Analyst Briefing

Nov 20, 2020

Slides

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 and 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 the copy of the presentation, kindly contact ircapacific.com. You are invited to submit your questions at any time during the briefing by clicking the Q and A box at the bottom of the window and filling out the submission form. I will then read these out during the Q and 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, afternoon, everybody. What I thought we'd do for the 3rd analyst presentation is to talk a little bit about the 2020 performance. And obviously, the impact of COVID-nineteen on the airline, the recently structure and then give some thoughts on the outlook both for this year, for next year and beyond. So 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, halfway through the year, and the recent restructuring before we move on to reviving the industry. So 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. And from August, we had the impact of the social unrest where inbound traffic was 40% down. So 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 was in COVID hit in February 2020, you can see from this slide, the devastating impact has had in the past year business since March 2020. So it's worth reminding us that in terms of looking at the 2020 performance where we were at the interim stage. So the interim year end, essentially, at interim, we made a $9,900,000,000 attributable loss. What I've done there is I've taken out the impact of the impairments and the government grants, there's about 1,000,000,000 of government grant in that figure and 1,000,000,000 off in payment. So the underlying operating performance is about CHF 8,500,000,000. And the reason why I offset that is because that includes obviously, the 1st 6 months of the year. And a reminder that January, another word of February, were actually strong months. And also to remind that, we do account for Air China 3 months in a year. So that only that period of losses only accounted for 2 months of COVID on the impact of our associates. So the period for the full year would include March to September, for Air China. So I see that because, we can certainly give guidance to the second half given our our plan or capacity plans through the end of this year. The second half will be more difficult than the first half, even though these numbers where our worst losses for an interim report. On the passenger side there, you just see the RPK gap capacity means will remain under 10% throughout the whole of 2020. Load factors are around 25%, and revenue is down about 96% currently. On the cargo side, the cargo side has been, obviously, has been strong, strong yields and utilization offset by lower capacity because more than 50% of our cargo is currently flowing on the passenger bellies. And so again, some cargo numbers there, capacity down 35%, but overall revenue up 14% efficiency up. 75% on the cargo business. So it's all really about the passenger side and the huge impact devastating impact pack on COVID on the business. Our initial slide, you've seen this slide before, So of course, we immediately cut passenger plate capacity, but down, cut 94% reduction in total capacity. We've had 2 rounds of voluntary unpaid leave. We've got 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. And on the CapEx side, We've been speaking to Boeing and Airbus and making the fellows as we reported at the interim stage to our CapEx. We've had government support prior to the recapitalization. So there, you'll see we've received approximately CHF 2,400,000,000 in government grants globally, mostly 1,000,000,000 in relation to income grants and 1,000,000,000 in relation to cost reductions and support from the airport authority at the airport. And so the key focus has been liquidity And throughout the year, we've looked at the start of the year, we had a public bond, some private placement, etcetera. Obviously, the big thing was the recapitalization in August. Again, we reported this at the interim stage. So 27,300,000,000 investment from the government. And similarly, our rights this year were 10,000,000,000 from our stakeholders. Which was oversubscribed by 137 percent. So that was the recapitalization, and that boosted our balance sheet, increased our equity by 1,000,000,000, reduced our net debt by 1,000,000,000 and reduced our gearing, where we sit today. So this is where we are at the 31st October. So we've got 33,000,000,000 of liquidity, currently and our gearing is 0.73. So again, a strong balance sheet of which to observe Watch and look at the outlook. In terms of the the the restructure, we the the restructure can be sort of put into 3 buckets, the the sufficient of the Kathy Dragon brand, then there was the restructuring, and the redundancies And the transition to the new condition of service, which will continue in the next two slides, I do want to also highlight, we started the fees looking at the underlying report of 1,000,000,000 terms of the operating results, we do have 1,000,000,000 of impairment in the first half On top of that, we have announced the 1,000,000,000 of redundancy costs in the restructuring And then we've also got, 1,300,000,000 impairment of deferred tax assets there too. So we've had about $6,000,000,000 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 well focused, more efficient and more competitive. There wasn't enough meaningful differential between Kathy and Kathy Dragon. And more importantly, it doesn't mean that we are giving up the higher network, yet we will be applying to the authorities for a significant number between Cathy and Hong Kong Express on that piece. In terms of the staff rationalization, 8500 positions will be redundant is 24% of the establishment. And because of a headcount freeze ended up being 17% of existing staff, 600 at the outputs. As I mentioned, the total cost of that redundancy was 2.2 1,000,000,000. In terms of freight costing, the new conditions of service have been offered to the Hong Kong base, a cathepsic crew, terms are competitive, they've been benchmarks and fair, 90% over 90% of of, staff accepted them, However, we did have to terminate 600 who did not accept the new conditions of service. And this week, we've offered a 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 So we have 6 deliveries in 2020, 7 deliveries in 2021. 