The operating environment in the first half of 2016 was affected by economic fragility and intense competition. There was sustained pressure on revenues, reflecting suspension of fuel surcharges, weak currencies in some markets, weak premium class demand, particularly on long-haul routes, and a higher proportion of passengers transiting through Hong Kong. All these factors impacted the Group’s operating performance. The contribution from subsidiary and associated companies increased.

Passenger business
The Group’s passenger revenue in the first six months of 2016 was HK$33,413 million (CAD$5,721 million), a decrease of 7.8% compared to the same period in 2015. Capacity increased by 4.2%, reflecting the introduction of new routes and increased frequencies on other routes. Load factor decreased by 1.4 percentage points, to 84.5%. Revenue was adversely affected by the suspension (from February) of fuel surcharges, which remained suspended for the rest of the period despite a subsequent rise in fuel prices. Yield fell by 10.1% to HK54.3 cents (CAD9.2 cents), reflecting the suspension of fuel surcharges, strong competition and adverse currency movements.

There was a significant reduction in premium corporate travel, particularly on long-haul routes. Revenue from long-haul routes declined compared to the same period in 2015, despite a 4.7% increase in long-haul capacity.

Cargo business
The Group’s cargo revenue in the first six months of 2016 was HK$9,415 million (CAD$1,612 million), a decrease of 17.2% compared to the same period in 2015. The cargo capacity of Cathay Pacific and Dragonair increased by 0.6%. The load factor decreased by 1.9 percentage points, to 62.2%. Tonnage carried decreased by 0.2%. The overall market was weak during the period, although tonnage stabilised in the second quarter.

Yield fell by 17.6% to HK$1.59 (CAD0.27 cents), reflecting strong competition, overcapacity and the suspension (from April) of fuel surcharges. Demand on European routes continued to be weak and demand on transpacific routes weakened. India was one of the few routes where demand strengthened. The Group managed freighter capacity in line with demand and carried a higher percentage of cargo in the bellies of its passenger aircraft.

Cost
Total fuel costs for Cathay Pacific and Dragonair (before the effect of fuel hedging) decreased by HK$4,023 million (CAD$689 million) (or 31.9%) compared with the first half of 2015, despite a rise in the price of fuel in the second quarter. A 33.3% decrease in average prices was partially offset by a 2.0% increase in consumption. Fuel remains the Group’s most significant cost, accounting for 29.1% of operating costs in the first half of 2016 (compared to 34.2% in the same period in 2015). Lower fuel prices were partially offset by fuel hedging losses. After taking hedging losses into account, fuel costs decreased by HK$3,360 million (CAD$575 million) (or 20.2%) compared with the first half of 2015.

Congestion at Hong Kong International Airport and air traffic control constraints in the Greater China region continued to impose costs on the Group. The Group is doing more to improve the reliability of its operations.

Productivity improvements kept the increase in non-fuel costs in the first half of 2016 below the increase in capacity. There was a 0.5% reduction in non-fuel costs per available tonne kilometre. In response to weak revenues, the Group introduced measures intended to reduce non-operational costs. The Group is reviewing productivity and expenditure, has stopped the hiring and replacement of non-operationally critical staff, and is restricting non-essential discretionary spending. Despite these short-term measures, the Group continues to make long-term investments.

Network
Cathay Pacific introduced a passenger service to Madrid in June. This service has been well received. The airline will introduce passenger services to London Gatwick in September, using new Airbus A350-900XWB aircraft. It stopped operating flights to Doha in February but still offers codeshare services with Qatar Airways on this route. Dragonair did not introduce any new routes in the first half of 2016. Frequencies on Dragonair’s Da Nang, Penang, Wenzhou and Wuhan services were increased. Frequencies on Dragonair’s Clark and Kota Kinabalu services were reduced. There were no changes to the Group’s freighter network in the first half of 2016. Cathay Pacific will introduce a freighter service to Portland in November. The Group continued to manage freighter capacity in line with demand.

Fleet
Cathay Pacific took delivery of its first Airbus A350-900XWB aircraft in May. A second was delivered in July and the third in August. The airline is scheduled to take delivery of further nine aircraft of this type during the remainder of 2016. The A350-900XWBs are fuel efficient and have the right range, capacity and operating economics for the Group’s requirements.

Cathay Pacific retired two Airbus A340-300 aircraft in the first half of 2016. It will retire one more aircraft of this type in the second half of this year and will retire the remaining four aircraft of this type in 2017. The airline will have retired our three remaining Boeing 747-400 passenger aircraft by October. One parked Boeing 747-400F freighter aircraft was delivered to Boeing in July and another aircraft of this type in August. The remaining two aircraft of this type will be delivered to Boeing in August and September. Cathay Pacific took delivery of its final Boeing 747-8F freighter in August.

Product
The new Airbus A350-900XWB aircraft have the latest cabins, seats and entertainment systems and inflight connectivity for passengers’ mobile devices. The Group opened a new lounge in Vancouver in May and reopened the business class lounge at The Pier at Hong Kong International Airport in June. The G16 lounge in Hong Kong closed for renovations in July and will reopen in the second quarter of 2017. The Group’s new first and business class lounge at London Heathrow will open in the third quarter of 2016.

In January the Group announced that Dragonair is to be rebranded as Cathay Dragon, bringing the brands of its two airlines into closer alignment. The first aircraft with the Cathay Dragon livery went into service in April.

Prospects
Cathay Pacific Chairman John Slosar said: "We expect the operating environment in the second half of the year to continue to be impacted by the same adverse factors as in the first half. The overall business outlook therefore remains challenging. We expect passenger yield to remain under pressure. Overcapacity and economic fragility will dampen cargo demand. Fuel prices have increased this year, but are still lower than in previous periods. The benefits from lower fuel prices will continue to be partially offset by losses on our fuel hedging contracts. The fuel surcharge remains suspended. In this difficult environment, we will manage capacity and strive to make further improvements in operational efficiency. We will also continue to be vigilant on costs."

"The strategic objective of the Cathay Pacific Group is to provide sustainable growth in shareholder value over the long term. To that end we will continue to build a modern and fuel-efficient fleet and to strengthen our network and will strive to provide a high standard of customer service. We will continue to develop our strategic relationship with Air China. As we celebrate our 70th anniversary, our commitment to the Hong Kong and its people remains unwavering. We will continue to make long-term strategic investments to develop and strengthen Hong Kong’s position as Asia’s premier aviation hub."

*The Canadian figures are translated at HK$0.171234

About Cathay Pacific

Cathay Pacific offers two flights daily non-stop between Vancouver and Hong Kong, 10 flights weekly from Toronto to Hong Kong, and daily non-stop service Vancouver to New York (JFK), plus dedicated freighter service to Hong Kong from Vancouver, Toronto and Calgary. Also, from the convenient hub of Hong Kong, the airline offers seamless connections to an extensive Asia network, including over 22 cities in Mainland China.