Cathay Pacific Group - financial and operational results for 2012

by Devesh Agarwal

Cathay Pacific Group FY2012 overall results

Hong Kong based, Cathay Pacific Group reported an attributable profit of HK$916 million (approximately $118.08 million) for 2012 – an 83.3% fall compared to the profit of HK$5,501 million reported for 2011, even though turnover for the year increased by 1.0% to HK$99,376 million (approximately $12.81 billion). Earnings per share fell by 83.3% to HK23.3 cents. (US$1=HK$7.75. 1HK$=INR6.99).

With a strong presence in the air cargo services area, the continuing slowdown in the Eurozone countries during 2012, and their resultant impact on the exports from China and Hong Kong, affected the group. The Group was also adversely affected by the high price of jet fuel, and pressure on passenger yields due to increased competition. The Group has investments in Air China, which also showed a significant decline due to similar reasons.

Cathay Pacific results FY2012 - pperating statistics

Annual passenger revenue for 2012 was HK$70,133 million, up 3.5% from 2011. Capacity was increased by 2.6%. The Group's two airlines (Cathay Pacific and DragonAir) carried 29 million passengers, up 5% from 2011. Passenger load factor fell 0.3%. Yield increased by 1.2% to HK67.3 cents, largely due to higher fuel surcharges but fuel prices increased 1.7%.

Economic uncertainty caused corporate customers to belt tighten, which pressured yields in the premium classes, while strong competition on key routes and the same economic FUD (fear, uncertainty, doubt) factor squeezed the economy class yields. Cathay does have a reasonably portion of its fleet as older fuel guzzlers, which made long distance operations under cost pressures. Cathay Pacific announced measures designed to protect its business in an environment of high fuel prices and weak revenues. The group accelerated the retirement of the less fuel-efficient Boeing 747-400 passenger aircraft and withdrew four Boeing 747-400BCF (Boeing converted freighters) from service.

Annual cargo revenue fell 5.5% to HK$24,555 million. Capacity decrease of 3.1%, helped keep yield for Cathay Pacific and Dragonair, unchanged, at HK$2.42. Cargo load factor dropped 3% to 64.2%.

Cathay Pacific Group FY2012 - sales by geography. Indian sub-continent and middle east is the smallest contributor

Fuel remained the most significant cost, and even discounting the effects of fuel hedging, increased by 0.8% to account for 41.1% of total operating costs. Fuel, as a percentage of total operating costs decreased 0.4%.

Through 2012, the Cathay Pacific Group kept a clear focus on its key strategic goals: developing its network and its Hong Kong base; maintaining and enhancing the quality of its services; strengthening its relationship with Air China; and maintaining a prudent approach to financial risk management.

On the passenger side, Cathay Pacific added frequencies on routes to India, Japan, Malaysia, Singapore, Taiwan, Thailand and Vietnam and introduced a new service to Hyderabad in India last year. Dragonair added frequencies on routes to secondary cities in Mainland China and introduced or resumed flights to eight destinations in 2012. In the first quarter of 2013, Dragonair is launching another four new destinations. On the cargo side, Cathay Pacific introduced freighter services to Zhengzhou, Hyderabad and Colombo last year.

Cathay Pacific Group FY2012 - capacities, load factors, and yields by geography

During the year, Cathay Pacific introduced a new Premium Economy Class product, a new long-haul Economy Class seat and a new Regional Business Class seat. See images and read details here and here.

Cathay Pacific and Dragonair received 19 new aircraft as part of their fleet upgrade plan. At the end of the fiscal, the Group had 92 aircraft on order for delivery up to 2020. An order was placed for six Airbus A350-900 aircraft in January 2012. In August the Group ordered 10 Airbus A350-1000 aircraft and converted an existing order for 16 Airbus A350-900 aircraft into an order for 16 Airbus A350-1000 aircraft. In March 2013, Cathay Pacific entered into an agreement with The Boeing Company under which it agreed to buy three Boeing 747-8F freighter aircraft and cancel the agreement to purchase eight Boeing 777-200F freighters that were entered into in August 2011. Under the agreements, the Company also acquired options to purchase five Boeing 777-200F freighters and The Boeing Company agreed to purchase four Boeing 747-400BCF converted freighters, which were taken out of service in 2012 and early 2013. The transaction is part of a package of transactions between the Group, The Boeing Company, Air China Cargo Co., Ltd and Air China Limited.

