CP_2012

COMPANY PROFILE

Cathay Pacific AirwaysLimited

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TABLE OF CONTENTS

Company Overview..............................................................................................3

Key Facts...............................................................................................................3

SWOT Analysis.....................................................................................................4

Cathay Pacific Airways Limited Page 2 MarketLine

Cathay Pacific Airways LimitedTABLE OF CONTENTS

COMPANY OVERVIEW

Cathay Pacific Airways Limited (Cathay Pacific or the company) is a Hong Kong-based internationalairline, offering scheduled passenger and cargo services to 167 destinations in 42 countries andterritories. It is headquartered in Lantau, Hong Kong and employed approximately 29,000 peopleas on December 31, 2011.

The company recorded revenues of HK$98,406 million ($12,684.5 million) during the financial yearended December 2011 (FY2011), an increase of 9.9% over FY2010. The operating profit of thecompany was HK$5,500 million ($709 million) during FY2011, a decrease of 50.2% compared toFY2010. The net profit was HK$5,501 million ($709.1 million) in FY2011, a decrease of 60.8%compared to FY2010.

KEY FACTS

Cathay Pacific Airways LimitedHead OfficeCathay Pacific City8 Scenic RoadHong Kong International AirportLantauHKG852 2747 5210Phone

852 2810 6563Fax

http://www.cathaypacific.comWeb Address98,406.0Revenue / turnover

(HKD Mn)DecemberFinancial Year End29,000Employees00293Hong Kong Ticker


Cathay Pacific Airways LimitedCompany Overview

SWOT ANALYSIS

Cathay Pacific Airways (Cathay Pacific) is a Hong Kong-based international airline, offering scheduledpassenger and cargo services. It has a wide-spread operational network which enables it to gainaccess to key markets as well as expand its customer base. However, natural calamities could havean adverse impact on the company's operations resulting in strain in its financial condition and cashflows.

WeaknessesStrengths

Antitrust investigations and proceedingshamper the reputation

Wide-spread operational network and strongfleet operations

Obligations under finance leasesRobust market positionGeographical diversified operations

ThreatsOpportunities

Risk relating to natural calamitiesGrowing global tourism industryVolatility in jet fuel pricesPositive outlook of Asia-Pacific airlines

industry Intense competition and price discounting

Strengths

Wide-spread operational network and strong fleet operations

Cathay Pacific has a wide-spread operational network. The company offers scheduled passengerand cargo services to 167 destinations in 42 countries and territories. During FY2011, Cathay Pacificincreased its flight services to a number of destinations in Japan, Canada, Brazil and the US throughcode-share arrangements. Moreover, Cathay Pacific is the parent company of Hong Kong DragonAirlines Limited (Dragonair), which offers scheduled passenger and cargo services to 33 destinationsin Mainland China and elsewhere in Asia. Additionally, Cathay Pacific is a founding member of theoneworld global alliance, whose combined network serves more than 750 destinations worldwide.

Furthermore, the company has a strong fleet base to complement its robust route network. As ofDecember 31, 2011, the company operated a fleet of 175 aircraft, of which 32 belonged to Dragonair,11 of AHK and the remaining 132 aircrafts were of Cathay Pacific. In 2011, the company took deliveryof 13 new aircraft, including three Airbus A330-300s, six Boeing 777-300ERs and four Boeing 747-8Ffreighters. Moreover, at the end of 2011 there were 93 new aircraft in total on order, for delivery upto 2019.


Cathay Pacific Airways LimitedSWOT Analysis

Hence, Cathay Pacifics robust operational network enables it to gain access to key markets as wellas expand its customer base. Also, the strong fleet operations allow the company to improve itsreturns by effective utilization of its asset base.

