Fall in yuan will create turbulence for Cathay Pacific Airways

For a decade, Cathay Pacific Airways Ltd has benefited from China's economic boom. But now the yuan currency depreciation and slowing growth are presenting a number of new challenges.

First, the economy posted its slowest growth in more than 20 years. Then about $3 trillion was wiped off the mainland's stock market after weeks of turmoil in July. Last week, the yuan fell by nearly 3 percent.

With 60 percent of Cathay's passengers starting their journeys from mainland airports, any negative impact in the world's second-biggest economy is an issue for Asia's largest international carrier.

"From the devaluation of the yuan, to more offerings from local Chinese carriers, earnings at Cathay will definitely erode," Shukor Yusof, an independent aviation analyst in Malaysia, said. "Also, with passengers having more options these days with stopovers, Cathay will have to relook at its business strategy."

Currency, economy and stock markets are the latest issues for an airline that has faced challenges such as the SARS outbreak, the Asian financial crisis and the global economic recession in the past two decades. Yet the airline has posted only two annual losses in the past 25 years.

Cathay's grip on Hong Kong, a popular international gateway to the Chinese mainland, and its ability to connect Asia to the North American market, give it some advantages no currency or economy can shake easily.

Passenger numbers grew 8.8 percent to 16.8 million in the first half of the year and occupancy increased to 85.9 percent, according to data Cathay has already released.

The plunge in the price of fuel - the carrier's biggest expense - has helped.

Profit also jumped to HK$1.97 billion ($254 million) in the six months that ended in June, which was good news for Cathay CEO Ivan Chu.

But headwinds exist. Almost half of Cathay's revenue last year came from Hong Kong and the Chinese mainland, it said in its annual report. That makes Cathay especially vulnerable if the Aug 11 devaluation undermines Chinese consumer confidence, according to Timothy Ross, a Singapore-based analyst at Credit Suisse Group AG.

A 1 percent drop in air-travel growth in China - poised to become the world's biggest market in two decades - could slash $5.6 million from Cathay's annual profit, Credit Suisse estimated. That would be the biggest hit for any Asian carrier other than Singapore Airlines Ltd.

"(The devaluation) might percolate into travel decisions made two, three quarters out," Ross said. "The earliest you can see any change in travel patterns is in October (or) November."

Eventually, a weaker yuan should boost exports and lift China's sagging economy. In the short term, it will make ticket prices more expensive for Chinese traveling through Hong Kong, which could put pressure on Cathay to cut fares, said Geoffrey Cheng, BOCOM International's head of transportation and industrial research. Since the devaluation, shares of Air China Ltd, China Southern Airlines Co and China Eastern Airlines Corp - the country's three biggest carriers - have all retreated in Hong Kong.

The yuan devaluation will have a negative impact on passenger yields, a measure of ticket prices, according to K Ajith, a Singapore-based analyst at UOB Kay Hian Pte.

Yet not everyone is pessimistic. Mohshin Aziz of Malayan Banking Bhd said Cathay is protected by the number of markets it serves. "Cathay has an advantage whereby their geographical diversification is quite high," Mohshin said. "In terms of their currency basket, they're very well diversified."