Cathay Pacific Airways Limited

Company Profile
Publication Date: 18 Aug 2011

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Cathay Pacific Airways Limited

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TABLE OF CONTENTS

TABLE OF CONTENTS
Company Overview..............................................................................................4 Key Facts...............................................................................................................4 SWOT Analysis.....................................................................................................5

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Cathay Pacific Airways Limited

Company Overview

COMPANY OVERVIEW
Cathay Pacific Airways (Cathay Pacific) is a Hong Kong-based international airline, offering scheduled passenger and cargo services to 141 destinations in 39 countries and territories. It is headquartered in Hong Kong and employs 27,600 people. The company recorded revenues of HK$89,524 million ($11,521.7 million) in the financial year ended December 2010 (FY2010), an increase of 33.7% over FY2009. The operating profit of the company was HK$11,053 million ($1,422.5 million) in FY2010, compared to an operating profit of HK$4,479 million ($576.4 million) in FY2009. The net profit was HK$14,048 million ($1,808 million) in FY2010, compared to a net profit of HK$4,694 million ($604.1 million) in FY2009.

KEY FACTS
Head Office Cathay Pacific Airways Limited 33rd Floor One Pacific Place 88 Queensway HKG 852 2747 5210 852 2810 6563 http://www.cathaypacific.com

Phone Fax Web Address

Revenue / turnover 89,524.0 (HKD Mn) Financial Year End Employees Hong Kong Ticker December 27,600 0293

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Cathay Pacific Airways Limited

SWOT Analysis

SWOT ANALYSIS
Cathay Pacific Airways (Cathay Pacific) is a Hong Kong-based international airline, offering scheduled passenger and cargo services. It has a wide-spread operational network which enables it to gain access to key markets as well as expand its customer base. However, a drastic change in the prices of the fuel can have a serious impact on Cathay Pacifics expenses which may in turn impact its profitability and margins. Strengths Wide-spread operational network and geographical reach Strong fleet operations and market position Cost cutting initiatives Robust operational performance Opportunities Growing air freight industry in Asia Pacific Poised to benefit from the growing passenger traffic in Asia-Pacific region Expansion of networks Weaknesses Obligations under finance leases Antitrust investigations and proceedings hamper the reputation

Threats Risk relating to natural calamities Volatility in jet fuel prices Intense competition and price discounting

Strengths

Wide-spread operational network and geographical reach Cathay Pacific has a wide-spread operational network. The company offers scheduled passenger and cargo services to 141 destinations in 39 countries and territories. In FY2010, Cathay Pacific increased the number of flights services to Moscow, Milan; it also intends to cover new destination which includes Abu Dhabi and to Chicago in 2011. It also added 22 destinations to its network through code-share arrangements with airlines in Central and Latin America, the US, Canada and Japan. In addition, Cathay Pacific is a major shareholder in Hong Kong Dragon Airlines (Dragonair) which offers scheduled passenger and cargo services to 33 destinations in 40 countries and territories with a fleet of 31 aircraft. In FY2010, Dragonair added a new service to Hongqiao in Shanghai, restored services to Fukuoka and Sendai in Japan and added Okinawa to its network. Furthermore, the company is a founding member of the "OneWorld" global alliance. Cathay Pacific's robust operational network enables it to gain access to key markets as well as expand its customer base. Moreover, Cathay Pacific has geographically diversified operations. The company has balanced revenue mix in terms of revenue generated from various geographical locations. For instance, in

