Cathay Pacific feels weight of fuel prices

Hong Kong carrier warns of profit hit; India, China focus BY BRUCE STANLEY
HONG KONG-Cathay PacmC Airways Ltd. warned of "disappoint ing" financial results this year, send- ing a signal that surging fuel prices threaten even the strongest airlines in Asia, one of aviation's few bright spots.
Cathay, which analysts and inves tors regard as one of Asia's best- managed carriers, blamed jet-fuel prices for anticipated weakness in its interim and full-year results this year. In a statement to Hong Kong's stock exchange, the carrier said fuel prices from January through June were on average 60% higher than hi the first half of 2007.
Many of the region's airlines have fared better than carriers in the U.S. and Europe because of less competition, greater dependence on high-margin business travelers, more-profitable international fares and continued strong economic growth hi China, India and other re gional anchors. Some, such as Aus tralia's Qantas Airways Ltd., are scaling back flights on less profit- able routes or considering doing so in response to costlier fuel.
However, Hong Kong-based Ca- thay is one of the first major interna tional Asia-based carriers to issue a profit warning as a result of steeper fuel prices.
Cathay's disclosure likely will fo cus attention on China and India, two of the region's biggest and fast- est-growing aviation markets. Both are showing signs of pressure. In- dian airlines are expected to consoli date amid overcapacity and dedlln ing profitability. China's airlines are warning that higher passenger sur charges can't offset their higher fuel bills.
"The first winds of economic slowdown are only just flowing through this region, so we don't really know how severe an impact that is going to have on airlines," said Peter Harbison of the Centre for Asia Pacific Aviation, a Sydney-based consulting group. "But we sus pect it will be considerable and wide- spread."
China will likely get a short-term reprieve, thanks to passenger de mand arising from the Olympic Games in Beijing next month, said ShukorYusof, a Singapore-based an- alyst at S&P Asia Equity Research.
Mark Webb, an analyst in Hong Kong at HSBC, said higher fuel prices might eventually lead weaker Asian carriers to try to defer orders for new aircraft, while the region's larger long-haul airilnes try to speed up retirement of older, fuel- guzzling planes.
"Nobody's really announced any- thing yet, but those will be the trends to watch for in the second half of the year if fuel prices stay at these levels," Mr. Webb said.
Cathay doesn't plan to defer or cancel new aircraft orders or deliv eries, company spokeswoman Caro lyn Leung said. It and subsidiary Hong Kong Dragon Airlines Ltd. have 49 planes on order.
Like many carriers, Cathay has tried to recoup some of its higher fuel costs by adding surcharges to its fares, though Ms. Leung said these surcharges offset "less than half" of its additional ftiel costs. Cathay also hedges some of its ftiel purchases to lock in the purchase price. The air- line has hedged 30% of its fuel re quirements for the past six months of 2008. During 2006 arid again in 2007, Cathy hedged 48% of its fuel.
In Wednesday's statement, Ca- thay said: "It is not possible to esti mate accurately the effect of high jet fuel prices on the 2008 financial results." After the announcement, shares of Cathay dropped, ending the day down 5.9% at 13.98 Hong Kong dollars田S$1.79).
The growth rate for Cathay's pas senger traffic to and from mainland China is already slipping. Traffic in January increased 30% from the first month of 2007, as measured in revenue passenger kilometers, or one paying passenger flying one ki lometer. By May, the pace of traffic growth had dropped significantly. Traffic in the January-May period was 12.2% higher than in the same five months of last year.
Mr. Yusof of S&P said airlines in the emerging markets of Thailand, Malaysia and indonesia are particu larly at risk. Malaysia Airline Sys tern Bhd. hasn't revised its profit goals for 2008. But Idris Jala, the company's chief executive and man- aging director, said: "It will be a tough challenge to achieve them." He added that Malaysia Airlines has no plans for now to defer deliveries or orders of new planes.