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Cathay Pacific: Cheap Travel is Over, Now What?

The global travel industry is one of the most affected industries due to the ongoing coronavirus epidemic. With borders closed and people hesitant to travel, occupancy rates at hotels are touching new lows.

Airbnb, the world leader in holiday rentals, is even diversifying into online experiences and quarantine housing.

Airlines are at the mercy of government bailouts as over half of the world’s airline capacity remains grounded amid the great lockdown.

Online travel agencies like Trip.com Group Ltd (NASDAQ: TCOM) are struggling to process cancellations and refunds. Meanwhile, manufacturers Boeing and Airbus are facing cancellations as carriers are unsure about the future.

Keep a safe distance! 

Last week, Alexandre De Juniac, the CEO of the International Air Travel Association (IATA) declared that “cheap travel is over”.

Regulators are drafting guidelines related to physical distancing on planes. As airlines will have to fly planes with lower occupancy to comply with the norms, the cost of flying is bound to increase.

Certain Hong Kong stocks and ADRs of Chinese travel companies are deep in the red as the epidemic may change the way people travel, at least in the short to medium term.

For example, Cathay Pacific Airways Ltd (SEHK: 293) has lost 22.7% so far in 2020. So, what does the future hold for the company?

This year looks worse than 2019

The second half of 2019 was tough for Cathay Pacific. The US-China trade war and Hong Kong political unrest hampered the group’s passenger as well as cargo operations. However, 2020 looks like it will be even worse.

First, even as life in China slowly comes back to normalcy, travel demand from the mainland is expected to be weak. The International Monetary Fund (IMF) is expecting China’s economic growth to slow to a dismal 1.2% this year. This will certainly impact leisure travel.

Internationally, things look gloomier. Cathay Pacific added capacity on American and European routes in 2019. Available Seat Kilometres (ASK), a metric to gauge airline capacity, was up by 8.1% on both the routes.

Both these regions are expected to be the worst-hit, economically. The IMF expects the US economy to shrink by 5.9% in 2020 while the economy of the eurozone is expected to contract by 7.5%.

The load factor, a measure for the airline’s capacity utilisation, is expected to fall for both regions. The social distancing measures will have an added effect. Even if things get back to normal quicker than expected, passengers may opt to travel less, hampering airline revenues.

How about costs?

Fuel is the single biggest cost for airlines along with staff costs. In 2019, fuel accounted for 28% of Cathay Pacific’s operating costs.

In its 2019 annual report, the airline mentioned that it had hedged 40% of its fuel requirements through the first three quarters of 2020 at an average strike price of ~US$63 a barrel.

Brent crude closed at below $20 a barrel yesterday. The group’s overall fuel costs will drop, benefitted by the unhedged portion.

However, flight cancellations will reduce the benefit as the group will need less jet fuel than earlier forecasted.

Summing up

The picture doesn’t look great for airlines including Cathay Pacific. Uncertainty related to border openings, social distancing measures, and changing travel preferences will affect the industry severely in 2020 and beyond.

Cathay Pacific’s finances also are not in great shape. The Hong Kong government has announced a bailout package for the airline but it’s not enough to get the airline out of trouble.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Mayur Sontakke doesn't own shares of any of the companies mentioned.