The gross profit margin of this airline is higher than that of Maotai？

Text | BT Financial Data Pass, Author | Three Crazy

Cathay Pacific has been controversial because of its attitude towards non-English-speaking passengers, but this does not affect its ultra-high profit margin.

In May 2023, Cathay Pacific was pushed to the forefront because of the blanket incident. Some passengers accused the flight attendants of showing obvious discrimination when providing blankets to non-English passengers. This incident quickly sparked heated discussion on social media.

In fact, this is not the first time that Cathay Pacific has attracted public attention because of discrimination. In the past few years, similar incidents have been common, and every time they have caused widespread discussion and criticism in society. However, Cathay Pacific does not seem to have learned from these incidents, and its service attitude has not been fundamentally solved.

Looking back at the long river of history, the development history of Cathay Pacific is accompanied by glory and shadow.

Since its birth in 1946, Cathay Pacific has carried the dream of Hong Kong’s take-off. At that time, Hong Kong was in the midst of a booming economy, and the founders of Cathay Pacific, Dragonair and Singapore Airlines were ambitious and determined to write their own legends in this hot land. They bravely embarked on the journey with a small plane and several short-haul routes.

However, the road to entrepreneurship is not smooth sailing. Cathay Pacific opened international routes and bought new aircraft during the expansion period, but its management means and technical level are still immature. Facing the competition of international aviation giants, Cathay Pacific strives for a breakthrough, but it also has to face various internal contradictions and challenges.

Entering the period of internationalization, Cathay Pacific ushered in a golden period of development. The opening of international routes such as new york, London and Sydney, as well as the cooperation with many international airlines, have made Cathay Pacific gradually emerge. However, just when Cathay Pacific seemed to have unlimited scenery, the shadow came quietly. The decline in service quality and frequent management loopholes have dealt an unprecedented blow to Cathay Pacific’s reputation.

During the merger period, Cathay Pacific tried to make up for its own shortcomings through acquisition and cooperation. The acquisition of Dragonair has undoubtedly injected new vitality into Cathay Pacific, but it has also brought many integration problems. At the same time, the cooperation and alliance with other airlines are not smooth sailing, and problems such as interest disputes and cultural differences have put Cathay Pacific into a situation of internal and external troubles.

In the period of modernization and transformation, Cathay Pacific tried to revive itself through digital transformation and the introduction of new aircraft models and technical means. However, in the face of intensified market competition and changes in customer demand, Cathay Pacific’s road to transformation seems to be difficult. Although innovative measures such as SkyTeam membership plan have been launched, it still needs to be improved in terms of service quality and operational efficiency.

In addition to service disputes, Cathay Pacific’s financial situation is also worrying. The performance of losing money for three consecutive years makes investors feel pessimistic about the company’s prospects. The latest financial report shows that despite the company’s efforts in some aspects, revenue and net profit have been greatly improved, but the overall financial situation has not improved significantly.

After the recent relatively bright financial report was released, Cathay Pacific’s share price fell instead of rising. According to statistics, the stock price fell by 3.27% in the trading day after the financial report was released, which reflected the market’s concern about the company’s future performance. As of the close of March 14th, Cathay Pacific’s share price was HK$ 8.870 per share, which was 40% lower than the high of HK$ 14.672.

Cathay Pacific released its financial report for 2023 on March 13th, and its performance showed a positive trend of turning losses into profits. On the whole, after experiencing the losses in 2022, the company achieved a significant recovery in performance through efforts.

From the overall performance overview, in 2023, Cathay Pacific’s performance income reached 94.485 billion Hong Kong dollars, compared with the loss of 6.623 billion Hong Kong dollars in the same period in 2022, achieving a significant increase in net profit of 9.789 billion Hong Kong dollars. This achievement is mainly due to the strong recovery of passenger transport business.

