Cathay Pacific Economic Turning Point

http://ca.finance.yahoo.com/q/ks?s=CPCAY.PK
http://www.cathaypacific.com/cpa/en_INTL/aboutus/pressroomdetails?refID=a4af1fe6e8b3a210VgnVCM1000000ad21c39____

Summary:

Cathay Pacific is a well known airliner in the industry. With the advertising campaign "It's the little things that move you", the brand name and popularity have gone up; however, good things come to the end when the financial crisis hit the world which impacted on Cathay Pacific’s sales. The net income was the fastest statistic to reflect the company’s situation immediately after the crisis. Turnover and demand had gone down sharply as the expenses were not cut immediately. With such a healthy company, Cathay had a large amount of cash on hand which allowed the company to pay off the debt while they were still having a net loss. Now the economy is slowly healing and so does Cathay Pacific. The interim financial results of 2010 clearly showed their ability to manage the company well through the crisis. With only HKD$812 million profit in 2009, Cathay managed to increase the profit by 724.4% in the first six months of 2010 which was HKD$6840 million. The company recovered fast from the economic downfall which could strengthen their popularity and possibly gain more customers in the later years. 

Analysis:

Airline companies tend to reserve more cash on hand and have less payment on account because usually airline tickets have the cash transaction; therefore, the company gets the money right away. Having a large amount of cash flow, it prevents the company from going bankruptcy during the economic crisis. Cathay Pacific Group is now back on the right track with cash flow USD$2.74 Billion and the profit margin ratio 13.85%. Although the company has a high net profit, the ratio is only 13.85% which is a low percentage in general industries at a glance. However, this is a high percentage in the airline industry. British Airway such a large competitor in Europe has -5.78% profit margin ratio meaning that the company is losing money currently. Air Canada, the Crown Corporation of Canada, has a negative profit margin ratio - 0.66% too. The reason why the ratio for such a profit-making company is really low is because the company has such a high sales revenue. However, the company’s operation expenses are relatively high; therefore, the net income is low with reference to the sales revenue. Running an airliner requires a lot of expense because the company has to ensure the safety of the passengers so that aircraft maintenance cannot be ignored. Airliner such as Cathay Pacific always aims at a high standard. To maintain their fleet in a high performance standard, the aircraft maintenance expenditure is essential to support.

Cathay Pacific has upgraded several aircrafts and invested in new cargo aircrafts which benefits the performance. With the upgrade, the company is able to charge a higher price for better service. Not only does the brand name go up, the profit also increases because of the extra charges. Cathay Cargo’s load factor increased 11.8% and hit a high record of 78% demand rate. With the additional route from Houston to Miami for the strong demand, Cathy Pacific will be able to increase a substantial profit. From this positive interim report shown, Cathay should have a strong and better financial result in the third quarter of 2010 if the trend continues. 

Reflections:

Cathay Pacific was found in 1946 and with long-timed experience, it proved her ability to run a business well. No matter how the world falls into crisis, the company still manages to survive from all of them. Even with the most recent financial tsunami, Cathay is still able to turn the table and make such a good profit in the most recent quarter. Since Cathy has already sustained very high performance in industry standard, her employees are able to steer the company back on the right track efficiently and effectively. As a customer, I would prefer to take the Cathay’s route because I would feel safe when I am on board, I would be treated with greatest respect and also the cabin provides a better comfort. All these factors not only attract me but also the common folks around the globe. Although the sales revenue is pretty good, aircraft maintenance expenses are very high; therefore, the profit margin looks not so good. It is true that the small margin does not necessarily mean the company not making money.

If the profit margin is surprisingly high in a company, it shows a symptom of probably some unexpected events to happen. For example, if the operational expenses for aircraft maintenances are not sufficient, this may lead to accidents. As the result, the company will pay for the penalties and investigation fees. Moreover, her brand name will be seriously affected. In order to keep the business running in a good shape, Cathay Pacific cannot ignore the huge operation expenses because “small money does not go out, big money does not come in”.

