Cathay earnings drop for first half

Cathay Pacific is Hong Kong's dominant carrier and the fourth-largest in Asia

By CNN's Alex Frew McMillan

HONG KONG, China (CNN) -- After posting record profits last year, Cathay Pacific Airways Ltd. said Wednesday that earnings slumped 39 percent for the first six months of 2001.

Its $169 million net profit (HK$1.3 billion) fell short of analysts' expectations. They were also a sharp drop from the same period last year, when the airline made HK$2.2 billion.

The Hong Kong-based company had its best-ever results in 2000, with profit of HK$5 billion.

Cargo operations down heavily

So far, 2001 is a very different story. Sales dipped for the first six months, down 1.9 percent to $2.0 billion (HK$15.8 billion).

The Hong Kong-based high flier said it came back to earth due to the global economic slump.

"Cargo operations performed poorly," Cathay Chairman James Hughes-Hallett admitted at a conference here. "Demand for air freight has been very weak thanks to the U.S. economy in particular, and reflecting the economies around the [Asian] region."

Freight shipments fell off sharply, with the total weight carried falling 5.2 percent. Shipments have dropped all but one month this year.

The profit figures sent Cathay's stock down 4.95 percent by Wednesday's close, to HK$9.60. During the day they reached their lowest point since April 1999.

That drop saw Hong Kong's benchmark Hang Seng index close below 12,000 for the first time in two years, at 11,958.01.

Passenger profitability drops

Cathay did see a slight, 2.3 percent rise in ridership over the first half of the year, to 5.9 million passengers.

But the big-bucks business travelers it thrives on are moving further back the plane, from first class to business or business to economy.

Planes were also flying emptier. Because capacity grew 8.6 percent, faster than the number of flyers, loads and profitability per passenger dropped.

Asia's fourth-largest air carrier admits prospects are not looking up for the rest of the year.

"At this stage, we can see no real signs of recovery in the Asian air passenger and air-freight markets," Hughes-Hallett conceded. "Indeed the situation may get worse before it improves."

Cathay predicts $45 million hit

The airline's pay dispute with its pilots has not bee factored in yet. But Cathay warns the battle over pay and rostering, now in week six, will slam earnings in the second half of the year.

Cathay predicts a $45 million (HK$350 million) hit to the bottom line. It had to charter extra planes after pilots began a "work to rule" boycott on July 3.

The company said Wednesday it would hire 350 new pilots through 2002. That's partly to replace the 52 that it has fired, saying it couldn't rely on them any longer, and partly because it is buying new planes.

Analysts say the cost of the labor fight might be much greater, outdoing even the HK$500 million cost of its last tussle with unions, in 1999.

"I'm sure there has been a loss of traffic, as passengers have moved from Cathay flights to fly some of their competitors, just due to the uncertainty of whether the flight will leave on time or if it will even leave," Philip Wickham, regional airline analyst with ING Barings, told CNN.

But Cathay underscores that the profit slump for the first half of the year stems from the negative impact of the economic slowdown. Asia's other big carriers, including Singapore Airlines, Thai Airways and Korean Air Lines, are also hurting.

Heavy cargo carriers are the hardest hit.

"The airlines which are experiencing the sharpest hit would be the Korean carriers, Korean Air and Asiana, as well as the Taiwanese, China Airlines and Eva [Air], because all of them have large cargo operations," Wickham said.

With Asian business feeling the pinch from Japan and the United States, analysts say it'll take a turnaround in global demand for them to get off the ground.