Financial Analysis and Recommendations for Cathay Pacific (AF2110)

This group project analyzes the financial performance of Cathay Pacific, an airline company, focusing on the impact of the COVID-19 pandemic. The project examines related issues such as layoffs and airline route cutting, providing a detailed cost analysis and break-even point calculation. It assesses the company's revenue, variable costs, and fixed costs, highlighting the significant decrease in passenger services revenue and the impact on the contribution margin. The project recommends strategies for cost reduction, including deleting unprofitable routes (Europe, Americas, and Southwest Pacific) and reducing the number of aircraft. The analysis includes detailed calculations of variable expenses, fixed expenses, and contribution margins for specific routes, concluding that deleting certain routes would minimize operational losses. The project also suggests abolishing fuel hedging contracts as a cost-saving measure. The student assignment is available on Desklib, a platform offering AI-based study tools and past papers.

AF2110 Management Accounting
Group Project
SEM002 Group5 - Cathay Pacific
20035026D Chan Kylie Ka Yee
20064963D Chan Pui Hei
20064636D Kwok Tsz Wai
20064728D Mak Ka Hei
20054179D Yu Cheuk Hin Elston
20066448D Yuen Chi Kin Caesar
All group members know that plagiarism is wrong. Plagiarism is to use another’s work and
pretend that it is one’s work.
This assignment is my own work.
All group members have not allowed, and will not allow, anyone to copy our work with the
intention of passing it off and his or her own work.
All group members acknowledge that copying someone else’s assignment (or part of it) is wrong,
and declare that our assignments are our own work.

1. Background （Yuen Chi Kin, Caesar 20066448D)
2. Related issues
2.1. Layoffs (Yuen Chi Kin, Caesar 20066448D)
2.2. Airline cutting (Chan Pui Hei 20064963D)
3. Cost analysis and break even (Mak Ka Hei, Samson 20064728D)
4. Recommendations
4.1. Delete route (Kwok Tsz Wai 20064636D)
4.2. Deduct the number of aircraft ( chan kylie ka yee 20035026D)
4.3. Abolishment of Fuel Hedging Contracts (Yu Cheuk Hin, Elston 20054179D)
5. Reference
6. Work allocation
7. Appendix

1. Background
Cathay Pacific is an airline company established in 1946 and became a listed
company in 1986. It mainly provides airline and air freight services. In 2006, it purchased
Dragonair and in 2019, it underwent the acquisition of the HK Express. However, due to
COVID-19, the number of passengers results in a great drop and the company starts to
lose money.
2. Related Issues
2.1. Layoffs
In late October, in order to lower the company’s cost, Cathay Pacific sent out
news about deciding to lay off 24% of total employees, which is about 8500 staff.
However, Cathay Pacific still needs to pay a large amount of severance fee for the laying
off decision. They basically divided their staff into three groups and applied the following
severance payment formula:
1. Employees receiving fixed monthly salary: (latest monthly salaryX2/3) X seniority
2. Employees receiving various monthly salary（(average salary of the last twelve
monthsX2/3) X seniority
3. Employees receiving daily/ per service salary : choose 18 days’ salary in last 30 normal
working days X seniority
The total amount is estimated to be 2.2 billion Hong Kong dollars, but what is following
is Cathay Pacific can save 500 million Hong Kong dollar for salary related payment each month.
Let us take the salary payment of the first half year as an example, according to Cathay
Pacific’s interim report, the total amount for staff salary is HK$ 7.42 billion, which is an average
of 1.23 billion Hong Kong dollars each month. After the lay off action, the cost for the coming
six months will become (1.23 billion-500million)x six months adding 2.2 billion of severance
payment, which is a total of 6.58 billion. It is estimated to reduce nearly 840 million hk dollar for
the next six months. Thus, this action is reasonable and correct.
2.2. Airline cutting
Due to the pandemic situation of COVID-19, the demand for airflight services
have dropped significantly. In the first nine months of 2020, it is reported that the number
of passengers had dropped by 83.2%. Operating loss has resulted. As to minimize the
operating costs, Cathay Pacific has decided to carry out airline cutting.
Normally, the airline can carry 100,000 passengers per day. In April 2020, it is
recorded that there are only 582 customers in one of the days, which is only 0.6% of the

