Good afternoon, ladies and gentlemen. Welcome to the Cathay Pacific 2020 Pre-Close Analyst Webcast. Thank you for joining us. We will begin with a presentation, after which we will hold a Q&A session. Slides from the presentation will be displayed alongside the live video for your convenience. A copy of the slides has also been sent to you by email. If you have not received a copy of the presentation, kindly contact ir@cathaypacific.com. You are invited to submit your questions at any time during the briefing by clicking the Q&A box at the bottom of the window and filling out the submission form. I will read these out during the Q&A session. With that in mind, allow me to introduce our speakers. Martin Murray, Chief Financial Officer, and Ronald Lam, Chief Customer and Commercial Officer.
I would now like to invite our Chief Financial Officer, Martin Murray, to begin the presentation.
Thank you. Good afternoon, everybody. What I thought we'd do for the third analyst presentation is to talk a little bit about the 2020 performance, and obviously the impact of COVID-19 on the airline, the recent restructure, and then give some thoughts on the outlook, both for this year, for next year and beyond. This is the slide we showed the last time. This is how we're internally communicating the impact of COVID, starting off with the impact of it at the start of the year, cost containment and cash preservation, the recapitalization happened through the year, and the recent restructuring before we move on to reviving the industry. In 2020, just a recap of the difficulty that this part of the world has faced.
The first decline started at the second half of 2019. From August we had the impact of the social unrest where inbound traffic was 40% down. We knew there was a difficult period at the end. Thankfully, we built up our liquidity towards the end of 2019, which put us in quite good stead for when COVID hit in February 2020. You can see from this slide the devastating impact it's had on the passenger business since March 2020. It's worth reminding us that in terms of looking at the 2020 performance, where we were at the interim stage. The interim, we made a HKD 9.9 billion attributable loss. What I've done there is I've taken out the impact of the impairments and the government grants. There's about HKD 1 billion of government grant in that figure and HKD 2.5 billion of impairment.
The underlying operating performance is about HKD 8.5 billion. The reason why I've said that is because that includes obviously the first six months of the year. A reminder that January and a little bit of February were actually strong months, and also to remind that we do account for Air China three months in a year. That period of losses only accounted for two months of COVID and the impact of our associates. The period for the full year will include March to September for Air China. I say that because we can certainly give guidance to the second half, given our passenger plans throughout the end of this year. The second half will be more difficult than the first half, even though these numbers were our worst losses for an interim report. On the passenger side there, you just see the RPK collapse.
Capacity will remain under 10% throughout the whole of 2020. Load factors are around 25%, and revenue's down about 96% currently. On the cargo side, the cargo side obviously has been strong. Strong yields and utilization offset by lower capacity because more than 50% of our cargo is currently flown on the passenger bellies. Again, some cargo numbers there. Capacity down 35%, overall revenue up 14%, efficiency up 75% on the cargo business. It's all really about the passenger side and the huge impact, the devastating impact on COVID on the business. An initial slide, you've seen this slide before. Of course we immediately cut passenger flight capacity down, cut 94% reduction in total capacity. We've had two rounds of voluntary unpaid leave. We've cut executive pay. The operating costs, we've looked at all discretionary spend.
We've gone through that and we've highlighted at the interim stage the cost saving measures we've introduced. On the CapEx side, we've been speaking to Boeing and Airbus and making deferrals as we reported at the interim stage to our CapEx. We've had government support prior to the recapitalization. There you'll see we've received approximately HKD 2.4 billion in government grants globally, mostly HKD 1.4 billion in relation to income grants and HKD 1 billion in relation to cost reductions and support from the Airport Authority at the airport. The key focus has been liquidity. Throughout the year, at the start of the year, we had a public bond, some private placement, et cetera. Obviously the big thing was the recapitalization in August. Again, we reported this at the interim stage.
