Chairman’s Statement

Overview

2019 was a turbulent year for the Cathay Pacific Group. With our three-year transformation programme starting to bear fruit we delivered a positive performance in the first half of 2019 notwithstanding a difficult environment brought about by geopolitical and trade tensions. However, with social unrest in Hong Kong intensifying over the second half of the year and mounting US-China trade tensions, we experienced a sharp drop in both inbound and outbound passenger traffic. We were faced with an incredibly challenging environment to operate as the Hong Kong economy slipped into recession. As a result, our second-half results – traditionally stronger compared to first-half results – fell well below what we would have hoped for.

The Cathay Pacific Group reported an attributable profit of HK$1,691 million for 2019. This compares with a HK$2,345 million profit for 2018. The earnings per share was HK43.0 cents in 2019 compared to an earnings per share of HK59.6 cents in 2018. The Cathay Pacific Group reported an attributable profit of HK$344 million in the second half of 2019, compared to an attributable profit of HK$1,347 million in the first half of 2019 and an attributable profit of HK$2,608 million in the second half of 2018. Cathay Pacific and Cathay Dragon reported an attributable loss of HK$434 million in the second half of 2019, compared to an attributable profit of HK$675 million in the first half of 2019 and an attributable profit of HK$1,253 million in the second half of 2018.

Overall, passenger and cargo yields were under intense pressure in 2019 and both were below those seen in 2018. Events in Hong Kong in the second half of the year significantly reduced load factors, forward bookings and the number of passengers we carried. Inbound traffic was hit hard, particularly on short-haul and Mainland China routes, while outbound traffic also decreased. Demand for premium travel was weak and we became increasingly reliant on lower-yielding transit traffic. We carried 0.7% fewer passengers in 2019 than in 2018.

Cargo demand was depressed all year as a result of US-China trade tensions and was noticeably below that of 2018. However, it did pick up later in 2019 during the traditional high season, reflecting new consumer product, specialist airfreight shipments and restocking ahead of holiday periods. Exports from Mainland China and Hong Kong to trans-Pacific and European markets were more encouraging later in the year. Nevertheless, the cargo business performed significantly below expectations in 2019.

To boost the competitiveness of Hong Kong International Airport as a global cargo hub, the Group together with the Airport Authority of Hong Kong announced in December it would introduce a new Terminal Charge concession effective 1st April 2020. The reduction ranges from 18% to more than 20% compared with the current charge levels and is applicable to shipments from Hong Kong on all four of the Group’s airlines.

We benefited from lower fuel prices for most of the year, but were adversely affected by a strong US dollar. There was a 2.7% decrease in non-fuel costs per available tonne kilometre (ATK), reflecting our focus on productivity and efficiency as part of our successful transformation programme.

In July 2019, we completed the acquisition of low-cost carrier HK Express, now a wholly owned subsidiary of Cathay Pacific. In November, we announced that the airline would begin taking delivery of half of our new narrow-body Airbus A321-200neo fleet (16 of 32 new aircraft) from 2022 as part of the Group’s efforts to optimise the deployment of the passenger fleets of its airlines.

In May 2019 we built on our commitment to our customers with the launch of our new brand direction, ‘Move Beyond’, expressing our drive to always exceed their expectations. Despite the challenges of the second half of the year, this period saw some of our most extensive enhancements to the customer experience proposition in recent years. These included a major expansion to our inflight entertainment content library; new bedding, amenities and culinary options in our First and Business Class cabins; an elevated Economy Class dining experience on our long-haul services departing Hong Kong; and the reopening of our newly renovated Shanghai Pudong lounge. All are designed to give our customers more reasons to fly with us.

Business performance of Cathay Pacific and Cathay Dragon Passenger revenue in 2019 was HK$72,168 million, a decrease of 1.3% compared to 2018. RPK traffic increased by 2.9%, while ASK capacity increased by 5.1%, albeit this was less than originally expected.

Consequently the load factor decreased by 1.8 percentage points, to 82.3%. Yield decreased by 3.9% to HK53.6 cents, reflecting a strong US dollar, intense competition and reduced travel in the second half of 2019 as a result of the social unrest in Hong Kong. Inbound and outbound traffic, particularly on short-haul Mainland China routes, substantially reduced from August to December. We became increasingly reliant on low-yielding transit traffic, which was relatively less affected. Premium class travel was also weak during this period.

