Good afternoon. Welcome to the Cathay Pacific 2020 Interim Results Analyst Webcast. Thank you for joining us. Before we begin, we'd like to go over the rundown for the briefing and the house rules. Kindly note that today's briefing will be conducted in English. We will begin with a presentation, after which we will hold the 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've not received a copy of the presentation, kindly contact ir@cathaypacific.com. You're 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. Our moderators will then read these out during the Q and A session. With that in mind, allow us to introduce our speakers.
Mr. Martin Murray, Chief Financial Officer at Cathay Pacific, Mr. Ronald Lam, Chief Customer and Commercial Officer. We'd now like to invite our Chief Financial Officer, Martin Murray, to begin the presentation.
Good afternoon, everybody. Usual format, I will go through our presentation, and then myself and Ronald will take questions. The first six months of 2020 have been the most challenging in our 70-year history. The impact of COVID-19 has been unprecedented on the global aviation industry. Our attributable loss for the first half is HKD 9.9 billion, compared to a first-half profit last year of HKD 1.3 billion.
Cathay Pacific and Dragon Air reported a loss after tax of HKD 7.4 billion for the first half, compared to a first-half profit last year of HKD 675 million. The share of losses of our subsidiaries and associates was HKD 2.5 billion, compared to HKD 672 million profit last year. These results include over HKD 1 billion of government grants in the first six months and impairment charges that we took up of HKD 2.5 billion relating to aircraft and two of our subsidiaries.
For CX, it's been a very difficult 12 months. Obviously, the social unrest started back in August 2019, we have actually reduced our passenger capacity from October 2019. With the social unrest at the end of last year, we started building some cash reserves, expecting a difficult first half of 2020. However, COVID-19 was unexpected. We have reduced our passenger capacity by 97% from April this year. On the upside, again, the cargo business has held up well. The overall performance, you can see the massive impact on our passenger revenue. ASK, as I said, down 97% from April. For the first half year, ASK is down 66%. Our load factor's down 17%, and passenger yield just up marginally at 1.1%. On the flip side of that, strong cargo demand with yield up 44%.
Our cost per ATK at the bottom there, without fuel and adjusting for FX, up 34%. That reflects the reduced capacity and the fact that a lot of our costs are fixed or semi-variable. In s of the impact of COVID-19, we sort of split it into these four segments: survive, recapitalize, restructure, and revive. I mentioned the impact on Hong Kong from the social unrest from August, but then the absolutely devastating impact of COVID-19 since February 2020. You'll see that from IATA. They are saying that the net losses globally will be around $84 billion, with the Asia-Pacific region expected to be the largest hit. As I mentioned before, a lot of the airlines carry about two months' cash reserves, and we had built ours to 2.3 months reserves by the beginning of the year.
We've talked about this in the previous analyst presentations and in our recent investor presentations for the prospectus, but our immediate response, clearly we've cut capacity as mentioned. In s of our workforce, we have had to introduce two unpaid leave schemes, and we've had two rounds of executive pay cuts. We've obviously been focusing heavily on our cash spend, and so we've cut all discretionary spend, and have been working with vendors and the authorities in s of deferring and saving cash. In s of capital expenditure, we have deferred our A321neos and A350s with Airbus, and we're in negotiations with Boeing on our 9X fleet. We are operating a skeleton crew since April. We're flying to all but 21 destinations there, and HK Express has been suspended since the 20th of March and to the 1st of August. HK Express suspended their flights.
Our focus has been on customer and employee care. We put an awful lot of effort into the travel experience and the safety of both our customers and our employees during this time, and have had some good feedback on the great service that we've been providing in this regard. The focus from a financial point of view has been very much on liquidity. As I said, our initial cash burn, as we pointed out earlier in the year, was around HKD 2.5 billion to HKD three billion per month. A lot of that was servicing customer refunds. Now that that has reduced, our current cash burn is around HKD 1.5 billion per month. The HKD one billion we received in government grants, HKD 640 million related to income grants, and HKD 420 million was in relation to cost reductions.
