these are great, but what about the competition? I’ve written before about how Cathay Pacific is squeezed from both sides: Chinese and regional full-service carriers and low-cost competition. This won’t change, it will only intensify. With Air China, China Eastern, and China Southern flourishing, Hong Kong is no longer the pivotal hub it once was.
I argue this is a more systemic problem than a flawed hedging program. That said, I’d still like to know who has benefited so richly from Cathay Pacific’s fuel blunder.
In becoming leaner and meaner, Cathay Pacific is doing the right thing. I applaud the airline for shedding excess while improving soft product, adding new routes, and announcing plans to hire 1,800 additional staff this year. I have my doubts about near-term profitability, but Cathay Pacific properly realizes it cannot cut its way to profitability. Now it just needs to get a grip on fuel and hope for the best with the rest of its strategic plan.
image: Cathay Pacific