Cathay Pacific upgraded to 'buy' as cargo continues to improve

Cathay Pacific has seen its stock rating upgraded to ‘buy’ by one leading investment bank, thanks to the improving performance of its cargo business.

Earlier this month Jefferies upgraded the airline’s rating from ‘underperform’ to ‘buy’ based on the improving performance of its cargo business, moves to control passenger capacity and the expectation that further cost saving initiatives will be launched.

Jefferies analyst Andrew Lee said that cargo, which accounts for around 22% of the company’s overall revenues, will remain a “key tailwind” for the company with year-to-date industry cargo yields 7.9% higher than last year.

Meanwhile, Cathay’s cargo volumes over the first four months have improved by 8.6% year on year, while IATA figures show industry capacity over that period is up by the lower amount of 3%.

Lee also pointed out that IATA is predicting overall industry cargo traffic growth of 7.5% this year.

The company upgraded the airline’s expected cargo yields for the year to HK$1.98 per revenue freight tonne km (RFTK) from HK$1.95 in its last estimate. Overall, cargo yields for the airline are expected to be up 5.2% year on year.

This is expected to improve further to HK$1.99 per RFTK next year and HK$2 per RFTK in 2019.

In its latest market update, the carrier reported an 8% improvement in freight traffic in May thanks especially to routes serving northeast and southeast Asia.

"Yield and demand continued to improve, which reflects the overall strength of the air freight industry. To take advantage of market conditions, we have bolstered our freighter fleet by wet-leasing two Boeing 747-8 freighters from Atlas Air Worldwide, which will supplement capacity on our existing network, including destinations in the United States and Europe,” the airline said of its May performance.

The analyst also expects further cost cutting measures, after the airline announced earlier this year that 600 jobs would go from its head office.

“We see this as the first step of [Cathay Pacific] becoming a leaner operation as [Cathay Pacific’s] employee/plane is higher than that for Chinese airlines,” Lee said. "Similarly, [Cathay Pacific’s] wages/employee is higher vs Chinese airlines and similar to [Singapore Airlines].”

He added that the airline is also taking steps to reduce passenger yield erosion by controlling capacity and in 2018 and 2019 it could benefit from predictions of lower oil prices.

So far Jefferies is the only investment bank to give Cathay a ‘buy’ rating, with four other firms listing the company as ‘hold’, five as ‘underperform’ and six as ‘sell’.

Also, despite upgrading the airline to ‘buy’, Jefferies still predicts that it will make another loss this year, of HK$902m. A further loss is predicted for 2018 before the airline bounces back to profit in 2019.

Last year, the company recorded its first full-year loss since 2008 as it came under pressure from Chinese low-cost carriers.