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”.