Earnings Call: H1 2020

Aug 12, 2020

Good afternoon. Welcome to the Cathy 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'll 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 have not received a copy of the presentation, kindly contact ir@cathaypacific.com. We 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. Our moderator 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, Cut Pacific Mr. Ronald Lam, Chief Customer Commercial Officer. We'd now like to invite our Chief Financial Officer, Martin Murray, to begin the presentation. Good afternoon, everybody. The usual format, I'll go through a presentation and then myself and Ronald will take questions So, the 1st 6 months of 2020 have been the most challenging in our 70 year history, the impact of COVID-nineteen has been unprecedented on the global aviation industry Our attributable loss for the first half is $9,900,000,000 compared to a first half profit last year of CHF 1,300,000,000. Kathy Pacific and Dragonair reported a loss after tax of CHF 7,400,000,000 for the first half compared to a first profit last year of 1,000,000. The share of losses of our subsidiaries and associates was 1,000,000 compared $672,000,000 profit last year. These results include over $1,000,000,000 of government grants the 1st 6 months and impairment charges that we took up of 1,000,000,000 relating to aircraft and 2 of our subsidies. For CX, it's been a very difficult 12 months. Obviously, the social unrest started back in 2020, August 2019. So we have actually reduced our passenger capacity from October 20 19. And with the social unrest, at the end of last year, we started building some cash reserves, expecting a difficult first half 2020. However, COVID-nineteen was unexpected. We have reduced our passenger capacity by 97% from April this year. And on that upside, I get 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 factors down 17% and passenger yield, just up marginally, 1.1%. On the other upside 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 fixed or semi variable. So in terms of the impact of COVID-nineteen, we sort of split it into for segments survive, be capitalized, restructure and revive. I mentioned the impact on Hong Kong, from the social unrest from August, but then absolutely devastating impact of COVID-nineteen since February 2020, you'll see that from IATA, they are saying that losses globally will be around USD 84,000,000,000 with the Asia Pacific region expected to be at largest hit. And as I mentioned before, a lot of the airlines build up carry about 2 months cash reserves and we had built ours to 2.3 months reserves by the beginning of the year. And we've talked about this in the previous analyst presentations and in our recent investor presentations for the prospectus, but our immediate response clearly, but cut capacity, as mentioned, in terms of our workforce, we've had introduced 2 unpaid leave schemes And we've had 2 rounds of executive pay cuts. Now we've obviously been focusing heavily on our cash spend. And so we've cut all discretionary spend have been working with vendors and the authorities in terms of deferring and saving cash. And in terms of capital expenditure, We have deferred our 2021 NEOs and 1850s 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 Hong Kong Express has been suspended since the 23rd March and to the 1st August, Ukraine expressed suspended their flights. Our focus has been on, on customer and employee care. We've put an awful lot of effort, into the travel experience and the safety of both our customers and our employees during this time, and I've had some strong good feedback on the great service that we've been providing in this regard. And the focus on financial point of view has been very much on liquidity. As I said, we have received, government initial cash burn as we pointed out earlier in the year was around 1,000,000,000 to 1,000,000,000 per month. All of that was servicing customer refunds Now that that has reduced our current cash burn is around 1,500,000,000 Hong Kong dollars a month. The 1,000,000,000 we received in government grants, $640,000,000 related to income grants and 420,000,000, it was in relation to cost reductions. In terms of the financial results for the first half, as I said, on the passenger side, revenue decreased 72.2%. ASK is down 66%. We the ASK is down 90 7% from April load factors have dropped significantly as well as there and yield, as I said, relatively flat. Revenue, passenger revenue per ASK down 19%. And we can see the impact of the revenue per ASK there on that graph. And again, this is a novel 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 bellies obviously, have been impacted by the reductions in the passenger ASK with a strong cargo yield of 44% up, and the load factor is up nearly 6%. Has resulted in our cargo revenue improving over the same period last year. And you see the difference in the curve there in terms of the cargo revenue for the FTK in the graph here. In terms of our costs, I mentioned that our costs for ATK without fuel and adjusted exceptionals and impairment and foreign exchange increased by 34%. That's reflecting the reduced capacity in the some of our