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SWOT Analysis

FY2010, the company generated revenues from seven geographies including Hong Kong and Mainland China, Cathay Pacific's largest geographical market, Japan, Korea and Taiwan, North America, Southwest Pacific and South Africa, Southeast Asia, and India, Middle East, Pakistan and Sri Lanka. Geographically-diversified operations enable Cathay Pacific to take advantage of a range of market opportunities while avoiding overexposure to any one market. Strong fleet operations and market position The company has a strong fleet base to complement its robust route network. As of December 31, 2010, the company operated a fleet of 167 aircraft, of which 31 belonged to Dragonair, eight of AHK and the remaining 128 aircrafts were of Cathay Pacific. In 2010, the company took delivery of seven new aircraft. In August 2010, the company ordered 30 Airbus A350-900s (to be delivered between 2016 and 2019) and six Boeing 777-300ERs. In March 2011, Cathay Pacific acquired 15 Airbus aircrafts and 10 Boeing aircrafts. Moreover, Cathay Pacific has 10 Boeing 747-8F advanced freighters which are scheduled to be delivered from 2011. Further, the company has a strong market position in the aviation industry. According to the Air Transport Worlds World Airline Report published in 2010, Cathay Pacific was the third most profitable airline worldwide (in terms of net profit) and the fourth largest airline (in terms of operating profit). In addition, it was also the 12th largest airline in terms of revenue passenger kilometers (RPKs) and fifth largest in freight tonne kilometers (FTKs). Moreover, Hong Kong Airport Services (HAS), a wholly owned subsidiary of Cathay Pacific and an integrated ground handling operator in Hong Kong, had 49.5% and 24.4% market shares in FY2010 in ramp and passenger handling businesses, respectively at Hong Kong International Airport. The strong fleet operations and market position provides competitive edge to the company over its peers. Cost cutting initiatives During 2010, Cathay Pacific took several measures to enhance its operational performance by following some cost cutting initiatives. In this context, the company sold 15% stake in Hong Kong Aircraft Engineering Company (HAECO) to Swire Pacific for HK$2,620 million ($337.2 million) in June 2010. Cathay Pacific recorded a profit of about HK$1,829 million ($235.4 million) from the share sale. The proceeds from the transaction were used in Cathay Pacific's aviation business including investments in new aircraft, in the new cargo terminal that was opened in August 2010 at the Hong Kong International Airport with an investment of HK$5,500 million ($707.6 million). The proceeds of the sale was used for enhancing its airlines products and services, as well as towards general working capital requirements. Cathay Pacific's effective cost balance by divesting some of its operations and investing the proceeds into the working capital requirements would help it maintain a strong balance sheet and enhance its operational performance in the future. Robust operational performance

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SWOT Analysis

Cathay Pacific witnessed a significant increase in its operational performance in FY2010. The companys passenger and cargo businesses both performed well with consistently strong loads and significant increases in revenues. It also benefited from the strong profits earned by its associated company, Air China (which contributed HK$2,482 million [$319.4 million] to the 2010 result) and from the aggregate profit of HK$2,165 million ($278.6 million) from the disposal of Cathay Pacifics interests in Hong Kong Air Cargo Terminals (HACTL) and Hong Kong Aircraft Engineering Company (HAECO). In addition, Cathay Pacific profits increased due to profit of HK$868 million ($111.7 million) earned from the deemed disposal of part of its interest in Air China. Moreover, Cathay Pacific and Dragonair together carried a total of 26.8 million passengers in FY2010, representing an increase of 9.1% over the previous year. The load factor increased due to strong demand for economy class seats and premium class seats. In addition, the passenger revenue of the company for the year increased by 29.3% to HK$59,354 million ($7,638.9 million) and passenger yield increased by 19.8% to HK61.2 cents ($7.8 cents). Similarly, the companys passenger capacity increased by 4.1% as Cathay Pacific restored services which had been reduced or suspended during the downturn and added new destinations. Further, the companys cargo revenue increased by 50.1% in FY2010 to HK$25,901 million ($3,333.5 million). In addition, freight carried by Cathay Pacific and Dragonair increased by 18.1% to 1.8 million tonnes. Additionally, cargo capacity of Cathay Pacific increased by 15.2%, as the company introduced service freighters which were not used in the downturn. Due to this substantial increase in capacity, the companys freight load factor increased by 4.9 percentage points to 75.7% and its cargo yield increased by 25.3% to HK$2.3 ($0.3). Robust operational performance improves the overall revenues and business position of Cathay Pacific.

