China Competition Hits Cathay Pacific's Cargo Margins
Bloomberg News | Mar. 29, 2007
Cathay Pacific Airways' margins at its cargo business, which accounts for about a quarter of sales, are being squeezed as competition from other carriers depresses rates from China.
"The cargo side looks troubling," said chief operating officer Tony Tyler, set to become the chief executive officer of Hong Kong's largest airline in July. "That's certainly an area we're giving a lot of attention to."
Cathay Pacific plans to add at least 11 more freighters by the end of 2009 as exports from China surge. Lufthansa, Singapore Airlines and other carriers have also set up ventures in China, helping drive down Cathay Pacific's cargo yield, or average rate per shipment, 3.4 percent in 2006.
"Cargo will probably be a lower-margin business going forward," said Peter Hilton, a Hong Kong-based aviation analyst at Credit Suisse Group, who rates Cathay Pacific "neutral". "Through deregulation of air service agreements, more foreign flights are allowed to come in through the established routes and provide direct competition."
The carrier's cargo yield and load factor, like that of other airlines, has also suffered from the limited demand for flying freight into China, which forces airplanes to carry little or no loads into the country.
The carrier plans to revive its cargo business by focusing on its pricing and distribution and by targeting long-term contracts, Tyler said.
Cathay Pacific moved a record 1.2 million tonnes of cargo last year, bolstered by its HK$8.22 billion purchase of Hong Kong Dragon Airlines. It also began freighter flights to Beijing last year, and added six more weekly services to Shanghai as of the end of January. It plans to form a Shanghai-based cargo venture with Air China this year.
Cathay Pacific plans to spend HK$10 billion a year until 2009, mainly on plane purchases, it said in January. It expects to boost capacity by 10 percent this year, 15 percent in 2008 and 10 percent in the following year, with growth primarily in cargo.
About HK$19 billion will likely be spent on new aircraft over the three years, with the remainder on infrastructure, said Peter Negline, an analyst at JPMorgan Chase in Hong Kong.
"This sustained investment is the most aggressive in the airline's history," Negline wrote in a report. "With a large growth focus on air cargo, we are concerned about the impact of competitive dynamics from a slowdown."
China's exports rose 27 percent last year. Its overseas air-cargo shipments are likely to grow 14 percent a year until 2009, according to the International Air Transport Association.
Cathay Pacific packed 68.3 percent of its cargo space last year, compared with 67 percent a year earlier. Cargo revenue climbed 11 percent to HK$14.3 billion. Cathay Pacific and Dragonair's combined cargo volume fell 0.7 percent in the first two months of this year. Net income rose 24 percent to HK$4.09 billion.