What is optimistic is that Cathay Pacific’s passenger transport business has grown substantially. In terms of passenger transport, Cathay Pacific’s passenger transport revenue is HK$ 55.951 billion, an astonishing increase of 308.8% compared with 2022. In 2023, the company transported 18 million passengers, with an average daily passenger capacity of 49,300 passengers, an increase of 541.4% compared with 2022. This growth reflects the strong recovery of the aviation market and Cathay Pacific’s efforts in passenger service.

The recovery in North Asia has been remarkable. From the perspective of Cathay Pacific’s global passenger transport business, the data of all regions have shown an increasing trend. It is particularly noteworthy that the recovery of North Asia, which is dominated by the mainland of China, is more remarkable. The financial report shows that in North Asia, the company’s carrying capacity increased by 534.7% year-on-year, and the passenger carrying rate also increased by 23.6 percentage points, reaching 78.4%. This growth rate ranks first in all regions, showing the importance of the North Asian market to Cathay Pacific and the company’s strong competitiveness in the region.

In addition to North Asia, Cathay Pacific’s performance in other regions can not be ignored. In South Asia, Middle East and Africa, the company’s carrying capacity increased by 467.7% year-on-year, and the passenger carrying rate also increased by 15.9 percentage points. In Southeast Asia, the carrying capacity increased by 456.6% year-on-year, and the passenger carrying rate increased by 17.7 percentage points. These data show the company’s business recovery and growth momentum on a global scale.

As we all know, the gross profit margin of Maotai is the ceiling of many industries.The gross profit margin can be higher than that of Maotai, and Cathay Pacific is one of the few.

Cathay Pacific’s gross profit margin in 2023 was as high as 91.85%, which even exceeded the gross profit margin of 91.71% of Kweichow Moutai in the same period. In general, gross profit margin is regarded as an important indicator of enterprise profitability and operating efficiency. Cathay Pacific’s gross profit margin is higher than Maotai’s, which explains its high profit margin in aviation business to some extent.

However, when we further observe Cathay Pacific’s net interest rate, we find that its net interest rate is only 10.36%, far lower than that of Kweichow Moutai’s 53.09%. This phenomenon of high gross profit margin and low net interest rate actually reveals a series of challenges Cathay Pacific faces in its operation.

First of all, labor cost is one of the important expenses in airline operation.With the recovery of global economy and the recovery of aviation market, in order to attract and retain talents, airlines often need to improve the salary and welfare level of employees. This has increased the labor cost of Cathay Pacific to a certain extent, thus compressing its net interest rate space.

Secondly, in addition to labor costs, airlines also need to face various cost pressures such as fuel price fluctuations, aircraft maintenance costs, and route operating costs.The changes of these cost factors will directly affect the profitability of airlines. For example, the increase in fuel prices will increase the operating costs of airlines, thus reducing their net interest rates.

In addition, market competition is also one of the important factors that affect the net interest rate of airlines.In the highly competitive aviation market, airlines often need to adopt price competition strategy in order to compete for market share and customer resources. Although this strategy can increase sales and market share, it will also reduce the profit rate of airlines to some extent.

Although Cathay Pacific has a high gross profit margin, its net interest rate performance is not ideal due to the increase of labor costs and market competition. In order to improve profitability, Cathay Pacific needs to make more efforts in cost control, market expansion and service quality improvement. Because Cathay Pacific’s high gross profit margin did not bring high net interest rate.

In the aviation industry, the performance of companies is often affected by multiple factors such as macroeconomics, fuel price, market competition and service quality. Cathay Pacific, as one of them, does not have obvious advantages over the same industry in some aspects.

First look at the revenue data. Although the revenue disclosed by Cathay Pacific in the latest financial report is still huge, compared with the industry leaders, its growth rate is somewhat weak. Take Singapore Airlines and Emirates as examples. Both airlines have achieved steady revenue growth in the past few years, while Cathay Pacific’s revenue growth is relatively slow.

There are many reasons for this situation. On the one hand, the market competition is becoming increasingly fierce, especially in Asia, where emerging airlines are constantly emerging, posing a severe challenge to traditional airlines. On the other hand, Cathay Pacific may be too conservative in route layout and market expansion, failing to fully grasp the growth opportunities of emerging markets.