In s of the financial results for the first half, as I said, on the passenger side, revenue decreased 72.2%. ASK is down 66%. The ASK is down 97% from April. Load factors have dropped significantly as well as there, and yield, as I said, relatively flat. Passenger revenue per ASK, down 19%, and we can see the impact of the revenue per ASK there on that graph. Again, this is a normal slide that we show, but it just shows you the global impact on every sector around the world. On the cargo side, the cargo revenue up 8.8%, despite the available cargo ton kilometers, down 31% due to the fact that our passenger belly obviously, have been impacted by the reductions in the passenger ASK.
A strong cargo yield of 44% up, and the load factors up nearly 6%, has resulted in our cargo revenue improving over the same period last year. You can see the difference in the curve there in s of the cargo revenue for the FTK in the graph here. In s of our costs, I mentioned that our cost per ATK without fuel and adjusting for exceptionals and impairment and foreign exchange increased by 34%. That's reflecting the reduced capacity and that some of our costs are fixed and variable. Fuel consumption per ATK declined 8.5%. Aircraft utilization decreasing by 55%. You'll see there our summary of costs. That highlights some of our fixed and semi-variable costs. Obviously, things like depreciation, very much fixed. Finance charge is the same.
Other costs are more variable, and some costs, like staff costs, semi-variable as we take up the SLS. In s of forward, this is very much a profit loss forecast. As we talk about cash burn, the big elements in the cash burn are our salaries, our vendor payments, particularly maintenance and airport and cargo services, delivery, finance costs of aircraft, and we have some hedging settlements to make as well. In s of our biggest cost, fuel. That reflects a 22% decrease in interplane fuel prices, and a 52% reduction in consumption. Our hedging losses there were HKD 1.6 billion, with the average price of Brent Crude for the period $42, and our hedging contracts at $65. Our hedging group, we continue to hedge on obviously lower forecasts.
Our hedging group there, we've hedged the rest of the year at around Brent at $62 for 2021. We've got contracts in place around $56, and in 2022, around $46. I should mention that, obviously, with the reduction in consumption, and that in the third quarter period of the interim results, in the forecast, we're about 18% overhead. There's a HKD 95 million mark-to-market loss, which has been brought forward for third quarter contracts in 2020 into the interim results.
In s of the subsidiaries, I've mentioned that Hong Kong Express incurred a loss of HKD 779 million in the first half. As I mentioned, they suspended flying from middle of March to the 1st of August. In s of our other subsidiaries, Air Hong Kong made a profit of HKD 363 million on the back of the strong cargo volumes.
As I mentioned, we had two impairment charges in the interims, one for Vogue Laundry of HKD 658 million and for Cathay Pacific Catering Services, HKD 526 million. A reminder, again, for this period that we account for Air China three months in arrears. This period in our six months just takes us up to the 31st of March 2020, in s of your full- year forecasting. Obviously Air China Cargo, we account on a calendar year basis and have had strong results.
Obviously, a big impact on our cash, net cash outflow before financing HKD 9.7 billion outflow. The losses, et cetera, have brought our shareholders' funds down from HKD 62.7 billion to HKD 49 billion, net borrowings up to HKD 93 billion. We did receive Tranche C in June, and we did have some bridging loans. We've not drawn on Tranche C of the loan.
That will be available for us for 12 months, and then an 18-month period of Tranche C. That did mean that our liquidity balance at the interim is HKD 15.4 billion. Our gearing, including operating leases, is at 1.88, and excluding operating leases, in line with our covenants, is 1.5 against our covenants of two. Again, this is just showing the increase since COVID-19 of our gearing from 0.99 to 1.5 on a covenant compliance basis.
We have presented our recapitalization commitment from the government and our major stakeholders, the Hong Kong government committing a total of HKD 27.3 billion. We received the facility, the ability to draw on the facility, which we haven't drawn off the HKD 7.8 billion in June, hence included in our liquidity balance. The HKD 19.5 billion in s of Preference A shares, was received today, and our rights issue of HKD 11.7 billion was received yesterday.