costs are fixed and variable. Fuel consumption, but ATK declined 8.5% aircraft utilization decreasing by 55%. You see there the our summary of costs. So that highlights some of our fixed and semi variable costs. Obviously, things like depreciation, very much fixed, financed add is the same. And then other costs are more variable and some costs like staff costs, semi variable we take up the SLS. So in terms of forward, this is very much a profit and loss forecast. As we talk about cash burn, the big elements in the cash burn, our salaries, our vendor payments, particularly maintenance and airport and cargo service, cargo services delivery finance costs of aircraft And, we have, some hedging settlements to make as well. Terms of our biggest cost fuel or, so that reflects a 22% decrease in interplane fuel prices, which are up 52% reduction in consumption. Our hedging losses there were one point 6,000,000,000 with the average price of Brent for the PDA 42 and our hedging contracts at USD 65. Our hedging group, we continue to hedge on obviously lower or lower forecasts. So hedging group there, we've hedged the rest of the year. At around Brent at $62 for 20.31, we've got, contracts in place, around $56 22, around $46. Should mention that, obviously, with the reduction in consumption and that, in the third quarter, period the interim results, that accounted that are, in the forecast, we're about 18% overhead And so there's a $95,000,000 Hong Kong dollar mark to market loss, which has been brought forward for 3rd quarter contracts in 2020 into the interim results. In terms of the subsidies, I've mentioned that Hong Kong Express incurred a loss of 779,000,000 in the first half. And as I mentioned, the suspended flying from middle of March to the first of August. In terms of our other subsidies, Air Hong Kong beat a profit of 1,000,000 on the back of the strong cargo volumes. And as I mentioned, we had 2 impairment charges, in the interims, one for Vogue Laundry of 6 58,000,000. And for Kathy Pacific, Catering Services, 526,000,000. A reminder, again, for this period that we account for Air China 3 months in arrears. So this this period is in our 6 months, just takes us up to the 31st March 2020, in terms of your full year forecasting. But 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, and now point 7,000,000,000 outflow, the losses, etcetera, has brought our shareholders' funds down from 62,600,000,000 49,000,000,000 net borrowings up to 1,000,000,000. We did receive TransC in June And we did have some bridging loans, so not drawn and trying to see of the loan. So that will be available for us for 12 months and then an 18 month period of trying to see. So that didn't mean that our liquidity balance at the interim is 1,000,000,000, are gearing, including operating leases at 1.88 and excluding operating leases, in line with our covenants is 1.5 against a covenants of 2. Again, this is just showing the the increase since COVID of gearing from 0.99 to to 1.5, after 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 CHF 27,300,000,000, we had we received the facility the ability to draw on the facility, which we haven't drawn off the GBP 7,800,000,000 in June, hence included in our liquidity balance, The GBP 19,500,000,000 in terms of preference A shares was received today and our rights issue of GBP 11,700,000,000 was received yet today. So that's the three areas of tranches, the 1,000,000,000 that we've, 31,000,000,000 of we've received over the last 2 days. That has increased our equity from 49,000,000,000 up to 1,000,000,000, reduced our debt from 1,000,000,000, down to 1,000,000,000 and our gearing, as I said, from 1.88to0.77 and on a covenant compliance basis to 0.53 So our gearing is now 0.53 compared to our covenants compliance of 2. We then move to our next phase. And 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 in 2019 impacts the industry. It changes on a daily basis in terms of that. And so by the fourth quarter of 2020, we have committed to go into the board to check the optimum size and the shape of the group, of what we think the go forward position will be So again, we'll come back at that point in time, but we will be bringing that taking that to the board, in November So to date, as we've said, we have, at the moment, we are down down just over 90% of our passenger fleet, we have publicly announced a third of our passenger, approximately a third of our passenger fleet are being parked. Overseas. We have a nice retirement. And in the age of 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 6 owned aircraft, we impaired in the interim interim stage. We have been working closely with our vendors. And in terms of our fleet, we have, we've been negotiating with Airbus and Boeing to fair some of these fleet. And so for the 8051,900s and the 8051,000 deliveries in 20202021, being pushed out between 20202023 and for the A320neos from 2020 to 2023, to 2020 to 2025. And again, we are in advanced negotiation stage with Boeing on on delaying the 9X program. And we have had 1 aircraft retire so far in 2020, And as I said, we have 16 other aircraft retiring or returning between now and the first quarter and all of been