Here’s What You Need To Know About Cathay Pacific Airways Ltd Before You Invest

Cathay Pacific Airways Ltd (HKG: 0293) is the flagship airline in Hong Kong. Listed on the Hong Kong Stock Exchange, it carried 34.3 million people and moved 1.8 million tonnes of mail & cargo to some 197 destinations in 48 countries in the year 2016 alone!

Having been around since 1946 when it was founded, Cathay Pacific has moved millions maybe even billion of passengers and cargo over its long history. Is there still growth potential left in the company?

With that, here are 7 things you need to know about Cathay Pacific.

Stock Information

1

TICKER SYMBOL: HKG: 0293

MARKET CAP: HK$ 46.4B

INDUSTRY: Aviation

The Business

Cathay Pacific operates passenger and cargo services to some 197 destinations in 48 countries. In the year ending 2016, it carried a total of 34.4 million passengers and 1.8 million tonnes of cargo. Below is a quick snapshot of the group’s network and operating performance for different regions.

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Source: Cathay Pacific presentation slides

As seen from the diagram above, Cathay Pacific’s network stretches out wide, there is almost no destination in the world where the airline cannot bring you to or send you mail or cargo too. Operating performance wise, we can see that its Southeast Asia business saw both increasing average seat kilometres (ASK) and load factor (LF).

Next moving on to look at the overall LF. We can see from the diagram below that LF has been fluctuating in a tight range for the past 4 years. Over the whole year, LF came in at 84.5% for the airline in 2016.

Load factors are one of the most important metrics for airlines as it shows how many of its total available seats are filled. And each seat that is filled creates higher revenue and profits for the company. LF can also be seen as an efficiency tool to evaluate the airline’s capability in filling seats.


Source: Cathay Pacific presentation slides

Next, we will look at Passenger yield. Passenger yield is a measure of average fare paid per mile, per passenger. This is usually reported in cents per mile as seen in the diagram below. Apart from being a measure of the amount of revenue the airlines can generate per passenger per mile, it is also useful in assessing the changes in fares over time.

From the diagram below Cathay Pacific has had a declining passenger yield for the past 3 years. This means that compared to 3 years back, the airline made 20% less per passenger per mile. Add that up over millions and millions of miles I am sure it’s a big downside for the airline.


Source: Cathay Pacific presentation slides

Like passenger yield and load factor, Cathay also reports its cargo load factor and yield. The diagrams below shed some light on this.


Source: Cathay Pacific presentation slides


Source: Cathay Pacific presentation slides

From the 2 diagrams above it can be noted that cargo load factor has been increasing over the past 4 years. This is in line with the trend of more online purchases being made that are delivered to your door step. On the yield front, the story is like passenger yield where over the last 4 years there has been a decline.

Overall in the year ended 2016, Cathay Pacific reported revenue of HK$ 92.7 billion and a loss of HK$ 575 million.

Key Opportunities

Digital Transformation


Source: Cathay Pacific presentation slides

One of the key transformations the management is trying to make is a digital transformation. It hopes to do this to keep up with the times and at the same time improve passenger service and experience. It is looking to provide personalised service and improving the in-flight retail experience. Also by moving more systems onto its digital platforms, it might be able to improve efficiency in operations and that should lead to long-term cost saving for the airline.

On the commercial front, a digital platform will help to improve customer reach and increase targeting efficiencies. All these improvements if done right should provide a growth avenue for the airlines.

3-year corporate transformation


Source: Cathay Pacific presentation slides

Apart from its digital transformation, management has embarked on a 3-year corporate transformation. The above diagram summaries what it hopes to achieve. Management is trying to stream line operations, improve customer experience, improve efficiencies and reduce cost across all its businesses. Of course, it wants to do this will maintaining a good safety record. It seems like the company has a lot on its plate at the moment.

Key Risks

Low-Cost carriers

The threats of low-cost carriers are hot on Cathay Pacific’s heals. Increasing many low-cost carriers are starting to increase the competition in which they are serving customers. These no-frills services are cheaper and appeal to many cost conscious customers.

While low-cost carriers are increasingly taking greater market share, Cathay Pacific has been trying to improve its services through code sharing ventures. These help it to retain the less cost-conscious passengers and hopefully makes them the airlines of choice due to its increased destination options.

Overcapacity in Cargo

In the annual presentation at the end of 2016, the company spoke about over capacity in the cargo market. This is one of the reasons the airlines have been facing cost pressures on its cargo yield as presented above. This over-capacity issue should come as no surprise after all the home delivery market is projected to grow at a fast pace with the increasing demand for online shopping. This has probably led to many companies over investing in the commercial sector to ensure they are early to the game and capture market share.

Valuation

Cathay Pacific currently trades at a Price to book (P/B) ratio of 0.8 and spots a 0.4% dividend yield for its investors. It’s price to earnings (P/E) ratio is negative due to the loss in 2016. It’s P/B ratio is lower than its five year average of 1.0 while its dividend yield is also lower due to a cut in its payout due to the losses in 2016.

Investor Relations

Investor Relation Material:

Top Shareholders (31st December 2016)

1.    Swire Pacific Limited 45%
     2.  Air China Limited 29.99%

Financials

Income Statement

Balance Sheet

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Ketz’s personal capacity. It does not in any way represent those of his employer and other related entities. Ketz does not own any companies mentioned.

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