That's the three areas of tranches, the HKD 31 billion of which we've received over the last two days. That has increased our equity from HKD 49 billion up to HKD 80.6 billion, reduced our debt from HKD 93 billion down to HKD 62 billion, and our gearing, as I said, from 1.88 to 0.77, and on a covenant compliance basis to 0.53. Our gearing is now 0.53 compared to our covenants compliance of two. As we have announced publicly at the time of the recapitalization, we are continuing to observe over the coming months how the impact of COVID-19 impacts the industry. It changes on a daily basis in s of that.
By the fourth quarter of 2020, we have committed to going to the board to check the optimum size and the shape of the group of what we think the go forward position will be. Again, we'll come back at that point in time, but we will be taking that to the board in November. To date, as we've said, at the moment, we are now down just over 90% of our passenger fleet. We have publicly announced that approximately a third of our passenger fleet are being parked overseas. We have announced some retirement and in the interim accounts, as I said, 16 aircraft that we don't believe will return to the fleet, between now and the summer of 2021. 10 lease returns and six owned aircraft we impaired in the interim stage.
We have been working closely with our vendors, in s of our fleet, we have been negotiating with Airbus and Boeing, deferring some of these fleet. For the A350-900 and the A350-1000 deliveries in 2020 and 2021 have been pushed out between 2020 and 2023, for the A321neos from 2020 to 2023 to 2020 to 2025. Again, we are in advanced negotiation stage with Boeing on delaying the 9X program. We have had one aircraft retire so far in 2020, as I said, we have 16 other aircraft retiring or returning between now and the first quarter, all have been impaired in the interim results. Going to the forecasting, obviously, the outlook remains bleak on the passenger side. I've put in here IATA's view. IATA's view sees 2020 continuing to be difficult.
The RPK is down more than 60% for the remaining of the year in their view. Aviation, not getting back to 2019 levels until 2024, and they're erring on the side of there's more downside risk to these numbers than upside. In that sense, the full- year forecast, the outlook for the second half, must be no better than the first half, in s of these forecasts. Positioning Cathay for the future in s of the medium .
We presented these slides when we did the recapitalization. We are still the global aviation leader on these charts. We're proud of the awards that we've won over recent years. We are a travel experience, we're more than just an airline, as we see on the left-hand side there, and very proud of the network that we've built over the 70-year period.
We are core to Hong Kong and the Greater Bay Area, we still see ourselves as the Hong Kong International Airport as an international hub and the global financial sector. As we've spoken to at length at these briefings, we're big believer in the opportunities that the development of the Greater Bay Area is bringing to aviation in this part of world. Cargo, we are the third largest cargo carrier, we operate in the number one global air cargo hub. Again, we remain bullish on cargo as well. We have this slide, that we showed before as well, that the recapitalization did was the rights issue was not only our stakeholders listed here, but the rights issue was over 40% oversubscribed.
Even with a very difficult outlook, it does show the faith in Hong Kong International Airport as that aviation hub and the belief in the Greater Bay Area and the opportunities that are still available in the medium . The outlook, as I said, for 2020 remains bleak. We have committed to do a restructure in the fourth quarter. Our focus remains very much on safety with our customers and staff alike. In the medium , we remain very bullish of Hong Kong as both a financial center and an international aviation hub. With that, Ronald and I will take your questions.
Thank you, Martin. We'll now hand over to our moderator, Andy Wong, who is General Manager, Corporate Affairs, to begin the Q&A session.
Thank you, Craig. Our first question comes from Ben Hartwright of Goldman Sachs. It's a two-part question. Part one, can you give us a sense of the current thinking about your fleet plan and the longer- plan you will disclose by Q4? Do you expect further impairments?