HKD 27.3 billion investment from the government, and similarly, our rights issue of about HKD 10 billion from our stakeholders, which was oversubscribed by 137%. That was the recapitalization, and that boosted our balance sheet, increased our equity by HKD 31 billion, reduced our net debt by HKD 31 billion and reduced our gearing. Where we sit today. This is where we are at the 31st of October. We've got HKD 33 billion of liquidity currently, and our gearing is 0.73. Again, a strong balance sheet of which to observe, watch, and look at the outlook. In terms of the restructure, the restructure can be sort of put into three buckets. The cessation of the Cathay Dragon brand. There was the restructuring, and the redundancies, and the transition to the new conditional service, which will continue in the next two slides.
I do want to also highlight, we started the piece looking at the underlying report of HKD 8.5 billion in terms of the operated results. We do have HKD 2.5 billion of impairment in the first half. On top of that, we have announced the HKD 2.2 billion of redundancy costs in the restructuring. We've also got HKD 1.3 billion impairment of deferred tax assets there too. We've had about HKD 6 billion of impairment so far, and we will reassess. We'll have to reassess the carrying value in March of some of our aircraft. In terms of the brand, our goal of the restructure was to achieve a business that was more focused, more efficient and more competitive. There wasn't enough meaningful differential between Cathay and Cathay Dragon.
More importantly, it doesn't mean that we are giving up the entire network, yet we will be applying to the authorities for a significant number between Cathay and Hong Kong Express on that piece. In terms of the staff rationalization, 8,500 positions will be redundant, which is 24% of the establishment. Because of our headcount freeze, it ended up being 17% of existing staff, 600 at the airports. As I mentioned, the total cost of that redundancy was HKD 2.2 billion. In terms of right costing, the new conditions of service have been offered to the Hong Kong-based Cathay Pacific crew. Terms are competitive. They've been benchmarked and fair. Over 90% of staff accepted them. However, we did have to terminate 600 who did not accept the new conditions of service. This week we've offered new conditions of service for Hong Kong Express.
In terms of fleet, we have been working with Boeing and Airbus, as I said, to defer some of the deliveries. We have six deliveries in 2020, seven deliveries in 2021. 45% of our passenger fleet is currently parked in outside locations offshore. You see there that, in terms of retirement, we have 29 aircraft retiring in 2020. As mentioned, we did impair in the interim 16 of those aircraft. We will have to review the others at the year-end. What does that mean? The restructuring has helped our cash burn. As I said, the focus is on liquidity. We are in a position of balance sheet strength at the moment, healthy liquidity and healthy gearing. We are still burning cash at the rate of approximately just over HKD 1 billion, between HKD 1 billion and HKD 1.5 billion. The restructure saves us about HKD 500 million a month.
The outlook for 2020. 2020 is going to be exceptionally poor year. As I said, the 1st January started strongly, February was okay, and then from March onwards, we've been flying at less than 10% capacity. Overall, on the year, it'll be 20%, but the second half will be worse than the first half at that operating level. As mentioned, we've had HKD 6 billion of impairment to date. We can net that off with the government grants, we will be looking at further impairment of aircraft as of March. In terms of looking beyond that in 2021. This is obviously the 2020 picture. The top piece, the top half of the red boxes, look at the challenges we've faced throughout the year.
Back in 25th of March, the border closed to non-Hong Kong residents, and then new regulations introduced in July imposing restrictions for travelers arriving from high-risk countries. The U.K. was added to the list of high-risk countries at the 1st of October. It went to 15 countries. Now all arriving passengers, except those from the Chinese mainland, undergo 14 days quarantine in a hotel. The bottom half looks at the small things that have happened. On the 1st of June, transit reopened except for those from the Chinese mainland. 15th of August, transit reopened for travelers from ex-Chinese mainland. 28th of October, [SkyPier] ferry transit reopened, and then obviously the 22nd of November, we welcome the start of travel bubbles, and particularly the one that's just been announced between Hong Kong and Singapore. We have announced our base assumptions for the restructure.
We do expect a continued very difficult first half of 2021. Capacity at less than 25%, load factor is low. Slowly picking up with hopefully, assuming the vaccine comes into effect in the second half of 2021, slowly building up to have ASKs above 50% for the second half. Overall for the year, our capacity will still remain well below 50%. There is some good news in the sense of we welcome the travel bubble between Hong Kong and Singapore, which was launched on the 22nd of November. It's a start and it's something that we welcome and hope we can roll out throughout the region. Obviously, we also are encouraged by progress that's recently been announced in terms of vaccine research, which gives us hope on the assumptions that we've made in terms of an effective vaccine by the second half of 2021.
