Cathay’s operation in the Southwest Pacific adds more capacity than can be absorbed in 1H2018

Cathay Pacific’s interim results, disclosed 08-Aug-2018, overall showed a better result but with unwelcome growth in its underlying cost base. Its regional performance for the Southwest Pacific includes figures on Australia, New Zealand and South Africa – but South Africa is a small contribution. As a result, the performance category largely reflects the carrier’s presence in Australia and New Zealand.


Summary:

  • Cathay adds more capacity in to Southwest Pacific aviation market than can be absorbed in 1H2018;
  • Cathay has been challenged in the Australia market from fast expansion at Chinese airlines and Gulf airlines;
  • Cathay may be targeting higher yielding passengers while aiming to not dilute revenue by selling seats too early and too cheaply.

Cathay added capacity faster than it could be absorbed, leading to a load factor decrease. Cathay is expanding in Australia through upgauging, which is cost-effective growth and offsets not filling its additional capacity. Yields may be growing as Cathay stops selling its cheapest tickets, while upgauging also brings significant benefit to freight.

Growth not fully absorbed – but this was cost effective growth

The airline grew ASKs in Southwest Pacific by 6.2% in 1H2018 – however this growth was not fully absorbed as load factor decreased by 3.6 ppts. The Southwest Pacific region actually saw the largest load factor change. The drop is far greater than that seen in Cathay’s average system load factor, which decreased by 0.5ppt.

At a load factor of 81.6% for 1H2018, this was Cathay’s lowest load factor for a long haul market, with Europe and the Americas at 86.2% and 88.2%, respectively.

TABLE – Cathay Pacific and Cathay Dragon capacity, load factor and yield: 1H2018

Source: Cathay

Cathay, like other airlines, has been challenged in the Australia market from fast expansion by Chinese and Gulf airlines, whom both compete in the Australia-Europe market. The latest performance by Cathay – which suggests moderate yield growth as fuel prices significantly increase – may not seem welcome. But the numbers need unpacking.

The capacity growth is more substantial in numbers than expenses since the expansion occurred through upgauging. This is cost effective growth that could tolerate lower take-up and yields since the cost of additional capacity is relatively incremental.

CHART – Cathay Pacific average daily seat capacity to Australia (left axis) and frequencies (right axis): 2008-2018

Source: Blue Swan Daily and OAG

Cathay had operated an all-A330 service to Australia a few years ago, but has replaced the variant with larger A350s and 777-300ERs. As seen in the chart above, Cathay has kept frequencies to Australia flat (about 10 daily since 2011) but has grown seat capacity by using larger aircraft, as displayed below.

Since 2013, Cathay has grown frequencies by 4% but has increased seat capacity by 26%.

CHART – Cathay Pacific aircraft deployment to Australia: 2008-2018

Source: Blue Swan Daily and OAG

Don’t forget freight

Cathay’s geographical performance is for the passenger division and excludes freight (freight does not have separate geographical figures). Not reflected in the passenger Southwest Pacific figures is the cargo gain Cathay would have from upgauging. The A350s and 777s replacing A330s bring a larger passenger cabin but also larger freight capacity. And since the A350s and 777s have a longer range than the A330, there are no concerns about payload restrictions.

It is generally understood freight ex-Hong Kong is lucrative. Most inbound freight to Hong Kong is not as voluminous or as high yielding. Yet Australia bucks this trend by having strong outbound freight, typically for food. Perth is a centre for year round crayfish while the east coast sees various demand, even for milk powder.

Yield recovery

Cathay reported a system yield growth of 6.6%. Southwest Pacific was the lowest with 3% growth. Yield and load factor are the opposing ends of a see-saw airlines constantly try to balance.

Cathay reported a decrease in load factor but increase in yield for its passenger average, which is also reflected in its Southwest Pacific figures. This could suggest Cathay wants to take higher yielding passengers, with the carrier aiming to not dilute revenue by selling seats too early and too cheaply. Closer to departure when there is greater visibility on loads, there may be last minute good deals, but early sales may now be more limited than before.

Future statistics impacted by new Christchurch and Cape Town routes

Future figures will need to consider the addition of Cathay’s new seasonal services to Christchurch and Cape Town, due to commence in 2H2018. Although these are a small contribution to flying, new routes have a build-up period that impact yield and load factor.