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Asia's flag carriers have found different ways of coping with the threat from the growing fleet of low-cost rivals. Some, such as Japan Airlines and Singapore Airlines, have bought stakes in these upstarts or, in the case of Qantas, developed their own. Eva Air has decked out its planes in Hello Kitty livery. Cathay Pacific has chosen another path: focusing on premium business and tight cost control. Is that enough in an industry it admits is volatile and will always be highly susceptible to external factors beyond its control?
Those factors – oil prices and a weak global economy – knocked four-fifths off Cathay's full-year profits, leaving it with $916-million Hong Kong ($121-million) and a net margin of just 1 per cent. In Cathay's favour is the fact that industrywide problems like fuel costs cause broad suffering and are eventually passed on in fares.
The bigger issue is how well it manages its own cost base relative to its rivals. The answer is well, in general. It has the highest seating density and almost the lowest wage inflation among Asian carriers, according to HSBC. That has helped keep the rise in its unit costs, relative to available seat kilometres, to 64 per cent since 2004, versus 70 per cent for Qantas and 80 per cent for Singapore Airlines.
Since its shares bottomed nine months ago, Cathay has gained a sixth, roughly in line with the Hang Seng, but eight times better than Bloomberg's Asian airline index. The gain since June has left its price relative to its book value at 1 times, a little below its average of 1.2. The index, at 1.1, is about a third below its average, implying slightly better value elsewhere.
For investors prepared to brave the turbulence of such a cyclical industry, the thing to do is pick the best-prepared. Cathay's slip on Wednesday – 0.5 per cent, versus 1.5 per cent for the Hang Seng's drop – suggests they have faith the airline is such a stock.