EUR 850.00 For Business Accounts Only

Morningstar | This premium legacy carrier retains a premium load factor.

Cathay Pacific is a premium legacy carrier with an above-average passenger load factor (84%-85%, versus 82%-83% for its key competitors) amid pricing wars and volatile global economic conditions. The company was among the first legacy carriers to roll out premium economy class, which caters to customers that find business class too expensive but are still willing to pay extra for a superior in-flight experience. Despite the historical success, this strategy is facing significant headwinds with the latest consumer behavior shift toward economy class as rising global economic uncertainty constrains corporate travel, in addition to Chinese Airlines' aggressive push into international markets. DragonAir, a wholly owned subsidiary of Cathay Pacific, maintains a leadership position in the mainland budget airline market. However, we believe the rise of high-speed railway will permanently change the market dynamics of the regional flights segment: Regional flights of less than 800 kilometres, accounting for roughly 10% of DragonAir's short-haul routes, simply cannot compete against high-speed rail, given an inherently higher cost structure and significant risks associated with long delay times. With the total high-speed railway network length surpassing 19,000 kilometres in 2015 and the target of reducing travel time between major cities to less than two hours by 2020, we expect the overall size of the regional flight market to shrink permanently. This will lead to structural overcapacity, negative yield growth, and ultimately margin erosion for Cathay Pacific unless it significantly adjusts its current operational strategy. Cathay's low-margin cargo business has struggled since the start of the global financial crisis. The weakening global economic activity and introduction of dedicated Boeing converted freighters have magnified the structural imbalance in the cargo market. We are concerned that freight load factor, currently at an anaemic mid- to low 60%, will stay underutilised for the next five years. Its cargo joint venture with Air China, while reaching break-even levels in 2014, will take years before starting to make meaningful profit contribution.