Hong Kong airline Cathay Pacific's 2011 profit dives on high fuel prices, weak cargo demand

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Cathay Pacific Airways Chairman Christopher Pratt reacts as he attends a press conference for the airline's annual results in Hong Kong Wednesday, March 14, 2012. Cathay Pacific Airways, Hong Kong's biggest airline, says profit fell 61 percent last year, hurt by persistently high jet fuel prices and weakness in the world's major economies. The airline posted a profit of 5.5 billion Hong Kong dollars ($709 million) for 2011, down from a record HK$14 billion the year before. Earnings per share fell to HK$1.40 from HK$3.57. (AP Photo/Vincent Yu)

HONG KONG - Cathay Pacific Airways, Hong Kong's biggest airline, says profit fell 61 per cent last year, hurt by persistently high jet fuel prices and weakness in the world's major economies.

The airline warned of a "challenging" outlook for 2012 as it posted a profit of 5.5 billion Hong Kong dollars ($709 million) for 2011, down from a record the year before of HK$14 billion, which was boosted by some one-off gains. Earnings per share fell to HK$1.40 from HK$3.57.

Cathay said high prices for jet fuel — its single biggest cost — had a "significant effect" on operating results. The airline's fuel costs rose by HK$12.5 billion, or 44 per cent, in 2011 from the year before, reflecting both higher jet fuel costs and that it flew more routes.

High fuel costs hurt profitability at its air cargo division, as fuel surcharges weren't enough to cover the gap.

The air cargo division, which accounts for 26 per cent of revenue, shipped 8.6 per cent less freight last year. Demand for air cargo shipments from Hong Kong and mainland China — Cathay's two biggest markets— started falling in April and remained weak for the rest of 2011, buffeted by the slumping global economy that cut consumer demand for electronics and other Asian manufactured goods. The company said European demand was particularly weak. The division also faced increased competition from Shanghai-based airlines.

Air cargo shipments through Hong Kong were also hit by the devastating earthquake and tsunami that struck Japan in March 2011. The tsunami destroyed a swath of factories producing auto and high-tech components in northern Japan, disrupting manufacturers that relied on shipping those parts through the city for use in China.

Natural disasters and political instability cut travel demand to some of Cathay's major destinations. Demand for travel to Japan was "heavily affected" by the tsunami and subsequent nuclear crisis, although it recovered by October. Flooding in Thailand and unrest in the Middle East also hurt demand for travel.

Cathay and its subsidiary Dragonair carried 27.6 million passengers last year, 2.9 per cent more than in 2010, but the amount of seats filled fell by 3 per cent as passenger growth failed to keep pace with added capacity.

Chairman Christopher Pratt was cautious about the outlook.

"Looking ahead, economic uncertainties have continued into the first half of this year — while these uncertainties continue, we expect pressure on economy class yields and our cargo business in particular to remain weak," Pratt said in a statement.

He added that "2012 is looking even more challenging than 2011," and noted that fuel prices have risen further.

A barrel of jet fuel cost $137 on March 2, which is nearly 10 per cent higher than 12 months ago, according to the International Air Transport Association. Jet fuel prices have averaged $133 so far this year.

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Alex Kennedy in Singapore contributed to this report.