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Kingfisher fiscal year 2012 results analysis. Will Kingfisher Airlines survive?

When Kingfisher Airlines, once India’s second largest domestic airline, reported a Rs. 2,328 Crore (1 Crore = 10 Million) net post-tax loss for fiscal year 2012, it was simply an affirmation of the dire straits that a once proud airline has fallen into.

Of the Rs. 2,328 Crore net loss, a whopping Rs. 1151.5 Crores were lost in the fourth quarter of fiscal year 2012. The sad affirmation is that Kingfisher’s current financial situation, as it stands, is clearly unsustainable in the long run.

When I joined Bangalore Aviation last year, Kingfisher had some 20% of the Indian domestic market. In just seven months, their market share in April 2012, has plunged to just 5.4%. Hypothetically, FDI would do some good for Kingfisher’s finances but given their abysmal current financial performance, one has to wonder whether KFA will be able to attract any foreign investment at all. From a pure financial sense, Kingfisher makes little sense as an investment opportunity, and the prestige factor that might have once attracted suitors like oneworld founding partner British Airways has worn off as Kingfisher service standards and aircraft cabins deteriorated over the past six months.

Even though the Indian government finally appears to have moved on the issue (reports emerged yesterday that the government and all airlines, including Jet Airways were on board), foreign direct investment by airlines may arrive in the Indian market too late to make a difference at Kingfisher.

Moving on to the actual results, they were pretty much as bad as one would expect. Domestically, the carrier has lost its once robust revenue premium relative to the market, with a 9.8% year over year in domestic revenues. Whereas Kingfisher had a more than 10% revenue premium relative to competitors like Jet Airways, in Q4 2012, Jet in fact had a 10+% revenue advantage over Kingfisher.

From a restructuring perspective, Kingfisher has obviously done a decent job of weathering the storm, managing to net a Rs. 138 crore EBITDAR profit (earnings before interest, tax, deduction, amortization, and rent). But EBITDA (adding in rents) collapsed from a Rs. 271 Crore profit last year to a Rs. 470 loss this year. Even so, Kingfisher’s “problem” has never really been the operations themselves, which would have been sustainable at last year’s profitability levels for 3-4 more years, but rather the crippling debt burden and financial charges. While the nominal financial and interest charges declined somewhat year over year, thanks the precipitous collapse in revenues, interest and finance charges represent a mind boggling 38.9% of revenues.

Still, even with this factor, Kingfisher’s performance may not have been as bad as the headlines say. While the net pre tax loss was huge at Rs. 1,700 Crore, more than Rs. 1000 crore of that was due to one-off restructuring costs. Excluding such special items, Kingfisher lost just Rs. 666 Crore in Q4 of FY 2012, which translates to a net margin of -8.97%, not much worse than Jet Airways’ net margin of -6.93%. For the full year excluding special items, Kingfisher actually had a better net margin than Jet Airways, which is surprising given their relative financial problems.

This begs the question, will Kingfisher survive?

There are really two separate answers to this question, governing survival in the short run and in the long run. The second case is still very iffy; a lot will depend on whether India's government can implement needed structural reforms within the market, whether they can attract adequate FDI capital, and the new Indian airline market picture 3-4 years down the road. But in the first case, the danger of Kingfisher ending operations entirely in the next few months is low. As I mentioned above, Kingfisher's finances are not necessarily immediately life threatening; the carrier has managed to cut costs surprisingly well (admittedly, at the expense of Kingfisher's wonderful employees). This is not to sugarcoat Kingfisher's losses, but rather to say that the airline has entered a form of a "holding pattern" operating 18 aircraft to a limited network of essentially domestic destinations; survival in the short term, barring a major ($40/barrel +) oil spike, seems assured.

