Weaknesses

1. Weak financials due to high leverage: Cathay Pacific posted first-half loss of HK$2.1 billion (US$269 million) in H1-FY17, its worst performance last two decades. It is seen from the financial reports that the company has low liquidity ratios. The weak ratio implies that the firm may face issues in fulfilling its short-term obligations. Also, the D/E ratio for Cathay Pacific is 1.04 compared to 0.76 for ANA (All Nippon Airways) proving that the company has raised more debt and it’s a highly-leveraged company. If we see the Cash Conversion cycle of Cathay airlines it shows that the firm is financing working capital requirement through supplier financing which would result in higher cost of borrowing for the firm based on the cost of capital of the suppliers. The company’s tight liquidity position puts it in a disadvantage when funding any new capital from the market due to increased risk perceived by the creditors.

Threats

1. Intense competition in both regional and international segments: The airline industry is a highly competitive one. The competitive factors are based on fares and services offered along with it. Profits of airlines are sensitive to even small changes in fares and demand conditions. Cathay Pacific's competitors include mainland Chinese and Middle Eastern airlines which are expanding aggressively over the last few years. Its low-cost subsidiary Cathay Dragon which mainly operates in the regional markets also faces significant competition from players like Air Asia and Tiger Air.

2. Volatility in jet fuel prices which is significant operating expense for the company: Fuel consists of the largest operating cost for the company consisting of approximately 34% of the total operating costs. The fluctuation of such an important factor in the operating cost is caused due to external factors which are out of the control of the company. The risk of volatility can be reduced by hedging the price risk. But, the amount of hedging is limited and nevertheless have material impact on the operating cost for the company thereby affecting margins and ultimately the profitability of the company. Further the group incurred significant fuel hedging costs to the tune of HK $M 8,456 in FY16 which decreased the overall benefit of decrease in fuel prices.

Economic

1. Low oil price environment reducing fuel costs: Fuel prices have witnessed a sharp reduction over the last year which has positively affected the operating costs of aviation players. Cathay Pacific incurred Gross fuel cost of HK$M 19,497 in FY16 versus HK$M 24,494 in FY15, a net saving of 20.4%. However the group incurred significant fuel hedging costs to the tune of HK$M 8,456 in FY16 which decreased the overall fuel benefit.

2. Strong dollar making Hong Kong expensive destination: The HK$ remained relatively strong over the year 2016 compared to yuan and other major currencies in South-east Asia which was a turn-off for tourists. Tourists from mainland China and South-east Asian destinations account for majority of the arrivals in Hong Kong. Thus the strong HK$ had an adverse effect on yield factor for Cathay Pacific. However the Hong Kong’s currency has been weakening steadily till mid-year FY17 and the sustainability of this trend is expected to benefit the Cathay Pacific in FY17.