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Cathay Pacific profit lags estimates on fuel-hedging loss

Cathay Pacific Airways, Asia's largest international airline by passengers, reported profit that lagged behind analyst estimates as losse

[HONG KONG] Cathay Pacific Airways, Asia's largest international airline by passengers, reported profit that lagged behind analyst estimates as losses from fuel hedging masked gains in passenger numbers.

Net income rose 20 per cent to HK$3.15 billion (US$406 million) in the year ended December, Hong Kong-based Cathay said in a stock exchange statement Wednesday. That compared with the HK$3.49 billion average profit estimate in a Bloomberg survey of 16 analysts. Sales at HK$106 billion matched estimates.

Cathay had a HK$911 million loss from hedging for fuel as the sudden crash in oil prices last year left several Asian carriers holding bets made when crude oil prices were hovering about US$100 a barrel. The airline, facing intense competition from Middle East carriers like Emirates and Etihad, said passenger numbers increased 5.5 per cent last year to 31.57 million as chief executive officer Ivan Chu added flights to the US and more travelers came from Northeast Asia.

"This is a fairly robust set of results, but the issue is the size of the realized hedging loss" booked to the profit- and-loss account, Geoffrey Cheng, BoComm International's head of transportation and industrial research, said after the release.

Cathay shares fell 0.1 per cent to HK$17.02 at the midday trading break in Hong Kong before the earnings announcement.

Singapore Air Cathay also said it had unrealized losses of HK$12.5 billion on its fuel hedges, some of which will remain in place until 2018. Several Asian carriers were projected to suffer paper losses as last year's sudden crash in oil prices took them by surprise. Carriers will have to account for those hedges or pay charges to unwind contracts prematurely.

Last month, Singapore Airlines Ltd. reported S$216 million (US$156 million) in fuel-hedging losses.

"The sharp reduction in fuel prices in the fourth quarter of 2014 caused a very welcome net benefit to overall profits," Cathay said in the statement. "However, it resulted in losses on our hedging contracts. It also resulted in significant unrealized hedging losses." Oil's dramatic decline and airlines' fuel hedging losses are a reprise of 2008 and 2009, when Cathay, Chinese carriers and Singapore Air all reported millions of dollars in losses because of their bets on fuel.

Still, lower oil prices and stronger economic growth are expected to help airlines post a global net profit of US$25 billion this year, up from US$19.9 billion in 2014, the International Air Transport Association said Dec 10.

Passenger Yields Passenger yields, which measures money earned from carrying travelers each kilometer and is a key indicator of an airline's performance, fell 1.8 per cent to 67.3 Hong Kong cents, the company said in its earnings statement today. Yield from carrying cargo and mail declined 5.6 per cent to HK$2.19.

Cargo demand is also beginning to pick up for carriers across Asia. Cathay was one of the five biggest airlines in the world in terms of freight carried in 2013.

Last year "saw the first significant boost in volumes since 2010, a trend we expect to continue this year," Tony Tyler, IATA director-general and chief executive, said March 10. "Revenues, however, are still down from the 2011 peak, and yields are falling for the fourth straight year." Cathay currently operates cargo services to 45 freighter destinations around the world. It launched new freighter services to Calgary, Mexico City and Phnom Penh last year, and started a specialized air freight service for wine.

Chief executive Chu said when he took over last year that he planned to ramp up investments in new products. In the past year, Cathay has announced it's investing in a US-based sustainable biofuel developer to help it achieve carbon-neutral growth from 2020.

Cathay also is retiring its Airbus Group NV A340-300s as part of a fleet modernization program that's seeing the airline replace older, less-efficient planes with newer models from Airbus and Boeing Co.

Cathay currently operates 147 aircraft, with an average fleet age of 8.09 years, according to its website. It has 79 aircraft on firm order, including 48 Airbus A350 models and 21 Boeing 777-9X, for delivery up to 2024.