45% of our passenger fleet is currently part and outside locations offshore. You see there that in terms of retirement, we have 29 aircraft retiring in 2020. As mentioned, the we did impair in the interim 16 of those aircraft, but 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, where the focus is on liquidity we start we are in a position of balance sheet strength at the moment, healthy liquidity and healthy gearing. But we are still burning cash at the rate of approximately just over 1,000,000,000, between 1,000,000,000 and 1,000,000,000 So the restructure saves us about 500,000,000 a month. So the outlook for 2020, 2020 is going to be exceptionally poor years 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. So overall in the year, it'll be 20%, but the 2nd half will be worse than the 1st half at that operating level. And as mentioned, we will have to we've had $6,000,000,000 of impairment to date. Net that off with the government grants, but then we will be looking at further impairment of aircraft as of March. So in terms of looking beyond that in 2021, so this is, this is obviously the 2020 picture, the top piece, the top half of the Red Box is look at the challenges we're faced throughout the year. So back in 25th of March, the border close to non Hong Kong residents and then new regulations introduced in July and posing restrictions for travel up travelers arriving from high risk countries. The UK was added to the list of high risk countries at the 1st October, then it went to 15 countries. And now all arriving passengers accept those from the Chinese mainland undergo 14 days quarantine in a hotel. The bottom half looks at the small things that have happened. So in 1st June, transit reopened, except for those from the Chinese mainland, 15th August transit reopened for travelers from X Chinese mainland's 28th October, CTF very transit reopened And then obviously, the 22nd 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 twenty twenty one, capacity at less than 25% load factors low, slowly picking up. With the, hopefully, as soon as the vaccine comes into effect, in the second half of twenty twenty one, slowly building up to have ASKs, above 50% for the second half. But overall, for the year, our capacity will still remain well below 50%. And there is some good news in the sense of we welcome the travel bubble between Hong Kong and Singapore, which was launched in the 22nd November. It's a start and, and it's something that we, we welcome and hope can we can roll out throughout the region. And then obviously, we also are encouraged by progress that's recently been announced in terms of vaccine resets and, of which gives us hope on the assumptions that were made terms of an effective vaccine by the second half of twenty twenty one. Cargo remains strong capacity is still seriously constrained given the impact from the passenger fleet. However, demand remains very strong. Demand in the U. S, China trade lane is back to pre COVID levels. And so an air travel is a preferred mode of transport at the moment. To get things to best stations as quickly as possible. IATA has announced that, they don't believe we'll get back to 2019 levels until 2024. And so 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 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 a previous analyst briefings. So 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 competitive. Liquidity and minimizing the cash burn remains our short term focus. And whilst it's fairly early, discussions and vaccines travel bubbles do provide some optimism. The cargo business remains strong. And 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 And with that, we'll open the floor up. Thank you, Martin. We'll now begin the Q And 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 1st 9 months of 2020. Well, the 1st 3 quarters of this year includes a few months in first quarter where the disruption was less. In particular, Jan was a pretty much normal month. And Feb, we had Chinese New Year, half of the month was affected, by the beginning of COVID-nineteen. And then March was, further affected. But it's only since April, the, our capacity on the passenger side has be shrunk to a single digit percentage versus the normal capacity. So if you count first quarter to the 3rd quarter, the capacity is the average of the three quarters, but quarter 4 is more like quarter 2 and quarter 3 where we have only single digit of normal capacity. So I think that's the reason why. 2nd question, is it fair to say the majority of the rightsizing has been concluded and no further impairment losses expected? Well, as I said, you can make your own assumptions on the forecast we've given. So 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 at currently. So in March, we have to look at our plans there, what the outlook looks then, an aircraft that are unlikely or will not return to flying will need to be impaired. So there will be some additional aircraft came in at the year end, for sure. And the third question, can you quantify the amount of committed lines that Cafe has at the moment and how much of this is currently drawn? As we've given our liquidity position of, kind of, position of 1,000,000,000. We haven't drawn on the government trying to see in terms of the recapitalization. On that, but that's included in the GBP 33,000,000,000 liquidity balance that we have currently, but our gearing remains low And so when there is a a pickup, in sentiment, then we're in a healthy position to to, again, 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? And the second question is how many months of capital buffer does CAFE have relative to its current cash burn rate? Well, again, the two parts to that. We've given you the cash run rate that we have, and we've given you where our current liquidity can the 6 that you can do the calculation on that piece. In terms of raising additional funds, I mean, 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, there's a bit of sufficient buffer to, to plan and to watch. So there's all that are obviously different types of capital raising that other airlines are doing at the moment. We're watching those with interest. But 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 Leah, Jefferies. Three parts I'll select from these. The first one is cargo. Is it possible to provide some guidance on its profitability or what percentage of the group expenses is related to cargo? It'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. And during normal time, our capacity on the cargo side, half of it is from the passenger flight value. And during this time, because of the major shrinkage or the normal passenger schedule, the cargo capacity has been affected. And also we're running a lot of cargo only passenger flights, are you deploying, passenger aircraft just to carry cargo? And we don't separate the P and 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. I'll take that question as well. Yes, it is our intention for Cathay Pacific And HP Express to continue to operate most of the CAFE Dragon route. But 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 