Canada's $9 Billion Fighter Jets

http://www.cbc.ca/canada/story/2010/07/16/canada-jets.html
http://www.cbc.ca/canada/story/2010/07/16/f-f35-faq.html
http://www.airforce.forces.gc.ca/v2/equip/f35II/index-eng.asp

Summary:

On July 16, 2010, the Government of Canada announced it is acquiring the fifth generation Joint Strike Fighter F-35 Lightning II aircraft for the replacement of the CF-18 Hornet aircraft fleet. It was the biggest military equipment purchase in the Canadian history. Department of National Defense need the new generation of aircraft to protect the safety and security of the Canadians. Each of the F-35 fighter jet cost $138.5 million dollars and it is around four times more expensive than the present CF- 18 fighter jets.

Countries such as the U.S., Britain, Canada, Italy, Netherlands, Turkey, Australia, Norway and Denmark made financial contribution to this program. Canada is one of the major partners out of nine in the Joint Strike Fighter program which have invested about $168 million on the program. The Canadian Air Force decide to get the first plane in service by 2016 and all 65 F-35 Lightning II will be in service before 2020. Lockheed Martin as the manufacture company of this JSF jet is expected to produce 3100 F-35 aircraft in the next 25 years. Canada is planning to spend $9 billion dollars on the replacement but this amount will be doubled when the maintenance contract is added. It is forecasted to spend at least $18 billion in this program.

The replacement program not only benefits the performance of the Canadian Air Force but also benefits the Canada aerospace industry because all the aircraft maintenances are done in Canada mainland which will generate a lot of job opportunities for Canadians.


Connection:

         The Department of National Defense approved to acquire 65 F-35 fighter jets to replace the aging CF-18 fleet. The Department will spend $9 billion dollars on the purchase and will possibly spend another $9 billion dollars on maintenance.

 They invest those funds to accomplish its goals. This purchase is considered as investing activities but in this case, the government is not looking for profit but instead their goal is to ensure safety and security of the Canadians. The fighter jets are invested as long term investments because each of the plane has its life expectancy which are usually long enough to survive another 25 years. The government will not replace the fleet again in the short term because each replacement program cost massively and the government cannot afford to replace regularly in a short period of time. All the plane that the air force are acquiring, is a type of equipment purchase which goes under the investing activities.

Usually a company gets their money by selling shares to shareholders. It lets the company to temporary use the money to invest on something so that the profit can cover the expense and also repay the shareholders. In this case, $9 Billion dollars are not a small number and the government cannot cover the cost by selling bonds to Canadians. The government has to take portion of the money from taxes that were collected in the past. Basically, the DND are approved to purchase fighter jets with the government funding. The funding is from government which eventually was the tax payers’ money. This is how most of the governmental departments get their fund from. A secondary funding would be from bonds which are similar to selling shares.

Reflection:

            Canada is known for a peacekeeping country which always supports her allies and the developing countries. However, the government decided to spend a large amount of money on fighter jet that cannot support the ground force during the peacekeeping mission. The Air Force always focuses on the response time during crisis but Canada would not response better to an unpredictable emergency such as 9-11 even Canada acquires a fleet of F-35. Since Canada is a peacekeeping country, the DND should consider purchasing heavy lifted helicopter, Large Transport Aircraft or some multi-role fighter jet instead of a heavy F-35 Lightning II that are not capable to fight other fighting jet. The purchase is totally unnecessary because Canada is in a position of peacekeeping and not in war state. With that much money, Canada can acquire more aircraft which can benefits the current Afghan mission.

            The aviation manufacture of F-35 Lockheed Martin awarded the contracts without any competitors which gives advantage for Lockheed Martin to bargain with Canada in future negotiation and maintenance costs. Instead of putting all the eggs in one basket, Canada can split the risk by buying aviation equipment from other manufacture company such as the Boeing or Eurofighter jet. However, the DND focuses on investing everything on single equipment.

            Nine billion dollars could possibly fund in other area such as education, health care or support the low income population. It is correct to spend money in military equipment so that the homeland security is well protected but the military expenses and the other basic welfare expense should be balance. The government spent so much money on something that is not necessary which made this as issues. Parties in the house of common suggested spending money on military but the DND should spend on the right equipment. Or else the investment may be useless.