As I said, we are committed to going back to the board in the fourth quarter, and that is a very dynamic situation. The impairment that we have made to date is the 16 aircraft that we don't believe will fly between now and the summer of 2021. That full assessment of network will be made later in the year.
Okay. Thank you. Part two, you're currently adding back some services. Is this the response to better demand, and how would it impact load factor and passenger yields?
Let me take that. Well, first of all, we have only added back a few passenger flights in the past few months. Currently, we are still only flying to only 22 ports worldwide, so it's a very small addition. Our forecast for August as a whole on the passenger side will only be operating around 8% of our normal capacity. This is still a very drastic reduction. Having said that, since the relaxation of the Hong Kong transit ban around two months ago, we have seen a small increase in s of passenger volume. Currently, around one-third of our passengers that we carry every day comes from that transit, via Hong Kong volume, which has helped compare to the period before where we had the transit ban.
Okay, thank you. Our next question comes from Lok Kan Chan of Credit Suisse. Two-part question again. Part one, how many transit flights to China do you have pre-COVID, and what is that as a percentage of total? Second part, what are the trends looking like for passenger and cargo?
The flights to China, before COVID-19, we used to fly between Hong Kong and Chinese mainland, around 20 something flights. As of today, we only fly to four of those points with less than daily frequency on those points, Beijing, Shanghai, Xiamen, and Chengdu only. At the moment, our connection between Hong Kong and Chinese mainland has been greatly reduced. In s of the passenger and cargo trend, passenger side, we haven't seen any major tick up in the coming two months yet. This is mainly driven by the travel restrictions as well as the quarantine requirements, which we haven't seen any sign of relaxation yet. The cargo front, our outlook is pretty positive for the rest of this year. We are actually going to enter into the peak season of the year from September onwards.
Currently, based on the market supply and demand, we believe the market supply will still be under a lot of constraints because the passenger network resumption by us and other airlines will still take some time. On the other hand, we are pretty confident about the demand side. With new products launching in quarter four of this year, we are pretty optimistic about the performance on the cargo side for the rest of this year.
Okay, thank you. We have Sean Ng from JP Morgan. I understand Cathay is currently doing a thorough fleet and network assessment. Can we gain further clarification on the 16 aircraft type and share your impairment evaluation process? Do we expect any further impairment losses?
The way the accounting rules work is that the impairment are for aircraft that you have strong view that will not come back to that fleet. Those are, as I said, there were six owned aircraft and 10 lease returns, mainly all of the older ones in s of the A330 fleet and some smaller aircraft there. Again, if aircraft are parked and then come back at a later date, we continue to depreciate them. The extent of future network, et cetera, that's the piece that changes all the time, and we're committed to going back and assess that in the fourth quarter.
Okay. Thank you. Next, Ian Wong from UBS. Can you please update us on the cash burn for the month of July and August? It was mentioned that the cash burn narrowed from HKD 2.5 billion-HKD 3 billion in February to April, down to HKD 1.5 billion in May.
The skeleton cash burn, as I said, the HKD 2.5 billion-HKD three billion, a lot of that was at the start of the year where there was a lot of forward bookings through Easter, Chinese New Year, et cetera, that were canceled. There was a lot of refunds included in that cash burn. Obviously, the future bookings at the moment, as we have no flight schedules, there's no bookings in that sense. The cash burn at the moment has reduced to HKD 1.5 billion. July actually picked up a little bit. July included over HKD one billion, HKD 1.5 billion of vendor deferrals. As we talked about in the first half of the year, a lot of the work was done in speaking to suppliers in s of deferring costs or canceling costs. It's obviously easier to defer.
A lot of the work that was done in January, February came back in July. That's a one-off again. We're expecting the cash burn, all else being equal, to be around HKD 1.5 billion going forward.
Okay. Thank you. Again, next question from Ben Hartwright, Goldman Sachs. Can you comment on the news that the new airline, Greater Bay Airlines, is applying for AOC? How does that impact you?
