March 14th, 2012
02:42 PM GMT
Hong Kong, China (CNN) – What a difference a year makes for one of Asia’s flagship airlines.
For its 2010 fiscal year, Cathay Pacific reported a record $1.8 billion in net earnings. Wednesday, it revealed a huge reversal for 2011. Its net profit slid 61% year-on-year to just about $700 million.
That multi-million dollar sum may sound good to those of us on the outside looking in, but it’s clearly a major disappointment for Hong Kong’s famous air carrier.
The reason for its big plunge in profits is two-fold.
The first is oil. Its soaring cost isn’t just burning a hole in our pockets. It’s also a huge headwind blowing away the black from Cathay’s bottom line.
And while fuel costs rose, cargo demand fell. Cathay reported an 8.6% drop in freight volumes last year.
That’s not a good thing for a company that relies on the transport of goods for one-third of its profits. Last year’s sluggish global economy meant weaker European and U.S. demand for manufactured goods, like clothes and electronics, from here in Asia.
But if we look to Cathay’s competitors, we can see this profit plunge narrative isn’t confined to just one single carrier.
Singapore Airlines’ most recent third quarter net profit was down 53% year-on-year. The Lion City’s flagship carrier blamed high jet fuel prices.
Air China’s third quarter net earnings fell 26% year-on-year. The airline blamed weak demand from overseas travelers and, yes you guess it, higher fuel prices.
And Japan’s All Nippon Airways said its third quarter net profits fell more than 10%. The country’s largest airline did, however, raise its outlook thanks to a stronger yen, cost cutting measures and continued recovery after last year’s quake and tsunami. What it doesn’t need at this fragile time is higher fuel prices.
Other regional players like Qantas and United/Continental also saw earnings drop in the most recent quarters for much the same reason.
For sure, the airline world isn’t in love with oil right now. And that emotional gap has widened to a gulch over the last four years.
The price of Brent crude has risen every single year since 2008. In December of that year, it was trading at just over $36 per barrel. Now, Brent is trading at about $126 per barrel. That’s a surge of more than 225% in just about three years.
To cope, Tom Ballantyne, chief correspondent with Oriental Aviation, says airlines will do what they always do, “Refocus on cost cutting, improving fuel efficiency and improving productivity.”
He expects income for most airlines, including Cathay, to stay depressed all this year because of uncertainty in global economies, especially in Europe, which will continue to act as a damper.
Ballantyne adds: “Although passenger traffic is performing relatively well, they need a strong recovery in the cargo sector, which will be a sign of renewed business and consumer confidence, and an easing of fuel prices to get their bottom line back on track.”
But as long as that doesn’t happen, the world’s airlines will only whisper to oil, “I only love you when you’re cheap.”
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