Summary of Key Points
Cathay Pacific reported a net profit of HK$6.243 billion in the first half of the year, a year-on-year increase of 71%, against the backdrop of domestic airlines predicting combined losses ranging from HK$7.373 to HK$8.973 billion. The profit included a one-time gain of HK$1.4 billion (resulting from the accounting impact of the dilution of its shareholding due to China Airline's rights issue), but even after deducting this, the result was still better than last year. The airline managed to cope with the soaring oil prices by adjusting fuel surcharges and using hedging strategies. The Middle East conflict led to an increase in transit passengers, and it plans to invest HK$150 billion in the next decade to upgrade its fleet and expand its network.
I. Why Was Cathay Able to Profit Despite the Challenges?
Of Cathay's HK$6.2 billion in profits for the first half of the year, HK$1.4 billion came from a one-time gain. In June this year, China Airline issued additional A-shares, reducing Cathay's shareholding from 15.09% to 12.85%. However, according to accounting standards, Cathay's net asset share increased, which was recorded as a "sale gain." Even after deducting this one-time gain, the remaining profit of around HK$4.8 billion was still higher than the same period last year, indicating that its core business is indeed growing.
The difference in performance compared to the other domestic airlines may lie in their business structures: Cathay has a higher proportion of international transit flights (e.g., from Asia to Europe or Australia to Europe), while domestic airlines rely more on domestic routes or have seen slower recovery in some international services. Additionally, Cathay took advantage of the increased transit traffic due to the Middle East conflict, which contributed to a real increase in its main business revenue.
II. How Did Cathay Cope with Rising Oil Prices?
In the second quarter of this year, oil prices soared (nearly $200 per barrel from April to May, and still ranging between $125 and $150 per barrel in August), resulting in a 58.5% increase in fuel costs for Cathay, amounting to an additional HK$857 million. To mitigate this, the airline took two measures:
- Shortened the frequency of fuel surcharge adjustments: It changed from adjusting surcharges monthly to every two weeks, quickly passing on the increased costs to passengers when oil prices rose.
- Used fuel hedging: Cathay entered into contracts in advance to lock in oil prices (essentially buying "fuel price insurance"), which generated a profit of HK$878 million in the first half of the year.
However, these measures only offset about half of the increased fuel costs. The remaining profit growth came from increased passenger and freight demand, as well as the flexible adjustment of its flight capacity.
III. The Middle East Conflict Created Unexpected Passenger Traffic
The outbreak of conflict in the Middle East in March led to the suspension of flights to that region. Passengers who previously used Emirates or Qatar Airways for transits to Europe changed their routes due to security concerns, and Cathay was able to capture this additional traffic:
- Since mid-March, many passengers flying from Asia to Europe, Australia to Europe, and India to the United States chose to transit through Hong Kong.
- As a result, Cathay increased its flight capacity to Europe by 18.8% in the first half of the year.
Cathay notes that this is only a temporary situation and that passenger flows may return to normal once the Middle East situation stabilizes.
IV. What Are the Plans for the Second Half of the Year?
Cathay is "prudently optimistic" about the second half of the year:
- Passenger traffic: Travel demand is expected to remain strong, especially during the summer vacation season.
- Freight traffic: The second half of the year is a peak season, and the development of high technology and artificial intelligence will support demand for goods such as chips and equipment.
The airline plans to invest HK$150 billion over the next 10 years to upgrade 150 new aircraft, improve cabin facilities and VIP services, and expand its network to 150 destinations, all in order to drive long-term growth.
In Conclusion
Cathay's good performance in the first half of the year can be attributed both to "luck" (one-time gains and increased transit traffic due to the Middle East conflict) and "strength" (flexible response to oil price changes and identification of growing demand). However, it faces challenges such as volatile oil prices, changing circumstances in the Middle East, and global economic uncertainties. Nevertheless, Cathay has already begun to make long-term investments, aiming to consolidate its advantages with new aircraft and expanded routes. For passengers, this may mean flying on more advanced aircraft and having more destinations to choose from in the future, although fuel surcharges may still fluctuate with oil prices.