Can Cathay Pacific fly its way out of a stock slump?
Fortunes of Hong Kong flag carrier are looking bleak and stormy, while its plans to narrow seats in economy class may be costly for both passengers and its stock price
Most of the time making a gain from stock markets is always more difficult than profiting from either fixed-income deposits or property markets as company fortunes change so fast.
But I say, one should try this: count the number of customers versus the negative press reports on a company to get a fairly good idea about where a stock is heading.
A perfect example is the plight of Hong Kong flagship carrier, Cathay Pacific. Negative press reports have splattered mud all over the once beloved airline, which now is more like an underdog. Last year it reported a loss of HK$575 million and has been battered by increasing competition.
Although Cathay has seldom oversold its seats and never forcibly removed a customer like United Airlines did on April 9, it has had a case almost every month of a disgruntled passenger.
Everyone has had a flight that they would rather forget and in some cases the experience may have been so bad that they are scarred for life.
This may explain why frequent travelers last October gave their thumbs down to Cathay after learning about the carrier’s plans to expand the number of economy seats in a row from nine to 10 in 2018. This means every seat, which is now 18.5 feet wide will be trimmed to 17 feet.
The change will enable Cathay to sell 1.1 million tickets per year, or a roughly 4% increase, at the expense of the comfort of economy class passengers. A group to whom Cathay are increasingly paying less attention.
Then there are the many disgruntled customers. For example, the carrier promised the nurse, surnamed Chung, an upgrade after he saved a dying customer on a Cathay flight 20 years ago, Oriental Daily reported on April 5.
Chung received a letter of appreciation that promised his whole family an upgrade at anytime, only to find that it was not redeemable after such a long time.
After several rounds of negotiations, Chung’s wife managed to get an upgrade to premium economy class for her trip to the United Kingdom, but not her 12-year-old daughter and her husband was not joining them. She said she would never take Cathay again.
A Cathay spokesperson said in the report that the airline may compensate Mrs Chung with Asia Miles points.
Her case, unfortunately, was not the only one about disgruntled customers splashed in local papers. By now, Cathay should be used to upset and furious customers who cannot be placated, and more importantly, unhappy investors.
Shares of Cathay Pacific were up nearly 9% year-to-date to around HK$11 (US$1.41), which around half of the stock’s value compared with its price on May 22, 2015, when it was HK$20.35.
The stock had witnessed an average annual decline of around 20% in the past two to three years, thanks to the wrong oil hedge that saw the company agree to pay US$90 per barrel from 2015.
In the second half of last year, Brent oil was about US$47.9 per barrel on average, which means Cathey is paying a hefty price.
And executive shuffles sometimes don’t help. On April 12, the company announced that its chief executive Ivan Chu will head back to the parent group from May 1 and be replaced by chief operating officer Rupert Hogg. Time will tell whether this change will affect the share price.
Although Cathay Pacific was perceived as a dead stock by institutional investors because it seemed to lose the pricing power from the customers who always demand more, it attracted a stock-savvy listed company for bottom fishing.
Kingboard Chemical Holdings, a Hong Kong-listed industrial company, disclosed in December that it owned 5% of Cathay and raised its stake to 6.11% last month. The print board circuit manufacturer said it was comfortable sitting in this position because it believed the airline’s price would take off.
Kingboard Chairman Cheung Kwok-wing, known as a shrewd investor with a track record in small stock investments, said the counter was a valuable franchise and compared well against the three major mainland airlines. He expects things will look bright again for Cathay after the oil hedging contracts expire in 2019.
The HK$10 stock price level is a bargain, he added, although HK$20 may look a bit expensive.
Does this mean good luck may yet fly Cathay Pacific’s way? We’ll have to wait and see. But for now, Cathay may lose his blue-chip status if its fortunes don’t change soon.
With HK$43 billion in market capitalization, it is languishing at a ranking of 108 on the Hong Kong stock exchange, which is a long-haul flight to reach the top 50.