impaired in the interim results. I'm going to the the forecasting. Obviously, it's, the outlook remains bleak on the passenger side. I've put in here, I have to view so I have to view sees 2020 being continued to be difficult. So the RPKs down more than 60% for the remainder of the year in their view. And at aviation, not getting back to 2019 levels until 2024. And they're erling on the side of there's more downside risk to these numbers than upside. In that sense, are we the full year forecast The first half, the only for the second half must be no better than the first half, in terms of the focus. Positioning, Kathy, for the future in terms of the medium term, We presented these slides when we did the recapitalization. We do 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 from more than just an airline as we see in the left hand side there and very proud of the network that we've built over the seventy year period. We're core to Hong Kong and the Greater Bay Area, and we still of, we still see ourselves as the Hong Kong International Airport as an international hub and the global financial sector. And as we've spoken to Atlanta, these briefings, we're big believer in the opportunity is that the development of the Greater Bay Area is bringing to aviation, in this part of world. Cargo. We are the 3rd largest cargo carrier, and we operate in the number 1 global year cargo hub. So again, we remain bullish on cargo as well. And we have this slide that we showed before as well that, the recapitalization did, was that the rights issue was not only our stakeholders listed here, but the rights issue is over 40% oversubscribed. So 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 term. So the outlook as I said for 2020 is, remains bleak We have committed to do a restructure in the fourth quarter. Our focus remains very much on safety with customer customers and staff alike. And in the medium term, we remain very bullish of Hong Kong as both a financial center and an international aviation hub. And with that, I'll Ronald and I will take your questions. Thank you, Martin. We'll now hand over to our moderator, Andy Wong, who is General Manager of Corporate Affairs to begin the Q And A session. Thank you, Craig. Our first question comes from Ben Hartry of Goldman Sachs. It's a two part question. Part 1. Can you give us a sense of, the current thinking about your fleet plan and the longer term plan you will disclose by Q4? Do we expect further impairments? And as I said, the 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. And so that full assessment of network will be made later in the year. So part 2, you're currently adding back some services. Is this the response to better demand and how would it impact load factor and passenger use? Let me take that. First of all, we have only added back a few passengers like in the past, few months. Currently, we are still only applying to only 22 points. Well, So it's a very small addition. And our forecast for August as a whole on the passenger side only be operating around 8% Having said that, since the relaxation of the Hong Kong transit ban, around 2 months ago, we have seen a small increase in terms of passenger volume. Currently around 1 third of our passengers that we care every day comes from that transit via Hong Kong volume, which has helped compare to the period before where we had the transit bank. Okay. Thank you. Our next question comes from Lokan Chen of Credit Suisse. 2 part question again, part 1 How many transit flights to China do you have pre COVID? And what what is that as a percentage of total? And second part, What are the trends looking like for passenger and cargo? But the flights to China before COVID-nineteen, we used to fly between Hong Kong and Chinese mainland, around 20 something plaques. As of today, we only fly to 4 of those points with less than daily, weak, less than week, daily frequency on those points, Beijing, Shanghai, and Chengdu only. So at the moment, our connection between Hong Kong and Chinese Mega Land has been greatly reduced. In terms of the passenger and cargo trends, passenger side, we haven't seen any major take up in the coming 2 months yet. Because this is mainly driven by the travel restrictions as well as the quarantine requirements. Which we haven't seen any sign of relaxation yet. On 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. And 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 4 this year. We are pretty optimistic part of the performance on the cargo side for the rest of this year. Okay. Thank you. Next we have Sean 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? So the impairment the way that the kenned rules work is that the impairment are, are for aircraft that you have strong view that will not come back to that fleet. So, those are, as I said, there were 6 old aircraft, and, and Ted Leisure maybe all the other ones in terms of the A330 free and some smaller aircraft there. Again, if aircraft are parked and then come back at a later date, we continue to depreciate them so that the extent of future network, etcetera, that's that's the piece that, changes all the time, and and we're committed to going back and 