Cargo remains strong. Capacity is still seriously constrained given the impact on the passenger fleet. However, demand remains very strong. Demand on the U.S.-China trade lane is back to pre-COVID levels. Air travel is the preferred mode of transport at the moment to get things to destinations as quickly as possible. IATA has announced that they don't believe we'll get back to 2019 levels until 2024. Our plans are consistent with that approach. However, as we announced at the interim stage, as we announced the recapitalization, we are encouraged by the level of support and the bullish outlook that remains from our stakeholders and government as to Hong Kong and the Greater Bay Area as part of an international hub and a global financial center. This slide we've used at previous analyst briefings.
In summary, the 2020 full year results will be extremely poor, and the outlook does remain uncertain. The recapitalization has strengthened the balance sheet, improved our gearing, and given us significant liquidity. The restructure enables the group to remain focused, efficient, and competitive. Liquidity and minimizing the cash burn remains our short-term focus. Whilst it's very early, discussions on vaccines and travel bubbles do provide some optimism. The cargo business remains strong. Whilst the recovery will be prolonged, all our shareholders remain very bullish on the long-term prospects of Hong Kong and GBA and a strong aviation hub. With that, we'll open the floor.
Thank you, Martin. We'll now begin the Q&A session. First question from Sean Ng from JP Morgan. In fact, three questions. I'll take each one in turn. The first one, what is driving the lower capacity deployment in the fourth quarter versus the first nine months of 2020?
I can answer that.
Yeah.
Well, the first three quarters of this year includes a few months in first quarter where the disruption was less. In particular, January was a pretty much normal month. February, we had Chinese New Year, half of the month was affected by the beginning of COVID-19. March was further affected. It's only since April, our capacity on the passenger side has been shrunk to a single-digit percentage versus the normal capacity. If you count first quarter to the third quarter, the capacity is the average of the three quarters. Quarter four is more like quarter two and quarter three, where we have only single digit of normal capacity. I think that's the reason why.
Second question. Is it fair to say the majority of the right sizing has been concluded and no further impairment loss is expected?
Well, as I said, you can make your own assumptions on the forecast we've given. We've given you the basis on where we've made our base case assumption, both in terms of capacity for 2021, and we have indicated in terms of impairment that we have additional aircraft, particularly aircraft that are currently still in March. We have to look at our plans there of what the outlook looks then. Aircraft that are unlikely or will not return to flying will need to be impaired. There will be some additional aircraft impairment at the year-end, for sure.
The third question, can you quantify the amount of committed lines that Cathay has at the moment? How much of this is currently drawn?
We've given our liquidity position of HKD 33 billion. We haven't drawn on the government tranche C in terms of the recapitalization on that. That's included in the HKD 33 billion liquidity balance that we have currently. Our gearing remains low. When there is a pickup in sentiment, we're in a healthy position to get additional liquidity.
Thank you. The next question is from Ian Wong at UBS. In fact, two questions. Do we expect further capital-raising transactions similar to SIA in the near future? The second question is, how many months of capital buffer does Cathay have relative to its current cash burn rate?
Again, two parts to that. We've given you the cash burn rate that we have, and we've given you where our current liquidity currently sits, so that you can do the calculation on that piece. In terms of raising additional funds, one of the things that we have been fortunate with in terms of the support that we've received from both stakeholders and what we did at the year-end last year, is that we've got sufficient buffer to plan and to watch. There are obviously different types of capital raising that other airlines are doing at the moment. We're watching those with interest. At the moment, we're in a healthy position to do that watch and learn and observe the outlook.
Thank you. The next question is from Andrew Lee at Jefferies. There's three parts, I'll select from these. The first one is cargo. Is it possible to provide some guidance on its profitability? What percentage of the group expenses is related to cargo? That's the first part.