whole airline holding capacity. In Sep 2020, the daily passenger numbers remain low, with
an average of 1,568 passengers per day.
As the deadly outbreak of COVID-19 continues and the local anti-government
movements, people travelling from Hong Kong and China have reduced by at least 50%. In
the first cutting, 90% of the services to mainland China were being cut for two months.
In the second half of 2020, more routes are going to reduce departures. After
careful considerations from Cathay Pacific, 7 routes including Washington, Seattle,
Newark Airport, Brussels, Dublin, Maldives and Gatwick Airport, were about to reduce
their departures. These routes were found operating at a loss and will be “permanently” cut
until the air travel is returned to normal.
Another action taken by Cathay Pacific is to combine the passenger flights and the
cargo flights. Cathay Pacific has removed some of the economy seats in the passenger
cabin and reserved the place for cargo deliveries. By this act, the spaces of each plane can
be more wisely used and the number of flights can be minimized to save operating costs.
Here are some statistics in 2019 and 2020 summers:
Sep 2019 Sep 2020 % change
Cargo and mail carried (000kg) 172,637 109,453 -36.6%
Passengers carried 2,426,961 47,061 -98.1%
Number of flights 6,507 1,283 -80.3%
To conclude, airline cutting is a necessary action to reduce the costs from idle
departures as to save operating costs.
3. Cost analysis and break even point
Year 2019 2020
HKD$ HKD$
Total revenue in first half 51850 million 25325 million(-51.2%)

year
Passenger services revenue 37449 million 10396 million(-72.2%)
Cargo services revenue 10275 million 11177 million(+8.8%)
Other revenue 4126 million 3752 million(-9.1%)
Total variable cost in first
half year
____ ____
Salaries 9042 million 7420 million(-17.9%)
Inflight service and
passenger expenses
2682 million 941 million(-64.9%)
Landing,parking and route
expenses
8451 million 3861 million(-54.3%)
Fuel 14524 million 6884 million(-52.6%)
Maintenance expenses 4592million 3193 million(-30.5%)
Commission 503 million 125 million(-75.1%)
Other expenses 2991 million 1766 million(-41.0%)
Total variable cost 42785 million 24190 million(-43.5%)
Fixed cost for the first half
year
_____ _____
Finance charges 1241 million 1327 million(+16.3%)
Aircraft depreciation and
rent
5945 million 5766 million(-3.0%)
Other depreciation,
amortization and rent
972 million 985 million(+1.3%)
Total fixed cost 8158 million 8078 million(-0.01%)
Contribution margin 9065 million 1135 million(-87.5%)
Contribution margin ratio in 2019 first half year: 9065/51850=17.5%
Break even point in total sales dollar: 8158/17.5%=$46662 million
Contribution margin ratio in 2020 first half year:1135/25325=4.5%

Break even point in total sales dollar: 8078/4.5% = $180242 million
It is found that the main revenue of Cathay Pacific which is passenger services
decreased greatly because of the COVID-19.However, the variable cost of the company
did not decrease the same proportion that their revenue had decreased.
It is found that some of the variable cost did not decrease greatly even the
passenger service is greatly reduced such as the salary and the maintenance. Especially
the salary, it decreased by less than 20% and it is one of the main reasons the variable
cost is high.
Moreover, the fixed cost such as depreciation would not be affected by the
pandemic issues. It only decreased slightly. The company will have net loss of 6.9billion
net loss and the break even point is not achievable.
4. Recommendations
The best recommendation for Cathay Pacific is to cut costs. There are three methods to cut costs.
1. Delete route
2. Deduct the number of aircrafts
3. Abolishment of Fuel Hedging Contracts
4.1. Delete route
According to the Interim Report 2019 of Cathay Pacific, the yield of Europe,
Americas and Southwest Pacific has decreased by comparison with 2018 which is 5.9%,
5.0% and 3.0% respectively. (Appendix 6.4) Therefore, we decide to delete some routes to
cut costs.
According to the news about combined traffic figures that were released in 2019, the
total number of flights until December, 2019 is 81195. (Appendix 6.5)
Expenses including
1. Staff (Fixed expense)
2. Inflight service and passenger expenses (Variable expense)
3. Landing, parking and route expenses (Fixed expense)
4. Fuel (Variable expense)
$3560/ton and 5 tonnes/flight hour

