2nd UPDATE: Cathay Pacific 2010 Net Profit Nearly Triples; To Buy 25 Aircraft

Cathay Pacific Airways Ltd. (0293.HK) on Wednesday delivered record 2010 results and announced multi-billion dollar deals for new jets in a strong vote of confidence to the region's aviation market that has seen a dramatic rebound in air travel demand since the end of the global financial crisis in 2009.

Though the Hong Kong-based carrier said it expects continued strength in passenger and cargo demand to boost revenues this year, Cathay Pacific Chairman Christopher Pratt told a news conference that surging fuel prices remain a key concern that could hurt the carrier's profitability.

"As an airline we don't like high oil prices," said Pratt. He added the carrier expects higher air traffic demand this year, while cargo traffic growth might not be as high as last year, given the high base comparison the previous year.

"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," said Pratt in a statement, noting that current fuel prices are higher than they expected.

Airlines globally have warned of the risk of rising fuel prices. Australian carrier Qantas Airways Ltd. (QAN.AU) on Wednesday increased for a second time in as many months the charge it adds to international fares to compensate for higher jet fuel costs, joining airlines around the world attempting to shield themselves from the rise in crude oil prices.

Besides fuel surcharges, Cathay Pacific said it aims to hedge around 20%-30% of its fuel purchases over a one to three year time frame to mitigate the potential risks and will consider hedging depending on market conditions.

Like other major airlines, Cathay Pacific was severely affected by the global financial crisis that began unfolding in 2008, as passenger and cargo volumes fell significantly. Nonetheless, business has improved markedly since the last quarter of 2009, with demand now back at levels seen before the crisis, leading to increased capacity and higher ticket prices.

The blue-chip airline, which is controlled by conglomerate Swire Pacific Ltd. (0019.HK), said its net profit for the 12 months ended Dec. 31 nearly tripled to HK$14.05 billion (US$1.80 billion) from HK$4.69 billion. The result was above the average HK$12.5 billion net profit forecast of nine analysts polled earlier by Thomson Reuters.

Revenue jumped 34% to HK$89.52 billion from HK$67.00 billion. The airline recommended a final dividend of 78 HK cents, up sharply from 10 HK cents a year earlier.

The substantial increase in dividend payout came as Cathay Pacific recorded HK$2.17 billion worth of gains from the sale of its stakes in Hong Kong Aircraft Engineering Co. and Hong Kong Air Cargo Terminals Ltd. It also booked a HK$2.48 billion gain from the profit contributions of Chinese flag carrier Air China Ltd. (0753.HK), which is 18.7%-owned by the Hong Kong carrier.

"The improved business conditions helped us to rebuild our balance sheet. Our financial position is strong," said Pratt. "This enables us...to increase the size of the airline and to further strengthen Hong Kong's position as a leading international aviation hub."

After its results were announced, Cathay Pacific said it has signed deals to buy a total of 25 jets from Airbus and Boeing Co. (BA) at a total catalog price of US$5.99 billion. It also said it is in discussions to buy an additional 14 planes. The Airbus A330-300 and Boeing 777-300 extended range jets on order will join its fleet between 2013 and 2015 to replace other ageing aircraft, such as the Boeing 747-400.

The airline didn't disclose the actual cost of the latest purchases, but it said Airbus and Boeing have both granted it "significant price concessions," which are typical in such arrangements.

The airline, which also owns China-focused Hong Kong Dragon Airlines Ltd., has been investing heavily to ramp up its capacity and services as it competes with other carriers in the region to meet the upswing in passenger demand.

The latest orders come on top of the airline's biggest-ever order, made in September, for 30 Airbus A350-900s to be delivered from 2016 to 2019, and six Boeing 777-300ERs to be delivered between 2013 to 2014. With the latest deals, Cathay Pacific now has 91 aircraft on order for delivery through 2019.

Cathay Pacific's shares ended up 4.5% Wednesday at HK$18.94, after the better-than-expected-results were issued during the market's midday trading break. The airline's shares have surged 48% in 2010, outperforming the benchmark index's 5.3% gain during the same period.

Analysts said the carrier's fortunes are overshadowed by rising oil prices while its multi-billion investments in fleet expansion won't be a major financial burden on the company, as the delivery of those new aircraft would spread over a multi-year timeframe.

"If fuel prices continue to rise, it would dampen Cathay's profitability. We estimate for every dollar increase of oil prices its net profit would be reduced by around 2%," said Kelvin Lau, an analyst at Daiwa Securities.

For 2010, Cathay Pacific carried 26.80 million passengers, up 9% from a year earlier. Total cargo carried rose 18% to 1.8 million metric tons.

The airline's passenger yields--a key measure of airline profitability--rose 19.8% in 2010 to 61.2 HK cents from 51.1 HK cents, reflecting higher average prices. Yields for cargo operations jumped 25% to HK$2.33 from HK$1.86.

-By Joanne Chiu, Dow Jones Newswires; 852-2802-7002; [e-mail]