On the operating cost side, fuel, as per the usual was the biggest drag on results. While the rest of Kingfisher’s cost-line items reported drops of more than 50% year over year, fuel costs dropped just 18%. But there is hope on the horizon for fuel prices. While the days of non-recession $35/barrel oil are likely over, oil prices are likely to fall to around $80 per barrel and stabilize thanks to rapidly growing US production.

One thing that does worry me about Kingfisher is their insistence on regaining lost bulk.

“The company has a focused fleet re-induction plan and hopes to be back to full-scale operations in the next 12 months backed by a recapitalization plan that the company is actively pursuing and confident of achieving.”

Thanks to KF’s capacity slash, the Indian market actually has seen some revenue gains in the past few months. A Kingfisher re-addition of capacity en-masse would do inexorable harm to the Indian airline market.

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Kingfisher Airlines Q3 FY2012 financial analysis

The past few days have been admittedly brutal for Kingfisher. Whether it was suspending flights entirely from Kolkata, or dealing with a particularly critical journalist, the events that befell Kingfisher stopped just short of catastrophic.

The immediate pressure appears to have been relieved by loans from State Bank of India, which will go further onto the hook for Kingfisher to the tune of Rs. 1,500 Crore, apparently on the premise that India’s government may finally release its vice-like grip around the Indian airline sector’s neck.

Given this rush of news from Kingfisher, we felt that it would be helpful to analyze the carrier’s Q3 FY 2011-2012 results, and in highly disappointing results, Kingfisher has outdone its domestic rivals in losing a ton of money, Rs. 442.6 Crore, which is up from Rs. 253.7 Crore in the year prior.

• Revenue growth for Kingfisher domestically was very weak, falling 3% to Rs. 1,184 Crore from Rs. 1,227 Crore
• International Revenue growth was even worse, falling 9% to Rs. 363 Crore from Rs. 398 Crore
• Passengers carried fell 15% to 2.63 million; antithetical to general market trends.
• Domestic Passenger Yield fell 3% to Rs. 3,804 despite capacity discipline.
• International Passenger Yield rose 5% to Rs. 10, 864
• Domestic absolute non-fuel costs fell 17.8% driven primarily by a large decrease in “Other Operating Expenses” (to a large extent aircraft maintenance; resulting in just 25-35 Kingfisher aircraft currently operating out of a fleet that numbered 64 in October 2011 and once had as many as 80 aircraft), while absolute fuel costs jumped a relatively modest 37%; on a capacity decrease of 5%, a 14% fall in number of flight hours flown, and a 15% decrease in number of departures, perhaps due to the drawdown of the ATRs.
• International absolute non-fuel costs were down 1.7%, driven primarily by cost discipline in employee remuneration (in certain cases not paying salaries at all),” while absolute fuel costs jumped 37%; on a capacity decrease of 4%, a 2% decline in number of flight hours flown, and a 6% increase in number of departures that was driven by a shift in capacity towards short-haul international markets.
• Domestic seat-kilometer revenues were up 2%, while seat-kilometer costs were up 9%; seat-kilometer costs excluding fuel were down 7%.
• International seat-kilometer revenues were down 5%, while seat-kilometer costs were up 22%; seat-kilometer costs excluding fuel were up 6%.
• Domestic seat factor was 79.1%, international 68.2%
• Interest expenditures on debt were up 2.2%% YOY to Rs. 347.2 Crore, which thanks to revenue declines represents a crippling 25.9% of total recenues
• EBTIDAR Profit (which measures operating results before taxes, interest, depreciation , loan amortization, and rents) of Rs. 125 Crore (Rs. 284 Crore in Q3 10-11), EBITDAR profit of Rs. 161 Crore on Domestic (Profit of Rs. 225 Crore in Q3 10-11), and EBITDAR loss of Rs. 36 Crore on International (Rs. 59 Crore profit in Q3 10-11)
• Kingfisher deferred almost 213.4 Crores worth of losses into future taxes under “Deferred Tax Asset”
• There was a onetime special item of almost Rs. 79.25 crore that contributed to the loss.