We don't publish the profitability on the cargo side independently, because our cargo business is closely linked to our passenger business. During normal time, our capacity on the cargo side, half of it is from the passenger flight belly. During this time, because of the major shrinkage of the normal passenger schedule, the cargo capacity has been affected. Also, we're running a lot of cargo-only passenger flights, i.e., deploying passenger aircraft just to carry cargo. We don't separate the P&L, and therefore, we don't publish the number in terms of cargo profitability.
The second part of the question is, for KA routes, does CX need to apply for all KA routes, or have some already been transferred?
Okay, let me take that question as well. Yes, it is our intention for Cathay Pacific and HK Express to continue to operate most of the Cathay Dragon routes. This is subject to regulatory approval, and since the announcement of the restructuring, we have already launched applications with different authorities worldwide, in Hong Kong and overseas, to make sure that we secure the necessary approval to continue to operate some of the Cathay Dragon routes. In fact, some of the previous Cathay Dragon destinations have already been resumed by Cathay Pacific, either providing passenger services and, in some cases, providing cargo-only services. For example, we have recently resumed points to Kuala Lumpur, Fukuoka, Kaohsiung, Hanoi, et cetera, which were run by Cathay Dragon previously.
Thank you. The third part to that question is, the HKD 3.5 billion restructuring cost, will this all be booked in the 2022 second half results?
Yes.
Okay. The next question comes from Ben Hartwright at Goldman Sachs. Again, three parts to this one. Sorry, two parts to this one I'll pick up. Can you give us any more color on the negotiations with Boeing for what deferrals you're hoping for?
Well, as we mentioned before, that's in relation to the 777-9X, which we plan to push out as far as possible.
Okay, the second part to that is, can you quantify the potential opportunity for cargo from vaccine distribution in terms of revenue or volume impact? Might this be meaningful?
Well, on the vaccine's benefit impact to our cargo business, it's too early to tell, but we are watching very closely. In fact, internally, we have set up a task force to work with different stakeholders, like the Airport Authority, to make sure Cathay Pacific and Hong Kong are ready to facilitate the transportation of vaccines into Hong Kong and via Hong Kong to different parts of the world. At the moment, it's very difficult to quantify the benefit to our cargo business. We believe there will be a positive impact, either directly through vaccine transportation or the surge in overall cargo demand, because there's more need to transport vaccines across the whole world within a short time. At the moment, we don't have a number in terms of quantifying the benefit.
Okay. The next question, Ajith Kumar from UOB. How many passenger aircraft have you converted to carry cargo by removing passenger seats? Would you plan to raise your cargo capacity by converting more passenger aircraft?
Okay. Currently, we have converted four 777-300ER aircraft by removing seats in the economy class and premium economy class cabin to facilitate carriage of cargo in the cabin itself. At the moment, we don't have further plan to convert more aircraft because we are also using normal passenger aircraft without the seats being removed to carry cargo. We're using our subsidiary, Air Hong Kong, to run extra charters to increase our cargo capacity. We believe these measures are optimal at the moment, and therefore, we're not looking at further converting our 777-300ER aircraft by removing the seat at the moment.
Thank you. The second part of the question is, does CX have the required cold chain capacity to carry vaccines?
We believe so. Actually, Cathay Pacific is one of the leading carriers in carrying pharmaceutical products. We are one of the few carriers that are certified by IATA on the CEIV standard for pharmaceuticals. Hong Kong as a hub is also well-suited to carry cold chain protected solution for vaccine. As I mentioned before, we have an internal task force working with different stakeholders to make sure that we're all geared up for the carriage of vaccines.
Thank you. The next question from Lok Kan Chan from Credit Suisse. Which markets do you expect will see a better recovery into 2021?
It's hard to say right now which specific market, but we believe that the Asian regions will recover first before the long-haul regions for us. Also, we believe the leisure segment will recover faster than the business travel segment when the recovery comes.
Okay. Thank you. From Karen Li at JPM. How much of the current capacity has been stored in the desert? In a more optimistic scenario, if the vaccine can become more readily available in 2021, the aircraft that are parked in the desert, can they be brought back easily? If not, what would be the cost or bottleneck?