Robust market position

The company has a strong market position in the aviation industry. According to the Air TransportWorld's World Airline Report published in 2011, Cathay Pacific was the second most profitable airlineworldwide (in terms of net profit) and the seventh largest airline (in terms of operating profit). Inaddition, it was also the tenth largest airline in terms of revenue passenger kilometers (RPKs) andfourth largest in freight tonne kilometers (FTKs). Moreover, Hong Kong Airport Services (HAS), awholly owned subsidiary of Cathay Pacific and an integrated ground handling operator in Hong Kong,had 49% and 24% market shares in 2011 in ramp and passenger handling businesses, respectivelyat Hong Kong International Airport.

Therefore, robust market position ensures Cathay Pacifics status as one of the strongest playersin the airline market, which in turn enhance the brand image and allows the company to chargepremium prices.

Geographical diversified operations

Cathay Pacific has geographically diversified operations. The company has balanced revenue mixin terms of revenue generated from various geographical locations. For instance, in FY2011, thecompany generated revenues from seven geographies including Hong Kong and Mainland China,Cathay Pacific's largest geographical market, Japan, Korea and Taiwan, North America, SouthwestPacific and South Africa, Southeast Asia, and India, Middle East, Pakistan and Sri Lanka.Geographically-diversified operations enable Cathay Pacific to take advantage of a range of marketopportunities while avoiding overexposure to any one market.

Weaknesses

Antitrust investigations and proceedings hamper the reputation

Cathay Pacific is defendant in several antitrust investigations and proceedings in various jurisdictions.For instance, in 2010, the European Commission imposed a fine equivalent to HK$618 million ($79.7million) on Cathay Pacific. The Commission issued a decision finding that Cathay Pacific and anumber of other international air cargo carriers agreed on cargo surcharge levels and that suchagreements infringed European competition law. During the same year, the Korean Fair TradeCommission (KFTC) fined several airlines, including Cathay Pacific, for infringement of Europeancompetition law. In this context, KFTC fined Cathay Pacific with HK$36 million ($4.6 million).



Therefore, such investigations and fines increase the operating costs of the company which in turninfluences its profitability. Additionally, such proceedings also negatively impact Cathay Pacific'sbrand image and reputation in the market.

Obligations under finance leases

Cathay Pacific has commitments under finance lease agreements in respect of aircraft and relatedequipment expiring during the years 2012 to 2023. As of December 2011, the company has a futurepayment of HK$33,677 million ($4,341 million) and present value of future payments of HK$30,323million ($3,908.6 million). Cathay Pacific's high level of finance obligations could impact its ability toobtain additional financing to support its expansion plans. In addition, it could also lead to the diversionof its cash flows from operations to service the finance obligations.

Opportunities

Growing global tourism industry

The tourism industry worldwide has witnessed a strong recovery since its downfall due to recessionin 2008-09. The recovery was primarily boosted by improved economic conditions worldwide.According to the World Tourism Organization (UNWTO), following the recovery in 2010, internationaltourism grew by about 5% in the first half of 2011. Between January and June of 2011, the totalnumber of arrivals reached 440 million, 19 million more than in the same period of 2010. Tourismin advanced economies increased by 4.3%, reducing the gap with emerging economies (4.8%),which have been driving international tourism growth in recent years. Europe witnessed a 6% increasein tourist arrivals. International tourist arrivals into Northern Europe increased by 7%, and Centraland Eastern Europe by 9%, and travel to destinations in Southern and Mediterranean Europeincreased by 7%.

Furthermore, according to International Air Transport Association (IATA), by 2014 there will be 3.3billion air travelers. China is expected to be the biggest contributor of new travelers. Of the 800million new travelers expected in 2014, 360 million will travel on Asia Pacific routes and of those214 million will be associated with China (181 million domestic and 33 million international).The USwill remain the largest single country market for domestic passengers (671 million) and internationalpassengers (215 million).

Thus, a growing end market auger well for Cathay Pacific as it is well positioned to capitalize on thegrowing global tourism industry.

