Cathay Pacific Earnings: Strong Passenger Load Factor and Yield Amid Capacity Shortfalls

As expected, Cathay Pacific 00293 turned profitable in the first half thanks to improving passenger traffic. Seat capacity reached 51% of 2019 level in June, but management kept 70% guidance by December 2023. As such, we reduce our seat capacity forecast to 53% of 2019 level for 2023 and 90% for 2024, down from 60% and 92%. But this is more than offset by our higher load factor and passenger yield assumptions. As a result, we increase our earnings estimates to HKD 7.5 billion in 2023 and HKD 6.3 billion in 2024 from HKD 6.7 billion and HKD 3.3 billion, respectively. We raise our fair value estimate to HKD 9.70 from HKD 8.90. The shares currently trade 9% below our fair value estimate, but we would prefer a higher margin of safety. We also change our Morningstar Uncertainty Rating to Medium from High to reflect lower uncertainty as the COVID-19 pandemic subsides.

Cathay’s passenger load factor rose to 87.2% in the first half, the highest in a decade, due to surging pent-up demand and slow rebound in seat capacity. We think the load factor will remain elevated before seat capacity fully recovers to prepandemic levels. As such, we raise our load factor forecast to 86.5% in 2023 and 85% in 2024 from 82% and 81%, respectively. The passenger yield declined 32% year on year and 14% sequentially, but was still 41% higher than that in the first half of 2019. Likewise, we expect passenger yield to slowly normalize as seat capacity returns. Hence, we raise our passenger yield forecast by 13% and 7% and project it to decline by 22% in 2023 and further by 21% in 2024.

The cargo market, however, softened from the exceptional 2021 and 2022 levels. Cargo load factor declined by 12 percentage points and yield fell by 52% year on year. As the cargo yield was still much higher than 2019 levels, we expect it to continue declining as belly-held capacity returns. Cargo contributed more than half of revenue over the last three years, but we only project 27% revenue contribution in 2023.