As mentioned by Martin's slide, we currently have 83 aircraft parked outside of Hong Kong, and some of them are on a long-term parking basis, so it would take a longer time to retrieve them. Others are on a short-term parking basis, meaning that we can retrieve them with relatively shorter lead time. With that combination, we believe we have the flexibility to retrieve our aircraft as the recovery comes in an agile way.
Thank you. Next question is from Nathan Gee at Bank of America. How much of corporate travel may never return, and can profit margins return to the pre-COVID levels if some premium traffic is permanently lost?
Again, it's very hard to tell right now. It's anyone's guess. We believe it's going to take time for all traffic to recover at normal level. At the moment, our projections follows and agrees with what IATA has mentioned, i.e., overall international passenger demand won't return to 2019 level until 2024. In the coming few years, we believe the business travel would not return fully. We still believe that in the long run, the business will be back to normal on both the business travel side as well as the leisure travel side.
Thank you. Next question, another one from Lok Kan Chan at Credit Suisse. With the Singapore travel bubble beginning in two days, how are you seeing the demand so far?
The demand on our Singapore travel bubble flight is overwhelming. In the next few weeks, our flights are pretty much full because there's also a quota of 200 passenger per flight. Due to the limited capacity and high demand, our flights are pretty much sold out in the next few weeks.
Okay. There's a second part to that question is, by any chance, is CX reviewing their existing routes and plans to trim the less profitable ones?
Yes. We've been reviewing our network. At the moment, we are only flying less than 10% of our normal network. The future is highly uncertain, we are taking a very agile approach to plan our network. As presented by Martin, overall next year, we believe that we will only be able to operate well below 50% of our total capacity on average, with better performance hopefully in the second half. In terms of the actual points to fly, we would see the market recovery situation and respond to the market in an agile way. It's too early to say which points will resume first and which one will resume later.
Thank you. A question from Xu Fang. "What are your expectations on passenger yield performance in 2021?
At the moment, actually, if you just look at our passenger yield performance, it's performing higher than normal. That's purely a function of a small base and different mix in demand. It's very hard to tell for 2021, because it really depends on the route mix. There's a difference between long haul and short haul yield performance. There's a huge difference between just point-to-point, third and fourth freedom yield versus sixth freedom yields. Yield is as much affected by the mix of traffic than the actual ticket price. It really depends on the recovery pace and the network structure and traffic structure for 2021. It's very hard to predict at this moment.
Thank you. Next question is from Kelvin Lau at Daiwa Capital. "What would be the magnitude of the voluntary special leave scheme next year, similar to previous schemes?
Yes. Actually, internally to date, we've just announced our third round of special leave scheme, which is similar to the scale and duration of the second round.
Thank you. The last question we have is Kelvin Lau again at Daiwa Capital. "Would there be any limitation on cold storage on the cargo belly holds for carrying vaccine, including the temperature control?
Well, it depends on the nature of the vaccines. There are different types of vaccines being researched out there. Some requires very low temperature, up to minus 80 degrees. Some requires minus 20. Some requires two to eight. It really depends on different manufacturers. We would look at those demand carefully and do our best to facilitate whatever type of vaccine shipment coming up.
Thank you. We have one more question come in from Andrew Lee at Jefferies. "How are current cargo yields compared with the first half of 2020?
Well, the cargo yield has been strong, because currently there is an imbalance in the market with reduced supply of the carriers worldwide. Therefore, the yield is higher than normal. At the moment, our yield is trending higher than first half, because second half we have a peak season from October to December. Usually, just like normal year, we enjoy a higher yield in the second half than first half.
Thank you. That is all the questions we've received so far. If there are any further questions, if you could submit them quickly now. I think that is all the questions we've got. Thank you very much for your questions. Kindly note that the slides from today's presentation will also be made available to download on our investor relations website later. If you have any further questions, please write to us at ir@cathaypacific.com, and we'll endeavor to respond to them as soon as possible. This concludes the Cathay Pacific 2020 Pre-Close Analyst Webcast. Thank you very much for joining us.