5. Aircraft maintenance (Variable expense)
6. Aircraft depreciation and rentals (Fixed expense)
7. Other depreciation, amortisation and rentals (Fixed expense)
8. Commission (Variable expense)
9. Others (Variable expense)
Assumptions:
Average flight hour The number of flight Total flight hour
Americas 18 10,000 180,000
Europe 15 15,000 225,000
North Asia 5 15,000 75,000
Southeast Asia 5 15,000 75,000
Southwest Pacific 24 15,000 360,000
South Asia, Middle East
and Africa
20 10,000 200,000
Total 80,000 1,115,000
Every expense will be distributed by using flight hours.
Total expenses Expense for each flight
hour
Inflight service and
passenger expenses
$5,306,000,000 $5,306,000,000 / 1,115,000
= $4,758/flight hour
Aircraft maintenance $9,858,000,000 $9,858,000,000 / 1,115,000
= $8,841/flight hour
Commission $927,000,000 $927,000,000 / 1,115,000
= $831/flight hour
Others $4,847,000,000 $4,487,000,000 / 1,115,000
= $4,024/flight hour

4.1.1. Europe
To Italy Rome Leonardo da Vinci-Fiumicino Airport
Assumptions:
Total number of flight in 2019: 360
Ticket revenue for economic class: $15,000/person
Ticket revenue for business class: $45,000/person
Total number of passengers: 215
(150 for economic class and 75 for business class)
Total flight hour in 2019: 360 x 21.5 = 7,740 hours
Flight time: 21.5 hours
HKD$ (per million) HKD$ (per million)
Ticket revenue
Economic class 810
($15,000 x 150 x 360)
Business class 1,215
($45,000 x 75 x 360)
Total revenue 2,025
Less: Variable expenses
Inflight service and
passenger expenses
37
($4,758 x 7,740)
Fuel 138
(21.5hours x 5 tonnes x $3560 x
360)
Aircraft maintenance 68
($8,841 x 7,740)
Commission 6
($831 x 7,740)

Others 31
($4,024 x 7,740)
Total variable expenses 280
Contribution margin 1,745
4.1.2. Americas
To United States Chicago O’Hare International Airport
Assumption:
Total number of flight in 2019: 200
Ticket revenue for economic class: $20,000/person
Ticket revenue for business class: $85,000/person
Total number of passengers: 150
(100 for economic class and 50 for business class)
Total flight hour: 200 x 20 = 4,000 hours
Flight time: 20 hours
HKD$ (per million) HKD$ (per million)
Ticket revenue
Economic class 400
($20,000 x 100 x 200)
Business class 850
($85,000 x 50 x 200)
Total revenue 1,250
Less: variable expenses
Inflight service and
passenger expenses
19
($4,758 x 4,000)

Fuel 71
(20hours x 5 tonnes x $3560 x
200)
Aircraft maintenance 35
($8,841 x 4,000)
Commission 3
($831 x 4,000)
Others 16
($4,024 x 4,000)
Total variable expenses 144
Contribution margin 1,106
4.1.3. Southwest Pacific
To Australia Adelaide Airport
Assumption:
Total number of flight in 2019: 260
Ticket revenue for economic class: $6,500/person
Ticket revenue for business class: $26,000/person
Total number of passengers: 150
(100 for economic class and 50 for business class)
Total flight hour: 260 x 13.5 = 3,510 hours
Flight time: 13.5 hours
HKD$ (per million) HKD$ (per million)
Ticket revenue
Economic class 169
($6,500 x 100 x 260)

