Cathay Pacific 2010 Annual Report Download - page 6

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Cathay Pacific launched services to two new destinations
in 2010, Milan and Moscow, added services to Haneda
and has announced the commencement of passenger
services to Abu Dhabi commencing in June 2011 and to
Chicago commencing in September 2011. It also added
22 destinations to its network through codeshare
arrangements with airlines in Central and Latin America,
the United States, Canada and Japan. Dragonair added a
new service to Hongqiao in Shanghai, restored services
to Fukuoka and Sendai in Japan and added Okinawa to its
network. In December 2010 Cathay Pacific announced
the introduction of a new long-haul flat-bed business class
seat. During the year we opened a new first and business
class lounge in London and a fourth first and business
class lounge in Hong Kong, called The Cabin. We also
began to renovate our signature lounge in Hong Kong,
The Wing.
In November 2010, the European Commission imposed a
fine equivalent to HK$618 million on Cathay Pacific. The
Commission issued a decision finding that Cathay Pacific
and a number of other international air cargo carriers
agreed on cargo surcharge levels and that such
agreements infringed European competition law. We are
appealing this decision but, consistent with accounting
standards, have made full provision for the fine in our
accounts for 2010. Cathay Pacific remains the subject of
antitrust investigations and proceedings in various
jurisdictions and will continue to cooperate with the
relevant authorities and, where applicable, defend itself
vigorously. We remain committed to our longstanding
policy of full compliance with the law and reaffirms our
support for full and fair competition among air carriers.
The authorities in Mainland China have given formal
approval for our cargo joint venture with Air China, and
the two airlines are now in the process of completing the
necessary paperwork to enable operations to commence.
An existing Air China subsidiary, Air China Cargo, will be
used as the platform for the joint venture. Air China Cargo
is based in Shanghai and is in a good position to exploit
the attractive air cargo opportunities in the Yangtze River
Delta region. The Group is selling four Boeing 747-
400BCF freighters and two spare engines to the joint
venture. One of these aircraft has already been sold to Air
China Cargo. The other three are expected to be sold in
2011 and 2012. Our commitment to Hong Kong as an
international air cargo hub remains unwavering. The
construction of our own cargo terminal at Hong Kong
International Airport is progressing on schedule. When
the facility opens in early 2013 it will be one of the
biggest and most advanced of its kind in the world.
The rapid turnround in our business from the lows of
2008 and much of 2009 to the record highs of 2010 is
very welcome. It is also indicative of the volatile nature of
our business. We cannot afford to be complacent. Our
results would be adversely affected, and very quickly so,
by a return to recessionary economic conditions. Demand
is at present expected to remain strong in 2011, but this
expectation could be undermined if the current (or any
higher) level of oil prices were to reduce global economic
activity. Capacity will increase with the introduction of
new destinations and increased frequencies. If our
expectation as to demand is met, revenues will increase
in line with capacity. Fuel costs are now higher than was
expected at the beginning of 2011. Other operating costs
are expected to increase, some at a faster rate than
revenue. With regard specifically to fuel, increased oil
prices can be expected to have a significant adverse
effect on profitability if they are not recovered through
higher tariffs or fuel surcharges or if the effect of their
being so recovered is to reduce demand significantly.
2011 will see significant expenditure on aircraft interiors
and airport lounges (undertaken with a view to enhancing
the quality of service) and on information technology. The
airline industry is challenging and unpredictable. We will
continue to manage our finances prudently and will strive
to keep costs firmly under control. Many good things
happened in 2010. I am confident that these, together
with our core strengths of a capable and committed team,
a superb international network, the quality of our product
and services, our strong relationship with Air China and
our position in Hong Kong, one of the world’s great
international aviation hubs and a key gateway to
Mainland China, will help to ensure the continued
success of the Group.
Christopher Pratt
Chairman
Hong Kong, 9th March 2011
Chairman’s Letter