Observations:

Domestic:

Almost paradoxically despite their continual shrinkage in the domestic market, Kingfisher has continued to post solid, if unspectacular operating figures in the domestic market. Remember, Q3 includes most of the November flight cancellations and the resultant issues, and yet despite these effects and huge capacity increases from the other carriers, they managed to prevent yields from falling off a cliff domestically, riding this decent revenue performance to yet another EBITDAR profit, which beat both Jet Airways and SpiceJet (in all likelihood Air India and Go Air) in terms of margin.

This EBITDAR profit was also enabled by discipline in employee remuneration, which was of course achieved in large part by simply neglecting to pay employee salaries. It is almost tragically comical that the only carrier to actually listen to my mantra of limiting the rise in employee costs was only able to achieve that by not paying any salaries at all.

The growth in costs was also limited by their approach to maintenance, which was to ground any and all aircraft that they were unable to adequately pay for parts and service for. While this course of action has been met with predictable teeth gnashing and hyperbole from certain members of the Indian press, in our opinion it is far preferable to the scenario where Kingfisher flies planes that are unfit for flight.

The outlook moving forward is sadly far, far worse. Kingfisher will essentially be flying at 55% of its average Q3 capacity in Q4, and domestic and international travelers continue to book away from Kingfisher on even the shortest of flights. These drops in revenue will likely place enough pressure on Kingfisher to swing them to negative EBITDAR domestically in Q4, especially if they are unable to reverse the trend of business traveler and frequent flyer outflow.

International:

Kingfisher’s international results meanwhile, are an illustration and manifestation of the full swath of issues facing Kingfisher. That they managed to keep revenues from tanking after pulling out of high-demand routes to Bangkok, and the increase in passenger yield of close to 5% was probably the last vestige of the respect Kingfisher has from the international business traveler.

That being said, we suspect that on the revenue side, October was unusually strong, November exceedingly weak, before a slight recovery in December that produced the overall slightly positive performance.

But as with the company in whole, these moderately positive trends were unable to outweigh the continuing rise in costs, both fuel, and aircraft lease rentals. Maintenance costs did not fall at the same level as they did domestically, which is indicative of a troubling decision on Kingfisher’s part.

Given that Kingfisher had a pressing need to reduce maintenance costs, it was ultimately necessary to ground certain aircrafts. Yet, what is not clear is why Kingfisher did not choose to ground more of its A330s (4 of 5 remain flying) during the quarter. If they had grounded all 4 aircraft, that could have paid for the maintenance of almost eight A320 family aircraft.

Considering that Kingfisher’s domestic operations are far more profitable, this would have been a far more sensible decision, even if it necessitated the cessation of flights to London and Hong Kong. Kingfisher appears to have made this decision as much for prestige as for economics, and it has certainly contributed to their accelerating losses.

General:

What is Kingfisher’s loss is the other airlines’ gain; Air India with its near-incompetent revenue management system has posted huge gains in January revenues, meaning that Jet Airways is likely to have a very strong (perhaps even profitable) Q4 along with the beleaguered national carrier. If India’s other airlines do not blindly rush to backfill the lost capacity from Kingfisher, these events might even have a positive effect on the Indian market as a whole.

To those who claim that Kingfisher’s losses go beyond the government I agree wholeheartedly but caution that government is still the largest factor. If the sales tax on jet fuel, which ranges from 4-29% in India and nets to about 20% for Kingfisher’s ops, were set to zero, Kingfisher would have more than doubled their EBITDAR profit, and achieved an EBITDA profit (which accounts for rentals) as well as pushed the net loss to closer to Rs. 250 Crore.

