By Max Clarke
The Cathay Pacific Group recorded an attributable profit of HK$14,048 million for 2010. This result, a record for the Group, compares to an attributable profit of HK$4,694 million for 2009. Turnover for the year rose by 33.7% to HK$89,524 million. Earnings per share rose by 199.3% to HK357.1 cents.
The Group’s business began to recover from the global economic downturn in the latter part of 2009. The momentum was sustained throughout 2010. Our passenger and cargo businesses both performed well with consistently strong loads and significant increases in revenues. We also benefited from the strong profits earned by our associated company, Air China (which contributed HK$2,482 million to the 2010 result), from the aggregate profit of HK$2,165 million from the disposal of our interests in Hong Kong Air Cargo Terminals Limited (Hactl) and Hong Kong Aircraft Engineering Company Limited (HAECO) and from the profit of HK$868 million from the deemed disposal of part of our interest in Air China. The deemed disposal occurred because Air China issued some new shares, an issue in which we were unable to participate.
In announcing the 2010 results, Cathay Pacific confirmed that all eligible staff would receive a 2010 profit share of five weeks’ salary plus either HK$6,000 or half of the staff's monthly salary, whichever is lower. Under this formula, more than 60% of staff will in effect get a profit share of more than six weeks of salary, two weeks of which was already paid to all eligible staff in August. This profit share is on top of the 13th month discretionary bonus they received last December.
Cathay Pacific and Dragonair between them carried a total of 26.8 million passengers in 2010, representing an increase of 9.1% over 2009’s figure. The load factor increased by 2.9 percentage points as a result of consistently strong demand for economy class seats and a steady increase in demand for premium class seats. Passenger revenue for the year increased by 29.3% to HK$59,354 million. Yield increased by 19.8% to HK61.2 cents. Demand was strong in most markets, there was a marked pick-up in premium travel and seat revenue was managed astutely. Passenger capacity increased by 4.1% as we restored services which had been reduced or suspended during the downturn and added new destinations.
The Group’s cargo revenue increased by 50.1% to HK$25,901 million. Freight carried by Cathay Pacific and Dragonair increased by 18.1% to 1.8 million tonnes. Cargo capacity increased by 15.2%, as we brought back into service freighters which had been parked in the desert during the downturn. Despite this substantial increase in capacity, the strength of demand was such that our load factor increased by 4.9 percentage points to 75.7%. Demand in all key markets was strong, and especially so in the peak season of October and November. This was reflected in yield increasing by 25.3% to HK$2.33.
Fuel remains our largest single cost, representing 35.6% of the Group’s total operating costs. The fuel price increased during the year and was 28.0% higher on average than in 2009. Our total fuel costs for 2010 (disregarding the effect of fuel hedging), reflecting both the higher price and increased operations, increased by 40.4%. Managing the risk associated with fuel price changes is a key challenge. The Group's fuel hedging activities resulted in a reported loss of HK$41 million in 2010, while unrealised mark-to-market gains of approximately HK$1 billion have been recognised in reserves. These gains, depending on intervening movements in the price of oil, will be released to the profit and loss account in 2011 and 2012 as the underlying contracts mature.
The improved business conditions helped us to rebuild our balance sheet. Our financial position is strong. This enables us (while continuing our policy of maintaining a conservative balance sheet) to increase the size of the airline and so further strengthen Hong Kong’s position as a leading international aviation hub. We continue to invest in a modern, fuel-efficient fleet. In 2010 we took delivery of seven new aircraft. In August 2010 we announced our biggest-ever aircraft order, of 30 Airbus A350-900s (to be delivered between 2016 and 2019) and of six more Boeing 777-300ERs. In December, a further two Airbus A350-900s were ordered. In March 2011, Cathay Pacific announced the acquisition of 15 new Airbus A330-300 aircraft and 10 new Boeing 777-300ER aircraft. Cathay Pacific is also in discussions which could result in the acquisition of 14 further aircraft. Unfortunately, there will be a delay in the delivery of our new-generation Boeing 747-8F freighters, with the first now scheduled to arrive in August 2011.
Cathay Pacific launched services to two new destinations in 2010, Milan and Moscow, added services to Haneda and has announced the commencement of passenger services to Abu Dhabi commencing in June 2011 and to Chicago commencing in September 2011. It also added 22 destinations to its network through codeshare arrangements with airlines in Central and Latin America, the United States, Canada and Japan. Dragonair added a new service to Hongqiao in Shanghai, restored services to Fukuoka and Sendai in Japan and added Okinawa to its network. In December 2010 Cathay Pacific announced the introduction of a new long-haul flat-bed business class seat. During the year we opened a new first and business class lounge in London and a fourth first and business class lounge in Hong Kong, called The Cabin. We also began to renovate our signature lounge in Hong Kong, The Wing.
The authorities in Mainland China have given formal approval for our cargo joint venture with Air China, and the two airlines are now in the process of completing the necessary paperwork to enable operations to commence. An existing Air China subsidiary, Air China Cargo, will be used as the platform for the joint venture. Air China Cargo is based in Shanghai and is in a good position to exploit the attractive air cargo opportunities in the Yangtze River Delta region. The Group is selling four Boeing 747-400BCF freighters and two spare engines to the joint venture. One of these aircraft has already been sold to Air China Cargo. The other three are expected to be sold in 2011 and 2012. Our commitment to Hong Kong as an international air cargo hub remains unwavering. The construction of our own cargo terminal at Hong Kong International Airport is progressing on schedule. When the facility opens in early 2013 it will be one of the biggest and most advanced of its kind in the world.
Cathay Pacific Chairman Christopher Pratt said: “The rapid turnround in our business from the lows of 2008 and much of 2009 to the record highs of 2010 is very welcome. It is also indicative of the volatile nature of our business. We cannot afford to be complacent. Our results would be adversely affected, and very quickly so, by a return to recessionary economic conditions. Demand is at present expected to remain strong in 2011, but this expectation could be undermined if the current (or any higher) level of oil prices were to reduce global economic activity.”
“Capacity will increase with the introduction of new destinations and increased frequencies. If our expectation as to demand is met, revenues will increase in line with capacity. Fuel costs are now higher than was expected at the beginning of 2011. Other operating costs are expected to increase, some at a faster rate than revenue. With regard specifically to fuel, increased oil prices can be expected to have a significant adverse effect on profitability if they are not recovered through higher tariffs or fuel surcharges or if the effect of their being so recovered is to reduce demand significantly.”
“The airline industry is challenging and unpredictable. We will continue to manage our finances prudently and will strive to keep costs firmly under control. Many good things happened in 2010. I am confident that these, together with our core strengths of a capable and committed team, a superb international network, the quality of our product and services, our strong relationship with Air China and our position in Hong Kong, one of the world's great international aviation hubs and a key gateway to Mainland China, will help to ensure the continued success of the Group.”