Cathay Pacific Airways, Hong Kong’s largest airline, posted a better-than-expected 83% gain in second-half profit after flying more passengers to China and raising fares to cover fuel costs.

Sales rose 21% which suggests that much of the extra profit came from the fuel surcharge.

The carrier boosted sales in Hong Kong and China 32% last year after buying Hong Kong Dragon Airlines to add more flights in China

Pauline Dan, who helps manage $2.5 billion, including Cathay Pacific shares, at Manulife Asset Management, said, ‘The growth was strong last year because of surging travel demand and higher ticket prices. This year ‘will not be spectacular if oil prices continue to stay at high levels.’

For the full year, the airline paid an average of $91 a barrel for fuel, 6.5% more than a year earlier. The average price of jet fuel traded in Singapore rose 7.7% last year.

Cathay Pacific charged customer 20% more than a year earlier while, at the same time, saving from fuel hedging. Hedging allows airlines to lock in future fuel prices to protect against possible increases.

Cathay Pacific and Dragonair boosted passenger numbers 4.3% last year to 23.3 million. The airlines fly to about 20 mainland cities, including Beijing, Shanghai and Tianjin.
Source: Bloomberg

The parent company of Air China used a newspaper advertisement to plead with the directors of China Eastern to review its rejection of a proposed alliance between the two carriers.

The advertisement was placed in the South China Morning Post in Hong Kong. (This is not a newspaper which has traditionally given full approval to the actions of the government of China. In the advertisement China National Aviation Corp (CNAC), parent of flagship carrier Air China, insisted its bid was sincere.

The advertisement said, ‘CNAC has been highly sincere in seeking a strategic partnership with China Eastern Airlines.
‘CNAC hopes that the board of directors of China Eastern Airlines will seriously review and give full consideration to the proposal.’

CNAC called on China Eastern to hold a meeting as soon as possible to discuss the details.

China Eastern, the country’s third largest carrier, has once again rejected the alliance and said the bid ‘lacks sincerity, planning and mutual trust and it would be hard to create a basis for cooperation’.

China Eastern added it would continue seeking strategic investors to strengthen its core business which means there may just be a glimmer of hope for the deadlocked plan to tie-in with Singapore Airlines (SIA).

In theory, at least, SIA and Temasek Holdings, Singapore’s state-linked investment firm, signed a preliminary deal in September to take a 24% stake in China Eastern for $923 million.

Minority shareholders rejected the bid after CNAC proposed to buy 2.985 billion new Hong Kong listed shares in China Eastern. China Eastern will receive at least US$1.9 billion US dollars in cash under CNAC’s proposal.

CNAC also suggested the two carriers integrate their cargo business to set up a joint venture and cooperate in codesharing, optimisation of route networks, maintenance and ground service.

What was not said by any party involved was why it was so important. And, in a sense it is simplicity itself. China Eastern has Shanghai sewn up. Air China does not; it has Beijing. If Air China can get a slice of China Eastern then it has the two main points of entry into the country covered. At the same time, Cathay Pacific has a strong interest in Air China which would be transferred to the new alliance.

A footnote: the thought appears to be that SIA would make a massive difference to the inflight service on China Eastern which, in truth, needs all the help it can get.

But Air China has for some time had some of its cabin crew under the training of Cathay Pacific. If there is a difference, it is not noticeable to the eye of a cynical passenger. Eventually it will all settle down and the airlines of China will realize that if they are to do battle in an itnernational sphere then the cabin service has to be up to that of other, competing airlines. At the moment it is not.
Source: AFP

Most major airlines see budget airlines as a threat. (The exception appears to be Cathay Pacific where the managing director, Tony Tyler, in an interview downplayed it as a potential problem.)

The potential problem will come from many directions. From Korea comes Jeju Air and Hansung Airlines, which have been operating domestic services for more than two years and plan to launch international services in the second half of this year.

They are expected to compete most on routes between Korea and China.

Typically budget airlines charge 50% less than the traditional services although, of course, the schedules may not be quite so convenient, the inflight service spartan and the ticket totally non-flexible.

An official with the airline industry said, ‘I expect that there will be a huge influx of low-cost flight services at various fare ranges launched on routes between Korea and Japan and China, with which Korea has already signed aviation agreements. New budget routes will also likely be opened from Shandong and Hainan to more remote areas throughout China.’
Source: The Chosun Ilbo

Cathay chief executive Tony Tyler said has said that Cathay Pacific Airways will be willing to help fund any bid by Air China for China Eastern Airlines. It will probably do this for two reasons. The first is to make it happen and the second is to avoid dilution of its 17.5% stake in Air China. If the deal goes through it automatically strengthens Cathay’s presence in Shanghai where China Eastern Airlines is based.

Tony Tyler said that Cathay Pacific is discussing closer co-operation with Air China including a Shanghai cargo joint venture.

He said Shanghai is an important market and it’s only going to get more important. He added better management would have little difficulty in turning around unprofitable China Eastern.

This is undoubtedly true. But note that Cathay Pacific has been working with Air China in improving areas such as its cabin service and has not found this an easy task.

Singapore Airlines, the opposition in this case, is currently sitting on a US$3 billion cash pile and almost certainly is going to make another bid for China Eastern Airlines. China Eastern Airlines (some cabin crew in the illustration) is openly hostile about the prospect of an alliance with Air China which makes the situation more than somewhat intersting.

Any move by SIA would re-ignite the currently stalled ‘Battle for Shanghai’ (that is e control of China Eastern Airlines.)

Global equity market weakness could help deflate Chinese airline stock prices which might give a second SIA bid a better chance of success. On the other hand, neither Air China nor Cathay Pacific would have any problems in raising the cash to meet or better such a bid.

As they say in newspapers, this story has legs and will run.
Source: CargoNews Asia and Centre for Asia Pacific Navigation

This is like a long running serial on television. You do not really enjoy watching it but there is always something happening to hook you into the next episode.

Now that Singapore Airlines has been repelled, with some small assistance from Cathay Pacific, China National Aviation Holding Company (CNAHC), parent of flagship carrier Air China, has said what it is looking for is a partnership, not a merger, with China Eastern Airlines in its new counter-offer. Makes it sound much more palatable.

CNAHC also said it would, as promised, submit the bidding within two weeks of the rejection to CEA’s proposed 24% stake sale to Singapore Airlines (SIA) and Lentor Investments, a unit of the Singapore state investment company Temasek.

(Bringing that down to basic ideas SIA would have got a strong foothold in China and the area in which is specializes, customer service, would have improved beyond measure. Cathay Pacific has tried to up the quality of inflight service in China but allows that it is tough going.)

Minority shareholders voted against SIA’s bidding after CNAHC’s wholly-owned subsidiary, China National Aviation (CNAC) said it planned to buy 24 to 30% of CEA’s shares at 32% higher than SIA’s offer price. Which is an offer you cannot refuse.

This deal reflects the long-held concept of Li Jiaxiang, former CNAHC’s general manager and Air China’s board chairman, for the joint running of overlapping flights, combined cargo transport subsidiaries and a cross-shareholding arrangement between the two carriers. The official said the two central government-owned airlines could still maintain independent operation and their own brands.

CEA had a dominant 36% share of Shanghai’s aviation market, compared with 12% of the Beijing-based Air China.

What is needed now is for someone like Emirates to get involved and show the inflight crew the way that customers should be catered for. Until that happens passengers will be predominantly Chinese and these will not be truly international airlines. If from scratch, Emirates could build a reputation as one of the great service airlines of the world it should not be impossible for China Eastern or Air China to attain similar standards.
Source: China Daily