CAFE Dragon routes In fact, some of the previous Capid Dragon destination have already been resumed by Capid Pacific. Either providing passenger services and in some cases providing, cargo only services. For example, we have recently resumed points to Kuala Lumpur for Coca, Gaussian, Hanoi, etcetera. Which were run by Cathy Dragon previously. Thank you. The 3rd part to that question is the GBP 3,500,000,000 restructuring costs, will this all be booked in the 20 22nd half results? Yes. Okay. The next question comes from Ben Hartright at Goldman Sachs. Again, 3 parts to this one sorry, 2 parts to this one, I'll pick up. Can you give us any more color on the negotiations with Boeing for deferrals you're hoping for? Well, as we mentioned before, that, that's, in relation to the 9 which we we plan to to appreciate as far as possible. Okay. And the second part to that is can you quantify the potential opportunity for cargo from vaccine distribution in the term in terms of revenue or volume impact. Might this be meaningful? Well, on the vaccines, benefit impact to our cargo business, it's too early to tell. But we are watching very, very closely. And in fact, internally, we have cellular task force, to work with given 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 a different parts of the world, but the model is very difficult to quantify, the benefit to our cargo business but we believe there will be a positive impact either directly through vaccine transportation or researching overall carbo 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. The next question, I just come from UOB. How many passenger aircraft have you converted carry cargo by removing passenger seats, would you plan to raise your cargo capacity by converting more passenger aircraft? Okay. Currently, we have converted 4, 770seven-300-eighty hour aircraft by removing seats in the, economy class cabin to facilitate carriage of cargo. In the cabin itself. At the moment, we don't have further plans to convert more aircraft because we are also using normal passenger aircraft with other seats being removed to carry cargo. Also, we are using, our subsidiary at 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 770seven-300ER aircraft by removing the seat at the moment. Thank you. And the second part of the question is, does CX have the required cold chain capacity to carry vaccines? We believe so. Actually, Cape Pacific is one of the leading carriers in carrying pharmaceutical products, and we are one of the few carriers that are certified by IATA on the CE IV standard for pharmaceuticals. And Hong Kong as a hub is also well suited to carry coaching, protective solution for vaccine. And as I mentioned before, we have internal task force working with different stakeholders to make sure that we all gear up for the carriage of vaccines. Thank you. The next question from Loch Chan Chan from Credit Suisse. Which markets do you expect will see a better recovery into 2021? Well, 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. And also we believe the leisure segment will become faster than the business segment, business travel segment. When the recovery comes. Thank you. From Karen Lee 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 airplane 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 park, outside of Hong Kong, and some of them are on a long term parking basis. So it will take a longer time to retrieve them. But others are on a short term parking basis, meaning that we can retreat them with whether to be a shorter lead time. So 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 Guy 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. Well, again, it's very hard to tell right now. I mean, it's anyone's guess, but we believe it's going to take time to recover for all traffic to recover normal level. At the moment, our projections follows and agrees with what IATA has mentioned, I. E. Overall international passenger demand wrong return to 2019 level until 2024. So in the coming few years, we believe the business travel would not return fully, but 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 Lochan Chan at Credit Suisse, with the Singapore travel bubble beginning in 2 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. And 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. And the future is highly uncertain, so we are taking a very agile approach to plan our network. And, 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. But in terms of the actual points to fly, we would see the market recovery situation and respond to the market in an agile way. So it's too early to say, which that will, which pods will we swim fast and which one will we swim later. The question from Shufang, what are your expectations on passenger yield performance in 2021? At the moment, actually, I was if you just look at our passenger yield performance, it's performing higher than normal, but 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 points upon for freedom yield versus 6 freedom yields. So yield is as much affected by the mix of traffic than the actual ticket price. So it really depends on the recovery paid and the network structure, the tropic structure for 2021. So it's very, 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 today, we've just announced our 1st round of special leave scheme, which is, similar to the scale and duration of the 2nd round. Thank you. And the last question we have is, Calvin Lau again at Dira Capital. Would there be any limitation on cold storage on the cargo belly hold for carrying vaccine, including the temperature control? Well, it depends on the nature of the vaccines, and there are different types of vaccines being researched out there. And some requires very, very low temperature up to minus 80 degrees. Some requires minus 20 and some requires 208. It really depends on different, manufacturers. So 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 coming from Andrew Lee at Jefferies. How are current cargo yields compared with the first half of twenty twenty. Well, the cargo yield has been strong. Because currently there's a imbalance in the market with reduced supply, of the carriers worldwide. And therefore, the U is higher than normal. At the moment, our U is trending higher than first half because second half, we have peak season from October to December. So usually just like normal year, we enjoy a higher yield in the second half and first half. That is all the questions we've received so far, if there are any further questions, if you could submit them quickly now. Think that is all the questions we've got. So 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 ircapacific.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.