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Cathay Pacific’s plight worsens; Firefly flounders

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Hong Kong flag carrier Cathay Pacific says it is expecting 2H16 profit to be worse than initially expected; the airline blames overcapacity and intense competition.

On October 12 CX released a statement saying: “Since the interim report was issued [in late August], the outlook for our airlines’ business has deteriorated…

Overcapacity and strong competition is putting particular pressure on our passenger business, with continued shortfalls in revenue compared with forecasts and heavy pressure on yield.”

Read the Financial Times’ take here.

We spoke to a few people close to CX and the gist is that the airline has lost its bearings. The decline is serious and rapid under current CEO Ivan Chu. CX shares have lost 20% of its value since the start of 2016 and will likely see more downside in the coming quarters. It’s a good time to consider disposing of it if you do own CX stock. There’s more turbulence ahead…

Notwithstanding the competition from expanding (and hungrier) Chinese airlines, the Gulf carriers are also taking a lot of business away from CX, especially on the European segments.

On top of that CX is a very costly airline to run (labour is expensive in HK and industrial action is always a threat) and the carrier has not shown it is able to fend off the competition. Hence, the need to urgently reduce unit costs.

Unlike Singapore Airlines (which CX has often been compared to), we think CX has not been paying attention to the market. In other words, CX was complacent under Chu’s helm. The Swire Group has many smart people so it’s unforgivable that it should now come to this.

For example, they did not anticipate a few things, such as (a) mainland Chinese carriers expanding their international destinations, (b) services at Chinese airlines have improved considerably, (c) mainland Chinese are eschewing CX and travelling more on inexpensive airlines, (d) less dependence on the Taiwan market following direct cross-strait flights, and (e) aggressive growth from players such as HNA (Hainan-based).

The issue of overcapacity affects all airlines in Asia Pacific, especially in Southeast and Northeast Asia. There’s just more supply than demand, so airlines need to be very canny.

The reality is that there are now more non-stop direct flights (or a short layabout in Doha or Dubai) between mainland China and Europe (and to some extent, North America) such that there’s no reason for a passenger to pay CX’s exorbitant fares.

And exacerbating the problem, management has decided (foolishly) to cram more passengers on its long-haul flights (from 9-abreast to 10-abreast). This is expected to happen in 2018. And so passengers now have more reason not to fly with CX.

Chu claimed the decision was made due to a lack of takeoff and landing slots at Chek Lap Kok but we feel it would have been better if CX raised prices and improve yields instead of raising capacity.

It would seem CX has lost its bearings, indeed, and it would be interesting to see how Chu and his team arrest the problem. The airline needs a new strategy and maybe a new CEO. Customer revenue is severely eroded and yes, they also need to find someone who can better manage the fuel hedging bets that CX seems to have often misread.

Firefly floundering?

Malaysian discount carrier Firefly, a wholly-owned subsidiary of Malaysia Airlines Berhad (MAB) is facing some rather torrid turbulence.

We understand Firefly’s passenger numbers are falling in 2016 mainly due to reduction in capacity and severe competition from Malindo Air. On several recent trips to Subang Airport in Kuala Lumpur we observed that Malindo offered fares that are at least 20%-25% lower than Firefly! And that’s to fly in the same aircraft type – ATR72-500.

And passengers appear to be choosing Malindo over Firefly given the huge differentials.

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A Firefly ATR72-500 at JHB. Pic/Shukor Yusof

International flights also seem to have been hit very hard. A couple had the great fortune of having a Firefly flight all to themselves, from Krabi in Thailand to Penang in September (read here) and even with oil prices at current levels that sort of journey is going to hurt the bottomline.

But why did Firefly have services between Krabi and Penang to begin with? Or from Koh Samui to Penang? Or Langkawi to Kota Bharu (Kelantanese going to beach resorts to get a tan?) – this route has since been dropped – while Penang to Kuantan also looks dodgy.

Firefly’s management blames overcapacity at Subang Airport; which is to say it is having a hard time competing against Malindo, whose flights to Senai Johor are extremely popular (because the fares are extremely attractive).

In 2015 Firefly flew some 2.3 million passengers. As of August 2016 the airline ferried just 1.2 million.

We understand the airline is on cost-cutting mode. It has deferred deliveries of 2 ATR72-600s this year. Firefly has ordered 20 of such planes and taken just the one in April this year. According to its website Firefly now operates 12 ATR72-500s and six ATR72-600s.

There are serious concerns about where Firefly is heading, especially with regards its financial health, judging from the decline in passenger numbers and the weakening Ringgit, not to mention flying aircraft that are virtually empty.

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