Cathay rises most since 2008 as reopening chance offsets virus

Cathay Pacific Airways Ltd. shares climbed the most in nearly 12 years after a Chinese state-run newspaper tweeted that Hong Kong’s airport may restart transfer flights to mainland China, a move that could inject the beleaguered carrier with some much-needed passenger traffic.

The tweet from the Global Times added fuel to Cathay’s Wednesday morning rally, pushing it to a 12% gain, its biggest since October 2008. Shares closed at HK$5.88 in Hong Kong. The newspaper cited a source it didn’t identify, and Hong Kong International Airport didn’t immediately respond to a request for comment.

At a media briefing later, Cathay Chief Customer and Commercial Officer Ronald Lam said the company, which typically relies on mainland traffic for a large portion of revenue, hadn’t heard any official news on reopening Hong Kong for transfer flights. Meanwhile, Chairman Patrick Healy reiterated that the coronavirus pandemic has been the most challenging period in the airline’s history.

Cathay released first-half results during the midday trading break, showing a first-half net loss of HK$9.9 billion ($1.3 billion) as the pandemic brought travel to a near standstill. That news was already priced in, with Cathay first warning about the loss last month.

The airline and its Cathay Dragon unit flew only 4.4 million passengers in the first six months, down from 18.3 million a year earlier. Passenger revenue tumbled 72% to HK$10.4 billion during the period. The company flew an average of just 500 passengers a day in April and May. Hong Kong Express, which Cathay bought in July 2019, suspended services in March and only began resuming a limited number of flights this month.

The first-half loss included impairment charges of HK$2.5 billion relating primarily to 16 aircraft unlikely to return to meaningful economic service again. Cathay said it agreed with Airbus SE to defer deliveries of A350s and A321neos until possibly 2025, and it is in “advanced negotiations” with Boeing Co. for the deferral of B777-9 widebodies.

Covid-19 struck just as Cathay was trying to rebuild following protests in Hong Kong that led to changes in senior management and a sharp drop in traffic last year. The pandemic made matters much more grave for Cathay and airlines elsewhere, many of which are relying on government aid to survive. Several have collapsed.

“This is the biggest challenge to the aviation industry that Cathay Pacific has ever witnessed”—Patrick Healy

Cathay unveiled a HK$39 billion rescue plan in June that gives the Hong Kong government a 6.08% stake in the company and two observers on its board. The recapitalization was completed Wednesday. The carrier’s main shareholders are Swire Pacific Ltd., Air China Ltd. and Qatar Airways.

The airline was losing HK$2.5 billion to HK$3 billion per month from February to April, and it took several steps to reduce costs, including cutting salaries, introducing unpaid leave programs for staff and closing crew bases overseas. Those cost control measures still aren’t sufficient, and a group restructuring will be necessary, Healy said.

Luya You, a transportation analyst with Bocom International in Hong Kong, said the airline cut about 15% of operating expenses on staff in the first half.

“That’s very, very low considering how big their staff is and how much money they’ve lost,” You said. She expects job losses at Cathay.

A review of the shape and size of the company will be presented to the board by the fourth quarter, Healy said, without ruling out job cuts.

“It is too soon to say for sure exactly what this will entail, but what is certain is that this will involve some very tough decisions,” he said.

Geopolitical tension and the threat of a global recession will impact trade and could have a negative impact on air travel and cargo demand, the carrier said, warning that the second half of 2020 isn’t likely to be better than the first.

Cargo operations were a bright spot in the first half, with revenue rising 8.8% from a year earlier to HK$11.2 billion and load factor increasing 5.9 percentage points to 69.3%. Revenue passenger kilometers, a measure showing distance traveled by paying customers, slumped 73% in the first half.

Fuel costs after hedging fell by HK$7.6 billion from a year earlier, but the benefits were offset by the decline in flying and losses on fixed volume fuel hedges.

Cathay’s passenger schedule for September is likely to remain around 7% of normal levels, though Healy said capacity could edge into double-digits in October.

“Demand will continue to be highly dependent on travel restrictions,” he said. “This has been an incredibly difficult time for everyone.”