Financial Review

The Group's attributable profit of HK$1,694 million was down 55.5% from 1996 while profit excluding exceptional items decreased by 37.5% to HK$2,041 million. These reductions stemmed from a deterioration in passenger load factors and yields following the significant downturn in Hong Kong tourism as well as the Asian currency turmoil.

Turnover

• Passenger turnover fell in 1997 - after showing growth in the first four months of the year - as most of our key revenue markets declined. While First and Business Class revenue held up reasonably well, Economy Class revenue fell sharply.

• The number of passengers carried decreased by 8.8% to 10.0 million.

• Revenue passenger kilometres decreased by 3.0% against a 5.2% increase in available seat kilometres which resulted in a deterioration in passenger load factor from 74.0% to 68.2%.

• Passenger yields came under severe pressure and decreased by 4.8% to HK55.7¢.

• Cargo services performed admirably in the face of tough competition - consolidated cargo turnover improved by 13.6%. Air Hong Kong's turnover increased by 37.5% as a result of capacity growth.

• Cathay Pacific Cargo's load factor improved by 6.0 percentage points to 72.9% as cargo tonne kilometres improved by 12.2% against an increase of 2.4% in cargo capacity. Air Hong Kong's load factor also improved by 2.8 percentage points to 78.7%.

• At the Cathay Pacific company level, the decrease in turnover by HK$1,230 million was a result of:

• The weak air travel market in the second half of 1997 resulted in the Company's revenue load factor falling by 3.1 percentage points to 69.5%.

• Cathay Pacific's traffic turnover sensitivity is set out below:

Operating costs

• Route costs, which include meal costs, landing and parking charges, increased primarily due to the increase in flights operated.

• Fuel costs increased by HK$386 million as a result of an increase in the volume uplifted and higher prices compared with 1996.

• Aircraft depreciation and operating lease costs increased, reflecting deliveries during the year and the full year's effect of the 12 aircraft delivered in 1996.

• Exchange losses realised on repayment of borrowings decreased as the Japanese Yen was weaker than in 1996.

• Commissions paid to agents decreased due to lower turnover.

• Cathay Pacific's cost per ATK fell by 2.7% to HK$2.57 reflecting efficient cost management.

Net finance charges

• Decreased by 12.8% to HK$335 million.

• The decrease reflects movements of exchange and interest rates.

• Interest cover fell from 9.9 to 7.2 due to the lower profit.

Share of profits of associated companies

• Decreased by 15.7% to HK$306 million, as a result of the full year's effect of the reduced shareholding in Dragonair and the Group's share of HAECO's exceptional gain in 1996.

• Dragonair's profit performance improved on 1996 as did the overall performance of the overseas flight kitchens.

Taxation

• The taxation charge decreased by 39.9% to HK$291 million as a result of reduced profitability and the resolution of overseas tax disputes.

Minority interest

• Increased by 135.3% to HK$40 million due to the improved performance of Air Hong Kong.

Dividends

• Total amount paid and proposed for 1997 is HK$986 million.

• Dividend cover has been reduced by 0.4 times to 1.7 times.

Financial position

• Total assets at 31st December 1997 amounted to HK$64,757 million.

• Additions to fixed assets amounted to HK$6,243 million, comprising HK$4,095 million for aircraft purchases, including advance payments, HK$1,858 million for expenditure at CLK, and HK$290 million for properties and other equipment.

• Funds with investment managers comprise government and corporate bonds, other fixed and floating rate instruments and bank balances.

• During the year, a decision was taken to have the portfolio of bonds actively managed by external professional fund managers with a view to achieving a higher return. As a result, any profit or loss arising from the revaluation of these securities is taken to the Profit and Loss Account as incurred.

• Gross borrowings decreased by 11.3% to HK$23,214 million but net borrowings increased by 50.0% to HK$8,795 million.

• The Group's shareholders' funds increased by 1.1% to HK$25,606 million.

• Net debt equity ratio increased to 0.34 times.

Financial Risk Management Policy

• In the normal course of business, the Group is exposed to fluctuations in foreign currencies, interest rates and jet fuel prices.

• These exposures are managed, sometimes with the use of derivative financial instruments, by the Treasury Department of Cathay Pacific in accordance with the Group's approved policies and parameters.

• Derivative financial instruments are used solely for financial risk management purposes and the Group does not hold or issue derivative financial instruments for trading purposes.

• Derivative financial instruments which constitute a hedge do not expose the Group to market risk since any change in their market value will be offset by an opposite change in the market value of the asset, liability or transaction being hedged.

• Exposure to foreign currencies, interest rates and jet fuel price movements are regularly reviewed and positions are amended in compliance with internal guidelines and limits.

• To manage credit risk, transactions are only carried out with financial institutions of high repute and all counterparties are subject to prescribed trading limits which are regularly reviewed. Risk exposures are monitored regularly by reference to market values.

Management of Currency and Interest Rate Exposures

• As an international airline, the Group's revenue streams are denominated in a number of foreign currencies resulting in exposure to foreign exchange fluctuations.

• To manage this exposure, where possible, assets are financed in those foreign currencies in which net operating surpluses are anticipated, thus establishing a natural hedge. In addition, the Company uses cross currency swaps to reduce such foreign currency surpluses.

• The use of foreign currency borrowings and cross currency swaps to hedge future operating revenues is a key component of the financial risk management process as exchange differences realised on the repayment of financial commitments are effectively matched by the change in value of the foreign currency earnings used to make those repayments.

• Derivative financial instruments are used to manage the interest rate profile of the foreign currency commitments.

Value added

The following table summarises the distribution of the Group's value added in 1996 and 1997.

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