Cargo contribution pushes up Cathay Pacific profits

Cargo contribution pushes up Cathay Pacific profits

HONG KONG — Cathay Pacific reported a 20 percent increase in net profit for 2014 as a strong second half recovery in the cargo market helped drive up earnings to $403 million.

Revenue for 2014 rose 5.5 percent year-over-year to $13 billion, with almost a quarter of that delivered by the cargo division.

“Our business is normally better in the second half than in the first half. This was the case in 2014,” said Cathay Pacific chairman John Slosar. He told reporters that in the first half of 2014, the business was affected by high fuel prices, reduced passenger yield and continued weakness and over-capacity in the air cargo market.

Cargo demand began to improve in the summer and was “very strong” in the fourth quarter, Slosar said. That drove the full-year revenue up to $3 billion, an increase of 7.3 percent over 2013.

“When demand was weak in the first half of the year, particularly in the first two months, we managed freighter capacity in line with demand,” Slosar said. “We reduced schedules and made ad hoc cancellations as necessary. However, the subsequent increase in demand enabled us to operate an almost full freighter schedule for most of the second half.”

During the peak period from October to mid-December the carrier put on extra scheduled and charter flights and has steadily expanded its long-haul cargo services.

Slosar dedicated a good portion of the results briefing to the performance of the cargo division, an indication of its growing relevance to the balance sheet of the world’s largest scheduled air freight carrier.

Cathay Pacific and sister airline Dragonair carried 1.7 million tons of cargo in 2014, a solid 12 percent year-over-year increase that was greater than the capacity growth of 10.4 percent. Load factors were up 2.5 percent to 64.3 percent.

Slosar said cargo volume out of China increased and enabled Cathay Pacific to grow its market share in the mainland. Exports from the Yangtze River Delta area were strong, particularly in the second half of the year, and demand for shipments from new manufacturing centres in Chengdu, Chongqing and Zhengzhou fluctuated in the early part of 2014. Later in the year, exports of new consumer electronic products began to strengthen.

Intra-Asia trade was also on the rise and Cathay Pacific allocated capacity to cater to the trend. “Freight movements within Asia have become more important to us. Demand for shipments of manufactured goods from Hanoi was strong for most of the year. We introduced a twice-weekly service to Phnom Penh in November 2014 in response to Cambodia’s growth as a manufacturing centre,” he said.

Demand to and from Latin America was steady, with strong demand for shipments of fresh produce to Asian markets and milk powder to mainland China. Chilled meat shipments to the Middle East were also robust.

But it was the North America cargo services that really paid dividends. Demand for shipments from Asia to North America was strong from March, and particularly in the fourth quarter, when Cathay Pacific operated more than 40 trans-Pacific services per week.

“There was high demand for shipments of perishables (fruit and seafood) and pharmaceuticals from North America to Asia. Our business was helped by severe congestion in the major shipping ports on the west coast of the United States, which resulted in more freights needing to be moved by air,” Slosar said.

Last year was the first full year of operation of the new Cathay Pacific cargo terminal at Hong Kong International Airport, which handled 1.45 million tons of air freight in 2014. The terminal handles cargo for Cathay Pacific, Dragonair, Air Hong Kong and four other airlines.

The cargo joint venture with Air China, Air China Cargo, has not been a shining light in the past few years and it received a “substantial” injection of capital and loans from its shareholders in 2014, providing funding for new aircraft aimed at helping the carrier improve its air freight business.

Three Boeing 747-400BCF converted freighters were replaced with four Boeing 777-200F freighters in 2014. Air China Cargo also took advantage of a general improvement in the air cargo market that began in the summer of 2014.

Slosar said the air freight business benefited from lower fuel prices in the fourth quarter, but that was partially offset by fuel hedging losses. “Managing the risk associated with high and volatile fuel prices is a priority,” he said, adding that fuel accounted for 39.2 percent of the airline’s operating costs.

“Our fuel hedging contracts extend to 2018. The sharp reduction in fuel prices in the fourth quarter of 2014 caused a very welcome net benefit to overall profits. However, it resulted in losses on our hedging contracts. It also resulted in significant unrealised hedging losses. These unrealised losses caused a reduction in our consolidated net assets.”

Cathay Pacific operates 13 fuel-efficient Boeing 747-8F freighters and has one more scheduled for delivery in 2016. The carrier agreed to sell six B747-400Fs back to Boeing and all the old freighters will have left the fleet by the end of 2016.

Contact Greg Knowler at gknowler@joc.com and follow him on Twitter: @greg_knowler.