clansey1973

I fully appreciate that this forum is FFP related, so I apologise in advance for the off-topic nature of this post!

At HKD10.40 per share I'm starting to feel CX is a deeply undervalued share. I appreciate competition may be hotting-up and that they have made a real mess of their fuel-hedging of late.

Optimistically: -
- The dividend has been maintained.
- The route network has been maintained, no services cancelled.
- Swire 45% and Air China 29.99% financially strong shareholders.
- A350 launch an opportunity to further lower cost base on marginal routes.
- Cathay Dragon another opportunity to further lower costs.
- Cathay Pacific owns 20% of Air China.

Pessimistically: -
- This may be a Huge Sign of a financial crisis in China.
- PRC competition may be prepared to lose money in order to gain market share and drive footfall through their hubs.
- Airlines are Never a good long term investment for small investors.

When Air China was making it's investment in CX in 2009 CA paid HKD12.88 per share Then!!.

Opinions gratefully sought from the Flyertalk CX Community!

Marco Polo

http://asia.nikkei.com/Business/Comp...the-air?page=1

garykung

When CX has a history of hedging oil mishaps, nothing will prevent CX from posting a loss.

Conclusion - unless CX overhauls how the airline hedges oil, not worth the risk.

1010101

Competition is only going to increase and the current management team haven't shown anything other than incompetence so far. The only real bright spot, a new and efficient fleet, is down to previous regimes. I agree they may be undervalued long term but i wouldn't buy in until a new management group comes in and shows they have a plan to turn things around.

triplefives

I too have considered the possibility of making an investment in CX stock, but wouldn't buy until I see a plan to address the local market. CX probably made a ton from all the easy money flowing from China but blew it all on their fuel hedging strategy (most airlines don't bother to hedge anymore because of the imputed premiums on contracts).

Now times are changing - China's economic footing is a bit more unstable and the Chinese themselves are pushing more point to point flights to/from these second-tier cities which are questionably profitable. Ultimately, there are only three things an airline can compete on: service, schedule (timing of flights and direct vs non-direct), and price.

I'm also hearing a lot of BS putting the blame on cost for their poor performance. The reason why I say it's BS is because the variable costs (labor on flights, fuel, etc) are also things that other airlines compete on. If fixed costs are indeed high, they're probably coming from either one of two sources - aircraft and back-office/infrastructure work (some would actually call this a variable cost because you can ax people).

If I had to sum up the problem with CX, it would come down to this: CX wants to premium airline that charges premium airfare without wanting to spend a premium on their customers.


You can't have it both ways in this world.

asv2

The price might be deeply discounted at present, but this is probably due to
(i) the expected loss on the fuel hedge in the coming years,
and (ii) more importantly a discount to the current management team on the terrible deals on fuel hedge and
how they react to make up with the loss by cutting costs and corners which impairing the precious brand image in the long run.

fakecd

i work in finance and dont like giving investment ideas. last time i invested in CX stock a mth later 911 happened and i got cleaned up. next time i though same about JAL and i got wiped out, literally. anyways on a serious note do you really want to invest in an airline where all the consumer here have voted against? share price reflects future and this effectively means something is fundamentally wrong

1010101

I have a feeling I know why you got wiped out on those investments

CX is cheap because of a lack of confidence in the current business being able to compete in the market, a large part of which is down to the high profile screw up in fuel hedging. It wouldn't take much to swing that opinion.

hkskyline

Are there any airlines in the region that have performed well? I wouldn't want to invest in the mainland carriers dumping capacity even if they don't have hedging losses, and the traditional ones are being brought down by falling yields as well.

Marco Polo

http://www.ejinsight.com/20170123-ca...ter-structure/

woresu

If you forget the hedge lost and look at operating profit, which slumped 70% sth in the first half. That's obviously not a good sign, indicating there's something wrong within CX's core aviation business.

TProphet

I have never lost more money than I have investing in airlines except for the money I have lost on my own business. There are a lot of existential risks to Cathay Pacific that would make me extremely hesitant. Keep in mind that there are entire countries much larger than Hong Kong that can't even keep one carrier in business. Hong Kong has two (three if you count Cathay Dragon) and is pretty much a free port for competition from essentially every other airline in Asia, including low cost carriers. This means there is plenty of competition on just about every route that Cathay Pacific flies to and from Hong Kong.