Positive outlook of Asia-Pacific airlines industry

The Asia-Pacific airlines industry suffered a decline in 2011 after experiencing a moderate growthduring 2010. However, the industry is predicted to experience strong growth from 2012 towards theend of the forecast period (2015). According to MarketLine (a unit of Informa Plc), the Asia-Pacific



airlines industry reached a value of $363 billion in 2011. In 2015, the Asia-Pacific airlines industryis forecast to have a value of $554.5 billion, an increase of 52.8% since 2011. As Cathay Pacifichas a strong network in Asia-Pacific, it can leverage the positive outlook of airlines industry in theAsia-Pacific region and enhance its revenues in the near future.

Threats

Risk relating to natural calamities

The results of operations of Cathay Pacific are threatened due to natural disasters, such as cyclones,volcanic eruptions, among others. Natural disasters and political instability cut travel demand tosome of the company's major destinations. For instance, in August 2012, Cathay Pacific suspendedall its Taipei flight operations due to expected severe impact of Typhoon Saola on Taipei. Similarlyin July 2012, Cathay Pacifics flight operation faced disruption due to strong and gusty crosswindconditions at Hong Kong International Airport.

In addition, air cargo shipments through Hong Kong were also hit by the devastating earthquakeand tsunami that struck Japan in March 2011.The tsunami destroyed a swath of factories producingauto and high-tech components in northern Japan, disrupting manufacturers that relied on shippingthose parts through the city for use in China. Furthermore, in 2010, the Eyjafjallajokull volcano inIceland erupted and emitted ash to heights in excess of 9 km (30,000 ft) causing significant disruptionto European air travel. Due to this, the aviation industry lost $1.8 billion revenues and more than 10million passengers were stranded in various airports worldwide. In addition, cargo trade was alsoseverely hit.

Hence, frequent occurrence of such natural calamities could have an adverse impact on the company'soperations resulting in strain in its financial condition and cash flows.

Volatility in jet fuel prices

Jet fuel forms the main raw material used in the airline industry. The demand for petroleum andrelated products has historically been cyclical and sensitive to the availability and prices of oil andrelated feedstock. Historically, international prices of crude oil and refined products have fluctuatedwidely due to many factors that are beyond the control of companies like Cathay Pacific. Fuel pricesand its availability are subject to wide price fluctuations based on geopolitical issues and supply anddemand, which can neither be controlled nor accurately predicted. For instance, in December 2011,the jet fuel price was recorded at $124.2 per barrel, as compared to $112.9 per barrel in January2011. Furthermore, the political turmoil in the Middle East has raised the oil prices. As the jet fuelprices account for a major portion of the operational expenses, the situation would result in a reversalof fortune for global airlines.

Fuel is the biggest single cost for Cathay Pacific and the persistently high jet fuel prices had asignificant effect its operating results in 2011. During the year, the companys profit fell by 61% and



one of the key reasons for the same was attributed to high jet fuel prices. Hence, a drastic changein the prices of the fuel can have a serious impact on Cathay Pacific's expenses which may in turndistresses its profitability and margins.

Intense competition and price discounting

The airline industry is highly competitive. The principal competitive factors in the airline industry arefares, customer service, routes served, flight schedules, types of aircraft, safety record and reputation,code-sharing relationships, capacity, in-flight entertainment systems and frequent flyer programs.Airline profits are sensitive to even slight changes in average fare levels and passenger demand.Cathay Pacific's competitors include traditional network airlines, low-cost airlines, regional airlinesand new entrant airlines. Some of its competitors are China Airlines, China Southern Airlines, JapanAirlines System, Korean Airlines, Lufthansa, Malaysia Airline System Berhad, Qantas Airways, andSingapore Airlines.

In addition, price competition between airlines occurs through price discounting, fare matching,increased capacity, targeted sale promotions and frequent flyer travel initiatives. A relatively smallchange in pricing or in passenger traffic could have a disproportionate effect on an airline's operatingand financial results. Therefore, intense competition may erode the market share of the companyand may also increase pricing pressure which may distress its earnings.



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