Let’s look at the net profit data. Cathay Pacific’s net profit performance is also not optimistic. Compared with its counterparts such as Singapore Airlines and Emirates Airlines, Cathay Pacific’s net profit level is low and fluctuates greatly. This instability not only affects the profitability of the company, but also increases the risk of investors.

The reasons of net profit fluctuation mainly include fuel price fluctuation, exchange rate change, market demand change and other factors. However, Cathay Pacific seems to be unable to cope with these risks. Especially in terms of fuel prices, Cathay Pacific failed to effectively hedge the pressure brought by rising fuel costs, resulting in a greater impact on net profit.

In terms of gross profit margin and net interest rate, Cathay Pacific’s performance is also unsatisfactory. Although its gross profit rate is relatively high, its net profit rate is far below the average level of the same industry. This means that the company is facing great cost pressure in the operation process, and the profit space is severely squeezed. This is mainly due to the pressure of labor cost, fuel cost and market competition faced by the company in the operation process, which leads to the compression of profit space.

Because Cathay Pacific has been criticized for its service quality, there are as many as 721 complaints about Cathay Pacific on the complaint platform Black Cat. In order to improve the service level, the company has increased its investment in employee training, which has increased its labor cost to some extent. It is reported that the labor cost of Cathay Pacific in 2023 increased by 3 billion yuan compared with previous years.

Although Cathay Pacific has made efforts in service training, its service problems are still frequent, which may be related to the company’s management system, staff quality and corporate culture. In contrast, Singapore Airlines and Emirates Airlines have shown good stability in terms of gross profit margin and net interest rate.

There are two main reasons for this situation. First of all, fixed expenses such as labor costs account for a relatively high proportion, which makes it difficult for Cathay Pacific to reduce costs during its operation. Especially in terms of employee compensation and welfare, Cathay Pacific needs to invest a lot of money to maintain the stability of the workforce and the quality of service. Secondly, the fierce market competition makes airlines have to adopt price competition strategy to attract customers, which further reduces Cathay Pacific’s profit margin.

In fact, how to find a balance between improving service quality and controlling costs is a big problem for Cathay Pacific. On the one hand, improving service quality can improve customer satisfaction and loyalty, thus bringing more market share and benefits to the company. On the other hand, excessive investment may lead to rising costs, declining profit margins and even losses. Therefore, Cathay Pacific needs to pay more attention to cost control and operational efficiency improvement on the premise of ensuring service quality.

The change in the rating of Cathay Pacific also reflects its performance to some extent. In recent years, due to the problems in service quality, cost control and market competition, some institutions have downgraded Cathay Pacific. These rating changes not only affected the company’s share price performance, but also dealt a blow to its market reputation and investor confidence.

In the latest trading day, Cathay Pacific’s share price fell by more than 4%, and CLSA downgraded its rating and earnings forecast. In the research report released by CITIC Lyon, Cathay Pacific’s investment rating was adjusted from "buy" to "outperform the market" and the target price was kept at HK$ 10.6.

The report predicts that the profit attributable to ordinary shareholders of the company will increase by 29% to HK$ 5.1 billion in the second half of 2023, which is 22% higher than previously expected. At the same time, it is expected that the company will resume paying ordinary dividends in advance.

However, CLSA believes that the risk return of the current share price is not attractive in view of the changes in air ticket prices and rising staff costs. Therefore, the agency lowered its profit forecast for 2024-25 by 4-5%, mainly because it has not seen obvious signs of improvement in freight business.

ICBC International, the investment banking department of the largest bank in the Mainland, downgraded Cathay Pacific to "strong sell" and adjusted its target price to HK$ 6. This shows that ICBC International is pessimistic about Cathay Pacific’s future development prospects.

To sum up, Cathay Pacific’s performance in 2023 does not have obvious advantages in the aviation industry. In order to enhance its competitiveness, Cathay Pacific needs to make more efforts in service quality, cost control, operational efficiency and market risk management.