HONG KONG: Flying under profitability's radar, short of its cargo and passenger booking targets and under the threat of H1N1 ("swine flu"), the city's top carrier, Cathay Pacific Airways reported a surprisingly positive bottoming out in weekly revenues.

The news triggered a brief jump in its share price, despite the airline's issuing a revenue "Mayday".

Chief Executive Officer Tony Tyler explained the revenue challenges in a note to staff obtained by Reuters, "there are signs that our own weekly revenue results seem to have bottomed out now, but at a very low level. As yet, there are still no signs of any sustained recovery," he said.

He added that the airline's latest revenue figures showed it was not yet clear of the difficulties it suffered in the first half, with passenger revenue 13 percent behind target and cargo revenue 22.5 percent below the desired mark for the first seven months to July.

Nonetheless, given the pull-out from Cathay Pacific's revenue dive, the stock rose to a high of HK$12.40 after the news, up 2.8 percent before shaving the gain to 0.33 percent by the close of the morning session - not quite 1/2 of the broader market's gain for the day. The broader market index was up as much as 1 percent, hitting a high of 20,786.02 points, before ending up 0.62 percent.

With Cathay Pacific scheduled to release its interim results tomorrow (Wednesday), analysts have said the carrier is likely to turn around in the first half from losses posted last year, on the back of a one-off fuel hedging gain; but like many other carriers, it continues to face strong headwinds and dark cloud banks in the months ahead.

The struggle and challenge are not Cathay Pacific's alone: Singapore Airlines, the world's second largest airline by market value, last week unveiled its first quarterly loss in six years, and warned that it could post an annual loss if adverse conditions continue.

"Operationally, (Cathay) is still facing a difficult environment in the second half, but the gains from hedging will help the results to turn around," said Cho Fook Tat, an aviation analyst at Taifook Securities.

If oil prices stay at $75 a barrel over the next three years to 2011, the company could make mark-to-market gains and write back some of the paper losses from fuel hedging provisions.

Crude oil has dropped 50 percent to its current level of about $72 from a peak of $145 hit in July of last year.

Brokerage Citi had downgraded the stock to "sell" before a copy of Tyler's remarks was obtained, but Daiwa was optimistic.

"We are optimistic about a gradual recovery, and believe this would overwhelm any negative impact that weak results would have," Daiwa Securities said in a research note last week.

The brokerage forecast a HK$1.4 billion net profit for the first half, supported mainly by a one-off fuel-hedging gain of HK$2.1 billion.

As of July 25, Cathay's weekly passenger revenue was 15.8 percent behind target for the year to date, while cargo revenue was 21.4 percent below target, Tyler said in a weekly business report obtained by Reuters yesterday.

"We are certainly still in a very challenging operating environment," he said in the report. "Our latest revenue figures highlight the fact that we are still some way from climbing out of our deep hole."

Reuters

(HK Edition 08/04/2009 page4)