Business class 338
($26,000 x 50 x 260)
Total revenue 507
Less: variable expenses
Inflight service and
passenger expenses
17
($4,758 x 3,510hours)
Fuel 62
(13.5hours x 5 tonnes x $3560 x
260)
Aircraft maintenance 31
($8,841 x 3,510hours)
Commission 3
($831 x 3,510hours)
Others 14
($4,024 x 3,510hours)
Total variable expenses 127
Contribution margin 380
Total approach for 3 route
Keep route Keep route Delete route
HKD$ (per million) HKD$ (per million) HKD$ (per
million)
Contribution margin
Europe 1,745 -
Americas 1,106 -
Southwest Pacific 380 -
Total contribution
margin
3,231 -

Less: Fixed expenses
Staff 20,125 16,625
Landing, parking and
route expenses
17,758 17,758
Aircraft depreciation
and rentals
12,022 12,022
Other depreciation,
amortisation and rentals
2,991 2,991
Total fixed expenses 52,896 49,396
Net operation loss (49,665) (49,396)
Assumption: Some Staff expenses can be avoided
Reason: Cathay Pacific usually uses firing people as their plan when they delete routes.
Conclusion:
Since the net operation loss of keeping route is larger than that deleting route, Cathay
Pacific should delete the three routes.
4.2. Deduct the number of aircraft
According to the interim report 2020 by Cathay pacific (2020), aircraft
depreciation and rentals of Cathay Pacific and Cathay dragon amounted to HK$5,766
million in the first half of 2020, while the same period last year amounted to HK$5,945
million( Appendix 6.1) . The figures showed that expense on aircraft depreciation and
rentals only decreased by 3% and it was the third biggest operating expense.
In order to reduce loss in the business, it is suggested that Cathay pacific could
deduct the number of aircraft to decrease the fixed cost. According to the news report by
south china morning post(2020), Cathay Pacific has cut flights to seven destinations and
would not return in the next year, therefore, Cathay pacific has a lot of surplus aircraft.
Cathay Pacific has made the following decisions which affected their performance
on cost control. In the second half of 2019, Cathay pacific has received new aircraft from

Atlas airline which increased the amount of aircraft depreciation and net finance cost. At
the same time, 16 aircraft were retired and those aircraft assets have been written off by
the impairment cost for property, plant, and equipment (HK$1,272 million). While
covid-19 has eroded sales, yet the expense of depreciation of property, plant, and
equipment increased. The expenses in the first half of 2020 were much higher than the
total revenue and resulted in a loss in the period( Appendix 6.2) , according to Cathay
Pacific(2020). Reducing the fixed costs may not help Cathay pacific to make a profit due
to the low passenger revenue, but it could definitely reduce the loss of business during the
outbreak of covid-19.
4.3. Abolishment of Fuel Hedging Contracts
For the purpose of minimizing the potential loss under the impact of the
coronavirus pandemic, it is recommended for Cathay Pacific to rescind the fuel hedging
agreement so as to reduce its operating costs.
Before the occurrence of the pandemic, many airline companies including Cathay
Pacific would perform enterprise risk management by opt for fuel hedging contract to
lock in their fuel costs for a period of time, turning it into a fixed expense, as fuel costs
accounts for 10% to 12% of operating expenses and the prices of fuel tend to be
immensely volatile. Kawase (2020) mentions that under the first half of this year, Cathay
Pacific has reported a net loss of around HK$9.87 billion, while the record loss of the
carrier was aggravated by fuel hedging contracts, as oil futures are trading at prices below
0, hedging losses was reported to increase by 16 times to HK$1.6 billion (Appendix 6.3).
In view of the devastating loss suffering from the company, Cathay Pacific should
abolish the fuel hedging agreements. IATA (2020) estimates the coronavirus pandemic is
projected to last for the foreseeable future until vaccines are developed, the aviation
industry is expected to be negatively affected until 2023, which indicates the company’s
payments for a certain volume of fuel at a fixed cost will remain significantly higher than
the market rate if the fuel hedging contract is still effective. Once the company abolishes
the fuel hedging contract, they only have to pay a market price to obtain fuel. This allows
them to reduce the cost spent on fuel and the operating expenses can be minimized.
Therefore, abolishment of fuel hedging contracts is recommended for Cathay Pacific to
avoid overpaying in acquiring fuel.

