Cathay Pacific shares drop after profit warning

Shares in Hong Kong carrier, Cathay Pacific dropped as much as 7.8 percent, falling to a two-year low, after the airline warned of reduced first-half earnings, attributed to the high price of fuel. The announcement triggered a round of selling of aviation shares in China and Singapore.

By market capitalisation, Cathay Pacific is the third-most valuable airline in Asia. It reported this past week that its fuel costs had risen by 60 percent in the first six months of this year.

The prices the airline is paying for jet fuel today are double the costs in 2007, and continue to rise. Fuel costs account for a large percentage of an airline’s operating costs.

“Fuel costs are still rising, while the deteriorating economic backdrop means we think the second half could be even worse,” Merrill Lynch reported in a research note issued this week.

“There was active selling in Cathay after the stock fell below its year low on the profit warning,” commented the chief dealer at Cheer Pearl Investment, Alfred Chan.

“High oil prices, which have been stubbornly staying at record levels, are very negative to the aviation sector,” he said.

“After the profit warning from Cathay Pacific, investors are worried there will be more to come, especially from the locally-listed Chinese firms,” noted the research director for Core-Pacific Yamaichi International, Alex Tang.

Shares in Singapore Airlines, rated as the most valuable airline in the world, dropped by up to 2.7 percent, hitting a 15-week low of S$14.20.

“The market took the news quite seriously and badly because Cathay Pacific is efficiently-run, and it tells you that SIA might face the same problem because of oil prices,” noted a Singapore dealer.

www.cathaypacific.com