Cathay Pacific reduces passenger capacity by 1.6%

2013 is seemingly another difficut year for Cathay.

Cathay Pacific (CX) hosted a quarterly analyst briefing, following closely on its trading statement of 23 November wherein it described the challenges to the business in passenger and cargo revenues as  well as cost pressures. CCB International Securities notes that 2013 appears to be equally challenging, at
least at the start.

Among the new items they learned from the fleet include:
• Fleet changes tending toward reductions. CX will retire ten 747-400 passenger aircraft by early 2014, one more than previously announced. CX will also park an additional freighter by  the end of 2012, adding to the three already known. In addition, one 747 freighter to be sold to the Air China Cargo (ACC) JV has
slid from 2H12 into 2H13, reflecting poor market demand.

• Capacity guidance for 2013 appears low. CX’s capacity growth plan for 2013 is a 1.6% reduction on the passenger side while freighter capacity is expected to grow 11.9%, which are lower  than our estimates of 4.6% and 16.5%, respectively. The passenger contraction is weighted towards long-haul, where 
smaller 777-300ERs will replace 747-400s.

• Cargo environment weak. We heard nothing that indicated  cargo has turned, though sentiment to the US is better than  Europe and may be improving. ACC is losing HK$50m/month.

• Cargo terminal start-up costs of HK$500m in 2013. CX’s new self-run cargo terminal will result in about HK$500m in one-off 2013 costs. However, CX expects it to be very efficient with a cost to run about 38% less per tonne at around HK$500/tonne versus HK$800/tonne at current provider HACTL.

• Downside risks to our 2012, and likely 2013, estimates. Our  2012F and 2013F EPS are 95% and 38% above consensus,  though on absolute terms the differences are less. On a recurring  profit basis, we are much closer to the market.  

• View maintained. We remain cautious on CX shares on a 2012  view, though we expect the market is valuing the name on 2013  multiples. However, 2013 could be another difficult year for CX.