5. Reference
Cathay pacific. (2019). Annual report 2019. Retrieved from:
https://www.cathaypacific.com/content/dam/cx/about-us/investor-relations/interim-annual
-reports/en/annual_report_2019_eng.pdf
Cathay pacific. (2019). Cathay Pacific Group Releases Combined Traffic Figures for December
2019. Retrieved from:
https://news.cathaypacific.com/cathay-pacific-group-releases-combined-traffic-figures-fo
r-december-2019
Cathay pacific. (2019). Cathay Pacific Group Releases Combined Traffic Figures for
September 2019. Retrieved from:
https://news.cathaypacific.com/cathay-pacific-releases-combined-traffic-figures-for-septe
mber-2019
Cathay pacific. (2020). Cathay Pacific Group Releases Combined Traffic Figures for
September 2020. Retrieved from:
https://news.cathaypacific.com/cathay-pacific-group-releases-combined-traffic-figures-fo
r-september-2020
Cathay pacific. (2020). Interim report 2020. Retrieved from:
https://www.cathaypacific.com/content/dam/cx/about-us/investor-relations/interim-annual
-reports/en/2020_cx_interim_report_en.pdf
Dimsumdaily Hong Kong. (2020, November 18). Cathay Pacific to reduce 7 more routes to
U.S. and Europe to cut costs. Dimsum Daily.
https://www.dimsumdaily.hk/cathay-pacific-to-reduce-7-more-routes-to-u-s-and-europe-t
o-cut-costs/.
IATA. (2020, July 28). Recovery Delayed as International Travel Remains Locked Down.
Retrieved from https://www.iata.org/en/pressroom/pr/2020-07-28-02/
Kawase, K. (2020, August 12). Record loss for Cathay Pacific exacerbated by fuel hedges.
Retrieved from
https://asia.nikkei.com/Business/Transportation/Record-loss-for-Cathay-Pacific-exacerbat
ed-by-fuel-hedges
Lee, D. (2020, February 4). Coronavirus: Hong Kong’s Cathay Pacific Airways to cut 90 per
cent of mainland China services. South China Morning Post.
https://www.scmp.com/news/hong-kong/transport/article/3048918/hong-kongs-cathay-pa
cific-airways-plans-deep-flight-cuts.

South China Morning Post.(2020). Cathay Pacific axes flights to select airports in some of
world’s busiest cities, including London, New York and Washington. Retrieved from:
https://www.scmp.com/news/asia/east-asia/article/3110280/coronavirus-times-here-are-w
orlds-busiest-airline-routes（（（（（（ HKET. (2020, October 21). （（（（（（（（（【】 5300（（（（（ （（（（（（（（（（（（（（ - （（（（（（ - TOPick - （（（（ . Retrieved
December 02, 2020, from https://topick.hket.com/article/2782333/ （（（（（（（（（【】
5300（（（（（ %E3%80%80（（（（（（（（（（（（（（

6. Appendix
6.1. Operating expenses in the first half of the year 2020
6.2. Loss/profit in the first half of the year 2020

6.3. Fuel expenditure and hedging
6.4. Available seat kilometres (“ASK”), load factor and yield change by region for
2019

6.5. Combined traffic figures that released in 2019

6.6. Operating expenses of the year 2019