They used to have an advantage in access to mainland China, since there were limited flights, but this is no longer the case. Chinese airlines have grown up, expanded their fleets, and they're flying direct on routes that Cathay Pacific used to reach with a connection. The service isn't as good but I'll take a nonstop to Beijing from Seattle any day on Hainan versus connecting through both San Francisco and Hong Kong. For 1/2 the price, no less. Plus, Hainan is legitimately a Skytrax 5 star airline.

Hong Kong is also a less attractive business destination, and this poses an existential risk to the city, not just Cathay Pacific. While Hong Kong is still a major world financial center, it's being openly ground underneath Beijing's boot heel, and this makes the global business community nervous. The China-focused financial industry is moving to Shanghai, because that's where the Chinese government wants it. And the Asia-focused financial industry is growing in Singapore. Hong Kong isn't growing anymore, the opposite actually, and it'll slowly shrink into oblivion as the city becomes just another Chinese city (but a much more expensive one). This means there is likely to be a long term down trend in business demand, Cathay's bread and butter.

There is room in the market for Cathay Pacific to operate only long haul premium routes with a focus on premium service. E.g. compete upmarket. However, management seems to be doing the exact opposite - they're trying to operate an airline that is completely organized for being a premium airline as a budget carrier. No way they'll ever do this effectively given their lack of experience and high labor cost base. And while there is room now, there may not be for a long time into the future. Cathay needs to prepare for the dark and unpleasant future of being based in a Chinese city that has a bad relationship with Beijing, and wherein Beijing is most interested in exacting obedience and subservience. It's not a great future in which to be running a business.

I'm just not seeing this as an airline that is even likely to survive, let alone thrive. Major changes are needed. Trimming away around the edges of business class catering won't fix this. Transferring regional flights to a lower cost subsidiary isn't going to fix it either. Cathay Dragon has lower costs than Cathay Pacific, but still much higher costs than its regional competition.

What might Cathay be able to do? That's really going to be up to Beijing, and it's going to be in whatever segment China Southern, Air China and mainland-owned Hong Kong Airlines doesn't want to compete in--and in the segments Air China will fight for them to be allowed to compete (given their substantial ownership interest). It's very difficult for Cathay to reduce their reliance on mainland China for business, and Beijing calls all the shots when it comes to landing slots, taxation, and a whole host of other issues. Plus, the Chinese army can pretty much do whatever it wants around managing Hong Kong airspace, which looks like it's in big trouble. Hong Kong and Macao were forced into the "Tripartite Working Group of the Mainland, Hong Kong and Macao" wherein the PLA is effectively managing regional air traffic, so you can probably guess where the most advantageous slots will land in future. In particular, if Beijing wants to make a political point. Did you notice all the new international service direct to Shenzhen recently?

Betting on airlines is risky. Betting on an airline that relies on a thriving Hong Kong is even more risky, given that Beijing clearly wants the opposite of that and is actively working to bleed off talent and business to Shanghai and Guangdong. If I had any assets at all in Hong Kong I'd be looking to sell right now. And if I were the Swire Group, while I would have no joy in doing this, I'd be looking to sell Cathay to Air China. It's the only good option financially. Granted, they will probably just sunset the brand, manage the whole thing from Beijing, and roll up its Hong Kong operation as a hub. Air China has the political clout in Beijing to set up a scenario where domestic flights within China could connect at a sterile terminal in Hong Kong and be considered local traffic, giving them a base to compete with China Southern. The network makes sense as part of Air China's larger operation, but not really as a standalone one. And for its part, Beijing would be delighted to see this happen. Air China is, after all, based in Beijing and the Chinese flag carrier over the skies of Hong Kong will assert mainland dominance in a way that will bring joy to the hearts of Zhongnanhai.

Aus106080

I have another view on HK future.
Chinese financial institutions grow dramatically in Hong Kong these years and it causes serious supply shortage of office. More and more financial institutions (mainly from China but also, have non-chinese organizations like citi bank, AXA, etc.) buy office in HK. It shows long term commitment and positive prospective for the Hong Kong markets as they have invested a lot.

woresu

OT, then Swire Properties, the sister company of CX, would be a better buy

kaka

A small data point, my gf's company buys thr cheapest ticket for work trips. They keep getting SNO class on cx to us within a month of departure.
The annoying part of that is tho she is ows, asr is often closed.
Anyways, would this be how you want your CX to run?