Weaknesses

Obligations under finance leases Cathay Pacific has commitments under finance lease agreements in respect of aircraft and related equipment expiring during the years 2011 to 2023. As of December 2010, the company has a future payment of HK$33,098 million ($4,259.7 million) and present value of future payments of HK$28,498 million ($3,667.7 million). Cathay Pacific's high level of finance obligations could impact its ability to obtain additional financing to support its expansion plans. In addition, it will also lead to the diversion of its cash flows from operations and expansion plans to service the finance obligations. Antitrust investigations and proceedings hamper the reputation Cathay Pacific is defendant in several antitrust investigations and proceedings in various jurisdictions. For instance, in November 2010, the European Commission imposed a fine equivalent to HK$618 million ($79.5 million) on Cathay Pacific. The Commission issued a decision finding that Cathay Pacific and a number of other international air cargo carriers agreed on cargo surcharge levels and

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SWOT Analysis

that such agreements infringed European competition law. Cathay Pacific has filed an appeal with the General Court of the European Union, in January 2011. Similarly in May 2010, the Korean Fair Trade Commission (KFTC) fined several airlines, including Cathay Pacific, for infringement of European competition law. In this context, in November 2010, KFTC issued a written decision and fined Cathay Pacific with HK$36 million ($4.6 million). Cathay Pacific has filed an appeal in the Seoul High Court challenging the KFTCs decision in December 2010. Such investigations and fines increases the operating costs of the company which in turn influences the companys profitability. These proceedings also hamper Cathay Pacifics reputation in the market.

Opportunities

Growing air freight industry in Asia Pacific The air freight industry is growing consistently in Asia Pacific. The Asia Pacific air freight sector generated total revenues of approximately $24.6 billion in 2010, representing a compound annual growth rate (CAGR) of 3.5% for the period spanning 2006-10. Sector volumes increased with a CAGR of 1.8% between 2006 and 2010, to reach a total of approximately 38 billion freight tones kilometers (FTK) in 2010. The sector's volume is expected to rise to 47.4 billion FTK by the end of 2015, representing a CAGR of 4.5% for the 2010-15 periods. The performance of the sector is forecasted to grow at an anticipated CAGR of 5.6% for the five-year period 2010-15, which is expected to drive the sector to a value of $32.4 billion by the end of 2015. To capitalize on this growth, Cathay Pacific and Air China established a cargo airline joint venture in February 2010. In addition, in the same year, the company also signed code-share agreements with many airlines including Mexicana Airlines, Alaska Airlines, Lan Peru, and extended its code-share agreement with Japan Airlines. Further, the company increased its flight destinations by offering services to Moscow, Milan, Abu Dhabi and Chicago. Therefore, the company is well positioned to capitalize on the growing Asia Pacific air freight industry. Poised to benefit from the growing passenger traffic in Asia-Pacific region Cathay Pacific is expected to capitalize the growing passenger traffic in Asia-Pacific region. The Asia-Pacific airlines industry has witnessed decent growth in the recent past and is expected to see a positive trend in the future. The industry had total revenue of $81.5 billion in 2009, representing a CAGR of 3.6% for the period spanning 2005-09. The industry volumes increased with a CAGR of 7% between 2005 and 2009, to reach a total of 522.3 million passengers in 2009. The industry's volume is expected to rise to 805.1 million passengers by the end of 2014, representing a CAGR of 9% for the 2009-14 periods. The domestic segment had the highest volume in the Asia-Pacific airlines industry in 2009, with 427.1 million passengers, equivalent to 81.8% of the industry's overall

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SWOT Analysis

volume. In comparison, the international segment had a volume of 95.3 million passengers in 2009, equating to 18.2% of the industry total. Further, the performance of the industry is forecast to accelerate, with an anticipated CAGR of 12% for the five-year period 2009-2014, which is expected to drive the industry to a value of $143.3 billion by the end of 2014. As Cathay Pacific has a strong network in Asia-Pacific, it can leverage the growing demand for airlines in the region and enhance its revenues in the near future. Expansion of networks In recent years, both Cathay Pacific and Dragonair have made intensive efforts to expand their networks and frequencies. For instance, Cathay Pacific added two new destinations to its passenger network in 2010. It started a four-times-weekly service to Milan in March 2010, and a three times week service to Moscow was commenced in July 2010. In addition, the airline added 22 destinations to its network through code-share arrangements with airlines in Central and Latin America, the US, Canada and Japan. Further, Dragonair started a new daily service to Shanghais Hongqiao International Airport in September 2010. It also restored its daily service to Fukuoka in October 2010, resumed seasonal services to Sendai in December 2010, and converted its charter services to Okinawa into a scheduled service in November 2010. Cathay Pacifics flight expansions in 2010 also included the addition of five flights per week to Toronto, three flights per week to Jeddah, three flights per week to Los Angeles, seven flights per week to Seoul, seven flights per week to Singapore, 21 flights per week to Taipei, extra flights to Australia and four flights per week to Paris. The airline also increased the number of flights to Denpasar and Sapporo in response to seasonal demand. Additionally, the company launched its first round-the-world freighter service in July 2010. Such strategic expansions and increasing frequencies improve the companys operational efficiency and help it to cater its customers more efficiently.