We welcome competition, in fact, we compete with around 100 airlines in Hong Kong already, whether they are local base or foreign carriers. We don't see this will become a major issue for us. We welcome competition, we'll watch the development closely.
Thank you. A follow-up question on maintenance cost. What drove the decline in the first half? Is this sustainable or just a short- cost saving?
On maintenance cost, some of those different components of maintenance, but some of it's on Power by Hour. We had some savings on that. As we park some of the aircraft, obviously, you get savings in the base maintenance costs too, so we can defer some of our maintenance costs as we have the aircraft parked.
Okay. Thank you. Our next question is from James Zhao from Bloomberg Intelligence. It's about hedging. You have given your fuel hedge volumes by quarter, but can you comment on the actual volumes of fuel being consumed at the current levels of flying?
The slide there shows you that we're 18% over hedge for the third quarter in s of where our current consumption is. You can work at that. The remainder of that just remains a forecast.
Okay. For hedging, how many barrels are we using in first quarter of 2020?
That's disclosed in the slide that you have.
Okay. Thank you. Another follow-up question on hedging as well. What would management further reduce the hedging ratio?
How would management further reduce-
Would management further reduce the hedging ratio?
Well, our hedging policy, we've explained over the period. We hedge two years out, and we hedge no more than 50% of our planned consumption in that sense because of the fuel surcharge mechanism. Obviously, that's based on forecast. The longer out we are, the less hedging we take on because of the uncertainty of forecast. We obviously revised our forecast back at the beginning of COVID-19. We are taking on a lot less our forecast in s of consumption two years out or less. Obviously, as we mentioned, we're still buying fuel in the $40 range now two years out at lower consumption levels based on our revised forecast.
Thank you. Next question, Parash Jain from HSBC. Do we expect any write down on aircraft values?
Do we expect any write down? As I said, we've taken HKD 1.2 billion of impairment on our aircraft for the 16 aircraft that we don't believe will return to service at that point in time. We'll continue to watch it. If at year end, your guess as to what happens with COVID, but, depending on the outlook at the year end, we may have to impair more, but not at this point in time.
Okay, thank you. The next one from Andrew Lee of Jefferies. It's a multiple part question. Some of the topics have been covered, but a specific question on, if Hong Kong allows China transfer flights, how significant is that to the passenger traffic?
We rely quite a lot, during normal days, on our transit traffic. In general, transit via Hong Kong volume is around 40%-50% of our total traffic. Transit from and into China via Hong Kong is a part of it. If that gets opened up, it will certainly help our passenger volume in the short .
Okay, a follow-up question on Hong Kong wage subsidy. How much and when will it be received? Will it be booked under staff cost?
Hong Kong?
I believe they're employing ESS.
The Received the second quarter.
We have already received the money for the Phase I of the Employee Support Scheme. It's booked into our year to date result already.
Thank you. Next, we have Jeff Keung from CLSA. What is your assumption in passenger traffic when you conduct your impairment assessment on aircraft carrying value, i.e., when do you expect passenger traffic to return to pre-crisis level, which leads to the HKD 2.4 billion impairment charge?
That's not quite correct. The HKD 2.4 billion in impairment charges, there's only HKD 1.2 billion refers to aircraft. As I said, it's not really about passenger demand at that point in time. The impairment is only for aircraft that you don't believe will come back into service. Again, you can have as many aircraft as you like parked for a long period. If it's going to fly again, you continue to depreciate them. We don't disclose our focus in that sense, but the impairment is just for 16 aircraft not returning to service.
Okay. Thank you. Next, we have K Ajith from UOB. Did Cathay recognize part of the bridging loan in the first half of 2020? Can you quantify that?
No. The bridging loan was available to us in June. Once you draw it's only available for 18 months, and given the fact that we were going to receive the Pref A shares and the rights issue around now, that would be a poor use of funds. With the recapitalization, we were able to take some short- bridging loans, which we took instead. We've not yet drawn on the bridge loan. We have 12 months to do that. That takes us through to June next year, and then we'll have 18 months use of those funds if needed.