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 August? It was mentioned that the cash burn narrowed from $2,500,000,000 to $3,000,000,000 in February to April, down to $1,500,000,000 in May. Yes. So, well, the the the skeleton cash burn, as I said, is this this the billion to 1,000,000,000, a lot of that was at the start of the year where there was a lot of forward bookings through Easter Chinese New Year, etcetera, that were canceled. So there's a lot of refunds included in that cash burn. Once we've, obviously, the future bookings at the moment as we as well, no flight schedules. There's no, bookings in that sense. And so The cash burn at the moment has reduced to 1.5. July actually picked up a little bit. July included about over $1,000,000,000, $1,500,000,000 of vendor deferrals. So as we talked about in the first half of the year, the, the a lot of the work was done in speaking to suppliers in terms of defending costs or a counseling cost It's obviously easier to defer. So a lot of the work that was done in January, February, and in February came back in July, that's a one off again. So we were expecting the cash burn, all else being equal to be around 1,000,000,000 going forward. Okay. Thank you. Again, next question from Ben Hart, right, 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. And in fact, we compete with, around 100 airlines in Hong Kong already, whether they are local based or foreign carriers. So, we don't see this will become a major issue for us. We welcome competition. And we'll watch the development closely. Thank you. And a follow-up question on maintenance cost, what drove the decline in the first half? And is this sustainable or just a short term cost saving? Well, on maintenance costs, some of those different components of the maintenance, but some of it's on power by power. So we had some savings on that. And 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 part. Our next question from James Chao from Bloomberg Intelligence is about hedging. You have given your few hedge volumes by quarter, but can you comment on the actual volumes of field being consumed at the current levels of flying? So the as the slide there shows you that we're 80% over hedge for the third quarter, in in in terms of where, current consumption is. So you go after that, the the remainder of that just remains a a a forecast. And what, and for hedging, how many barrels should we are we are we using in the first quarter of 2020? That's disclosed in the slide that you have. Okay. Thank you. And another follow-up question from on hedging as well. What management fur what would management further reduce the hedging ratio? I would management Would management further reduce the hedging ratio? Well, our hedging policy where we explained the over the period. So we only hedge we hedge 2 years out and, and we hedge no more than 50% of our plan consumption in that sense because of the fuel surcharge mechanism. Obviously, that's based on forecast. And the longer out we are, the less hedging Kcon because of the uncertainty of forecast. We obviously revised our forecast back at the beginning of COVID. So we are taking on a lot less, a forecast in terms of consumption 2 years out or less And obviously, as we mentioned, the we're still buying fuel in the $40 range now 2 years out at lower consumption levels based on our revised forecast. Thank you. Next question, Paris Jane from HSBC. Do we expect any write down on aircraft values? We expect any write downs or as I said, we've taken 1,200,000,000 of in payment on our aircraft for the 16 aircraft, that we don't believe will turn to service at that point in time. We'll continue to watch it. If at year end, the complete your guess as to what happens with co but, depending on the outlook, at the year end, we may have to appear more, but not at this point in time. Okay. Thank you. And the next one from Andrew Lee of Jefferies is 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 we like quite a lot, during the whole days on our transit traffic. So in general, transit by Hong Kong volume, is around 40% to 50% of our total traffic. And transit from and into China via Hong Kong is a part of it. So if that gets opened up, it will certainly help our passenger wall volume in the short term. Okay. And a follow-up question on Hong Kong wage subsidy. How much and when will it be received and will it be booked under staff cost? Hong Kong. I believe they're deploying ESS. The Yeah. We we have already received the money for the phase 1 of the employee's, support scheme. And, yeah, and it's built into, 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 with carrying value? I. E, when do we expect passenger traffic to return to pre crisis level, which leads to the $2,400,000,000 impairment charge? That's not quite correct. The 1,000,000,000 in impairment charges is only 1,200,000,000, refers to aircraft. And as I said, it's not really about passenger demand at that point in time. It's competitive. The impairment is only for aircraft you don't reasonably you don't believe we'll come back into service. So again, you can have as many aircraft as you like, part for for a long period. If it's going to fly