To mitigate these challenges, in October we introduced a number of short-term tactical measures, including frequency cuts on more than a dozen routes during the winter season and suspending our service to Medan indefinitely. We examined expenditure to focus on increased productivity and cost saving, along with implementing a hiring freeze, prioritising projects and deferring or cancelling non-critical expenditure.

Cargo revenue in 2019 was HK$21,154 million, a decrease of 14.2% compared to 2018. RFTK traffic decreased by 6.7%, whilst AFTK capacity decreased by 0.3%. Consequently the load factor decreased by 4.4 percentage points, to 64.4%. Yield decreased by 7.9% to HK$1.87, reflecting a strong US dollar and weakened cargo demand resulting from intensified US-China trade tensions.

Total fuel costs (before the effect of fuel hedging) decreased by HK$3,110 million (or 9.8%) compared with 2018. Prices decreased but we flew more. After taking hedging losses into account, fuel costs decreased by HK$4,454 million or 13.4% compared to 2018. The net cost of fuel is the Airlines’ most significant cost, accounting for 28.4% of operating costs in 2019 (compared to 31.4% in 2018).

Non-fuel costs per available tonne kilometre decreased slightly, reflecting our focus on productivity and efficiency.

We continued to take delivery of new and more fuel-efficient aircraft, including six Airbus A350 aircraft. We now have 24 Airbus A350-900 and 12 Airbus A350-1000 aircraft in our fleet. We also took delivery of three used Boeing 777-300 aircraft during the year. At the same time we retired three Boeing 777-200 aircraft, and returned four Airbus A330-300 and one Boeing 777-300ER leased aircraft to their lessors.

Business performance of other subsidiaries and associates HK Express reported a post-acquisition loss for 2019, against expectations of a small profit. The airline suffered from reduced demand to and from Asia as a result of the Hong Kong social unrest.

Air Hong Kong’s results attributable to the shareholders of Cathay Pacific improved year on year. In 2019 we owned 100% of the airline compared with 60% in 2018. On a 100% like-for-like basis there was a decrease in profit. This was in part due to gains on disposal of certain aircraft in 2018, and in part due to a new block space agreement and an underlying decrease in capacity and cargo uplift in 2019.

Our airline services subsidiaries generally performed worse than 2018 due to reduced activity and rising cost pressures.

Whilst our share of Air China’s results (accounted for three months in arrears) marginally improved, Air China Cargo suffered a significant decline in results as trade tensions escalated, negatively impacting air traffic and yield, and reducing throughput tonnage for its cargo terminals.

Prospects
Following the impact of social unrest in Hong Kong in the latter half of 2019, the first half of 2020 was expected to be extremely challenging financially, with an already reduced winter season capacity. This has been exacerbated by the significant negative impact of COVID-19 (see note 16 below). It is difficult to predict when these conditions will improve. Travel demand has dropped substantially and we have taken a series of shortterm measures in response. These have included a sharp reduction of capacity in our passenger network.

Despite these measures we expect to incur a substantial loss for the first half of 2020.

We expect our passenger business to be under severe pressure this year and that our cargo business will continue to face headwinds. However, we are cautiously optimistic about cargo following the recent reduction in US-China trade tensions and we have maintained our cargo capacity intact. The US dollar is expected to remain strong in 2020, and intense competition, especially in long-haul economy class, will continue to place significant pressure on yields.

Although there is much uncertainty, we have an incredible brand with a reputation and track record of premium service and commitment to our customers that differentiates us from our competitors. These qualities and values remain at the heart of everything we do and are what will help us through the current challenges.

Our three-year transformation programme has left the business leaner and more resilient, and we move forward with a culture of continuous improvement. Investment in our products, customers and fleet is ongoing.

We will continue to take delivery of new aircraft in 2020 and, with the hope that the environment will improve, we will retain the flexibility to add capacity back to the market as soon as we are able to. Our plan to take delivery of 70 new and more fuel-efficient aircraft by 2024 remains unchanged.

The hard work and determination of our teams of professionals over the past year, and in the current COVID- 19 crisis, has been outstanding. I would like to thank them for the dedication they have shown during these exceptionally challenging times in ensuring our ability to maintain our operations as smoothly and efficiently as possible. As a Group, we remain unwavering in our commitment to our customers, our people and our home hub, which we have proudly served for more than seven decades. We will continue to invest significantly in delivering an industry-leading experience for our customers and in strengthening Hong Kong’s position as a world-class global aviation hub.

Patrick Healy
Chairman
Hong Kong, 11th March 2020