Cathay issues second profit warning in less than a month

by BLOOMBERG/ pic by BLOOMBERG

Cathay Pacific Airways Ltd. issued its second profit warning in less than a month as Hong Kong’s flag carrier continues to struggle from a slumping number of visitors because of the protests that have gripped the city for months.

Second-half financial results will be “significantly” lower than in the first, Cathay said in a statement Wednesday. The language in the warning was even more pessimistic than what it said last month, when it said the rest of 2019 would be “incredibly challenging.”

Cathay has been badly hit by months of protests that show no sign of abating. The unrest has worsened this week, with widespread damage and intense clashes in many parts of the city. Transport in the Central business and shopping district was brought to a standstill again Wednesday, as the local government and Chinese state media warned of consequences if violence continues.

“The short-term outlook remains challenging and uncertain,” Chief Customer and Commercial Officer Ronald Lam said in the statement. “Mainland China routes, in particular, felt significant pressure with weak travel sentiment to Hong Kong by mainland tourists. Demand for premium class travel was also sluggish with passenger volume seeing a double-digit dip in October, traditionally a peak month for business travel.”

Overall passenger numbers for Cathay and Cathay Dragon fell 7.1% in October from a year earlier, the third straight monthly decline. Inbound passenger traffic to Hong Kong slumped 35%, consistent with a trend in both August and September. Outbound traffic dropped 13% and overall passenger yield remained under “significant pressure,” the airline said.

In addition to suffering a slowdown in business, Cathay faced a clampdown from Chinese regulators after some employees took part in demonstrations. The airline’s decision to subsequently fire staff and warn workers about supporting the pro-democracy movement angered activists. Cathay appointed a new chief executive and chairman after their predecessors resigned amid the unrest.

Cathay may report a loss of HK$973 million ($124 million) in the second half because of weak travel demand, Andrew Lee, an analyst at Jefferies in Hong Kong, wrote in a report last month. The company posted first-half net income of HK$1.35 billion.

Shares of Cathay fell 0.5% to close at HK$9.99 ahead of Wednesday’s announcement. The stock is the second-worst performer among the world’s major airlines in the past six months.

Demand on Cathay’s premium seats has been hit as some business travelers have been ordered to shun Cathay. State-run companies including China Citic Bank International Ltd., China Huarong International Holdings Ltd. and finance-to-brewing conglomerate China Resources National Corp. banned employees from booking flights on the airline, people familiar with the matter have said.

The protests, now in their sixth month, spread to Hong Kong’s airport in August, forcing the cancellation of flights and leaving passengers stranded. In its statement Wednesday, Cathay said transit traffic via Hong Kong remained “relatively less affected.”

“Our advanced bookings continue to show weakness in both inbound and outbound Hong Kong traffic for the rest of 2019, partly offset by moderately increased transit passengers,” Lam said.

The Rugby World Cup in Japan provided a bright spot for the carrier last month as it generated strong demand for flights to the host country, especially from England and South Africa when both teams reached the final, Cathay said.

Cargo traffic improved as it entered into the sector’s peak season in the fourth quarter, helped by demand for raw material and machinery parts into China, said Cathay, Asia’s biggest airfreight airline. Still, overall yields remained significantly lower than a year ago.

Cathay said it has cut its passenger capacity from its earlier schedule by 2% to 4% for the last three months to October and as much as 7% for November and December. It has also frozen headcount and reduced capacity for the winter season due to weaker demand.