Awesome. Thank you. Next from James Tong, Bloomberg Intelligence. Why increase capacity to 8% when traffic is still around 1% of normal? Demand being relatively inelastic to low fares, would it not be better to keep capacity at 3%-4%?
Well, we looked at our cash contribution when we consider our flights. Cash contribution consists of passenger revenue and cargo revenue, and then against the cash operating cost. Some of the flights, maybe there aren't that many passengers, but because we have good cargo demand, so we can justify some of those passenger flight. The resumption of the passenger flight is not just driven by the passenger demand. That's my first point. The second point is that, as I mentioned, since the opening up of the transit via Hong Kong two months ago, it has helped, to a certain degree, the demand on the passenger side going to Hong Kong. Also coming up, there are students returning to overseas for their studies. That would also help in s of short- demand. We always look at cash contribution when we resume the flight.
Whenever it makes sense, whether it's from a passenger or cargo angle, we will resume more flights.
Thank you. Next from Sean Ng, JP Morgan. Do you mind sharing any guidance on the capacity ASK? What is the expected recovery in ASK by the end of the year and early next year? Following on, any expansion on cost control measures?
Well, especially on the capacity side, to be honest, at the moment, we are looking very short . We are looking in the next two to three months, and longer than that is very hard to predict because the travel restriction, the quarantine requirement, the pandemic situation are all changing every day. We cannot plan too far from now for the time being. It is very hard to predict what sort of ASK level we will resume to by end of this year.
In s of cost control measure, as Martin explained, we will continue with our effort in making sure that we keep the cash burn as low as possible so that we can survive through this difficult period.
Okay. Thank you. Another one from Ben Hartwright, Goldman Sachs, on fleet. Fleet deferral on Airbus, can you provide more details of the deferral announced? Should we think about these being spread evenly over the period or more front or back-end loaded? Anything you can share on the Boeing conversation?
We'll not say any more on the Boeing because we're still in discussions with that other than that it's a healthy relationship, we are working to defer the 777-9 and expect that to happen. In s of Airbus, in s of the 2020 fleet that you've seen there on the slides, the deferral is into 2021 for those ones. We've basically spread that over an additional two years for the 321s and the 350s.
Okay. Thank you. We have time for a couple more. Second-last, Andrew Lee from Jefferies, on deferred tax. What is this related to, and when will it occur in second half?
Well, the deferred taxes, it builds up for a long period. You've got a deferred tax asset. A lot of that refers to Cathay Dragon. It's for all the airlines, obviously, the losses you incur gives you a corresponding deferred tax asset that you can utilize when the airline becomes profitable again.
Oh, thank you. Another question from UOB. Can you guide us on the CapEx for the second half of 2020, given that you have deferred some of your aircraft deliveries? Did the CX sell six aircraft to BOC Aviation for HKD 700 million? This does not appear to be reflected. Please advise.
Sorry, what's not reflected?
The sale of the six aircraft to BOC.
That was a sale and leaseback, so that is reflected in the first six months of the year. That was more treated as a financial transaction. In s of the accounting rules, it was treated as an asset and just the same as a depreciated airline rather than a lease. Because of the arrangements that we did for those six aircraft, it was our ability to bring in more cash in the first six months of the year. The first part of that question was?
On the second half of 2020, any guidance on the CapEx?
It'll be similar. As I said, you've got the 10 deliveries. Now you can see that we've pushed them into 2021. Again, we'll manage the situation, and we'll continue discussions with the vendors. It's unprecedented times, so we don't have any guidance depending on what our output will be in the fourth quarter.
Okay. Thank you.
Thank you, Andy. Thank you 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 this afternoon. If you have any further questions, please write to us at ir@cathaypacific.com, and we will endeavor to respond to them as soon as possible. This concludes the Cathay Pacific 2020 Interim Results Analyst Webcast. Thank you for joining us.
Thank you.