Threats

Risk relating to natural calamities The results of operations of Cathay Pacific are threatened due to natural disasters, such as cyclones, volcanic eruptions, among others. For instance, the company cancelled its flight services between Hong Kong and Taipei in August 2009 due to Typhoon Morakot, a strong typhoon in Taiwan. Similarly, on 14 April 2010, the Eyjafjallajokull volcano in Iceland erupted and emitted ash to heights in excess of 9 km (30,000 ft) causing significant disruption to European air travel. Due to this, the aviation industry lost $1.8 billion revenues and more than 10 million passengers were stranded in various airports worldwide. In addition, cargo trade was also severely hit.

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SWOT Analysis

Further, Cathay Pacific's flights to and from London, Amsterdam, Paris and Frankfurt were affected in April 2010 and the number of passengers carried by Cathay Pacific and Dragonair, fell by 3.6%. Moreover, according to The International Air Transport Association (IATA), there are chances of 50 to 60 volcano eruptions expected every year. Moreover, Cathay Pacific suspended all flights to Narita International Airport and Haneda Airport in Tokyo in March 2011 as Narita airport was closed after a massive earthquake which hit the coast of north-eastern Japan. These natural calamities could have an impact on the company's operations resulting in strain in its financial condition and cash flows. Volatility in jet fuel prices Jet fuel forms the main raw material used in the airline industry. The demand for petroleum and related products has historically been cyclical and sensitive to the availability and prices of oil and related feedstock. Historically, international prices of crude oil and refined products have fluctuated widely due to many factors that are beyond the control of companies like Cathay Pacific. The cost of jet fuel formed a significant part of the total expenses for the company. For instance, the total aircraft fuel costs for the company in FY2010 stood at HK$28,276 million ($3,639.1 million), representing 35.6% of the total revenues. The fuel price increased during the year and was 28% higher on average than in 2009. Its total fuel costs for 2010 reflecting both the higher price and increased operations, increased by 40.4%. Hence, with an increase in the jet fuel prices, the operating costs of the company also increases which can have an adverse impact on the total revenues and profitability. Moreover, the global jet fuel prices have seen a considerable increase over the past few years. For instance, in January 2011, the jet fuel price recorded $112.9 per barrel, an increase of 33.1% compared to the previous year. The price of jet fuel is estimated to average $110.5 per barrel in FY2011 which may cost more than $34 billion to the global airline industry. Furthermore, the political turmoil in the Middle East has raised the oil prices. As the jet fuel prices account for a major portion of the operational expenses, the situation would result in a reversal of fortune for global airlines with more losses in the current year. Hence, a drastic change in the prices of the fuel can have a serious impact on Cathay Pacifics expenses which may in turn impact its profitability and margins. Intense competition and price discounting The airline industry is highly competitive. The principal competitive factors in the airline industry are fares, customer service, routes served, flight schedules, types of aircraft, safety record and reputation, code-sharing relationships, capacity, in-flight entertainment systems and frequent flyer programs. Airline profits are sensitive to even slight changes in average fare levels and passenger demand. Cathay Pacific's competitors include traditional network airlines, low-cost airlines, regional airlines and new entrant airlines. Some of its competitors are China Airlines, China Southern Airlines, Japan Airlines System, Korean Airlines, Lufthansa, Malaysia Airline System Berhad, Qantas Airways, and Singapore Airlines.

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SWOT Analysis

In addition, price competition between airlines occurs through price discounting, fare matching, increased capacity, targeted sale promotions and frequent flyer travel initiatives. A relatively small change in pricing or in passenger traffic could have a disproportionate effect on an airline's operating and financial results. Therefore, intense competition may pressurize the operating margins of Cathay Pacific.

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