Weekend Special (1)- Cathay Pacific, HONG KONG

Cathay Pacific

● The delayed effect of jet fuel's price decline on profitability is unequivocally good news, with a marked improvement in cargo volumes continuing from 4Q14 into the first half of this year.

● Explanations of CX's fuel hedge accounting treatment also took centre stage, with Murray explaining the differences between the cash flow effects and the losses taken through balance sheet reserves. Were the price of Brent to stay where it is today for the balance of the year, CX would be HK$5 bn better off than it was last year.

2015 off to strong start

Given CX's hedge book and forward fuel purchases (typically six weeks' worth), the drop in jet fuel prices at the end of 2014 has only really started impacting in 1Q15. The impact was felt immediately at the associate company, Air China (CA), as it does not hedge its fuel requirements. However, since CX accounts for these contributions on a quarter lagged basis, the benefits of a strong 4Q15 at CA will only show up in CX's 1H15 numbers.

Excess capacity in the cargo industry, generally, combined with loss of modal share to sea and freight miniaturisation (especially in the IT industry), will hammer performance between end-2010 and June of last year. Since then, CX's freight loads have been their best in the past four years, rising over 5 pp YoY in February alone, with freight traffic up 24% YTD, almost twice the rate of APAC regional cargo demand growth.

The growth of passenger revenues will likely map CX's 8%+ ASK growth this year, as jet fuel surcharges are rolled back and as it continues to develop new long haul routes, which are affected by lead in fares and longer stage lengths. February YTD, CX passenger loads are ahead by 1 pp to 84%, with demand rising 9%, due to passenger growth most obvious between HKG and North Asia (especially Japan) and the US.

CX's passenger fleet plan will see it concentrated around B773ERs, A350s, and A330 within two years, as all of its remaining A340s and B744s are retired. At the same time its freighter fleet will have completed its transition to 100% B748F. CX has no plans to change its fleet structure, given the low price of fuel and, if it were to reassess its fleet composition on this basis, it would probably only see older capacity retained in the freight division.