Meanwhile the near term prospect for Kingfisher are not great, with the carrier likely to post large losses in Q4 and the full year despite the slight narrowing of losses from Q2 to Q3. The SBI equity has given Kingfisher a small “margin of error” so to speak, it will be interesting to see how well the airline can

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SpiceJet Q3 Fiscal 2012 financial analysis: Q400 operations cushion the loss

The second financial analysis for the third quarter in India is of low fare carrier SpiceJet, who mirrored the performance of the industry by losing Rs. 39.26 crore in Q3 of Fiscal Year 2011~2012 (FY2012).

• Revenue growth for SpiceJet was strong, rising 41% to Rs. 1,175.8 Crore from Rs. 759 Crore
• Passengers carried were up 29.2% to 3.08 million; beating demand growth for the overall industry by about 17%
• Passenger yield grew 9.7% to Rs. 3,816; despite a large increase in capacity
• Absolute non-fuel costs were up 49.7% driven jointly by large increases in employee remuneration, aircraft lease rentals, and maintenance costs, while absolute fuel costs jumped a staggering 90%; on a capacity increase of 32%, a 52.8% growth in number of flight hours flown, and a 60.1% increase in number of departures.
• Seat-kilometer revenues were up 7.2%, while seat-kilometer costs were up 26.8%; seat-kilometer costs excluding fuel were up 14%.
• Load factor slipped 8.8% to 80.1%
• EBTIDAR Profit (which measures operating results before taxes, interest, depreciation , loan amortization, and rents) of Rs. 14.7 Crore (Rs. 22.7 Crore in Q3 10-11), resulting In fall of EBITDAR margin from 27.3% to 12.5%
• Net margin of -3.3% vs. 11.3% in same period last year, but up from -32% in Q2 of this fiscal year

Analysis

Considering that Q3 is typically the best quarter for India’s airlines, this performance from SpiceJet is somewhat disappointing. However, SpiceJet has managed to reverse some of the negative trends from the previous quarter, while displaying some positive trends as well.

Particularly important was that they managed to increase passenger yields despite a huge rise in capacity, both from SpiceJet and the market as a whole. SpiceJet has also managed to outstrip demand growth for the market as a whole. The combination of these two effects really reflects in our opinion, the stunning success of SpiceJet’s Q400 operations, which have achieved better unit revenues and superb loads, and served to prop up SpiceJet’s overall revenue figures.

On the expenditures side, two particularly troubling figures were aircraft maintenance and employee remuneration both of which saw increases that far outstripped the increase in capacity (implying an unnatural rise in costs). The former is probably a direct response to the ever increasing utilization and flying from SpiceJet as well as the additional costs of starting up a Q400 operation and adding a second fleet type, which will be mostly accounted for during Q3.

Meanwhile, the employee remuneration increase is something that India’s airlines apparently just do not understand the necessity of controlling. SpiceJet’s employee costs rose a mind-blowing 82.2% in Q3, and this sort of situation simply is not sustainable moving forward. Employee costs are the single biggest portion of an airline’s expenditures that it can control, and the real story here is that if SpiceJet had limited the increase in employee remuneration to 32%, it would have made a net profit this quarter.

So given this mixed bag of performance in Q3, the main question that remains is should these accumulated losses erode SpiceJet’s net worth as a recent article in the Business Standard newspaper claims they have?

At the moment, I will say no, simply because they have done a good job of minimizing their losses after a disastrous Q2. Moreover, the Q400 has been a fantastic success, and with more of these aircraft on the way in 2012 (plus 15 options), its not hard to see a scenario under which SpiceJet’s losses narrow this calendar year.

India’s legacy carriers still charge an arm and a leg for some short turboprop flights, and SpiceJet’s ability to enter these markets and stimulate them with low fares, especially in light of Kingfisher’s continual draw down in regional capacity, should boost profitability moving forward.

That being said, the fact that SpiceJet has failed to make a profit despite insanely strong (given current market dynamics) revenue performance is another black mark against the poor environment for airlines in India, which continues to strangle this vital sector.

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