again, you continue to depreciate them. So it's not to the we don't disclose our focus in that sense, but payment is just for 16 aircraft, not returning to service. Okay, thank you. Next, we have comma Jeth from UOB. The CAFE recognized part of the bridging loan in the first half of twenty twenty. Can you quantify that? No, the bridging loan was available to us in June. But once you draw it, it's only available for 18 months. And given the fact that we were going to receive the prefaced shares and the rights issue around now, that would be a poor use of funds. And so we took out with the recapitalization, we were able to take some short term bridging ones that we took instead. So we've not yet drawn on the on the bridge loan, we have 12 months to do that. That takes us through to June next year. And then we'd have then we'll have 18 months use of those funds if needed. Thank you. Next from James Tall, Bloomberg Intelligence. Why increased capacity to 8% when traffic is still around 1% of normal? And demand being relatively inelastic to low fares, would it not be better to keep capacity at 3 to 4%? Well, we looked at the our cash contribution, when we consider our flights. And cash contribution consists of passenger revenue and cargo revenue and then against the cash operating costs So 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 pass new flight. So the resumption of the flights, passenger flight is not just driven by the and your demand. That's my first point. The second point is that, as I mentioned, since the opening up of the transit via Hong Kong, 2 months goal, it has helped to a certain degree the demand on the passenger side going into com. And also coming up, there are students returning to, to overseas for their studies. So that will also help in terms of short demand. So we always look at cash, contribution when we resume the flight whenever it makes sense, whether it's from the into a cargo angle, we will assume more flights. Thank you. So 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? And falling on any expansion on cost control measures. I think that he came in explanation on cost control measures. But, especially on the capacity side, to be honest, at the moment, we are looking very short term. So we are looking, in the next 2 to 3 months. And, longer term than that is very hard to predict because the trouble restriction, the quarantine requirement, the pandemic situation are all changing every day. So we cannot plan, too far from now for the time being. So it is very hard to predict what sort of ASK level will we assume to by endofthisyear? In terms of cost control measure, 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 Van Hardright. Goldman Sachs on Fleet. Fleet deferral. Airbus can Fleet deferral on Airbus. Can you provide more details of the deferral announced? We think about these being spread evenly over the period or more front or back end loaded? And anything you can share on the Boeing conversation We're not going we're not set anymore on the on the Boeing because we're still in in in discussions with that other than other than that's uh-uh health relationship and we are working to defer the 9x and expect that to happen. In terms of airbus in terms of the 2020 fleet, that you've seen there on the slides, the the deferral is into 2021 for those ones and was basically spread over an additional 2 years the 321s and the 350s. Okay. Thank you. We have time for a couple more. So second last, Andrew Lee from Jefferies. On deferred tax, what is the what is this related to and when will occur in second half? Well, the deferred taxes, it builds up for 1 period. So your deferred tax asset we're going to accept tax asset. A lot of that refers to Cathy, Cathy Draghi, in terms of, but it's for all the airlines, obviously, the losses you incur gives you a corresponding funding deferred tax asset that you can utilize when the airline becomes profitable again. Thank you. Another question from your Can you guide us on the CapEx for the second half of twenty twenty? Given that you have the first time of your aircraft deliveries, and did the 6 aircraft to build, steal CAV for 700,000,000 Hong Kong dollars. This does not appear to be reflected. Please advise. Let's say what's not reflected? The sale of the 6 aircraft to BOC. The sale of the that's the sale leaseback. So that is reflected in the 1st 6 months of the year. That was more treated as a financial transaction. So in terms 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 6 aircraft, which was our our ability to bring in more cash in the 1st 6 months of the year. The first part of the question was. Can you put on yes, on the second half of twenty twenty, any guidance on the CapEx? Very similar, as I said, you've got the 10 deliveries. Now you can see the push them into 20 31. And so again, we'll manage the situation and we'll continue discussions with the vendors in this I mean, it's unprecedented times. So we don't have any guidance depending on what our rate will be in the fourth quarter. Thank you, Randy. 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 ircapipcivic.com, and we'll endeavor to and respond to them as soon as possible. This concludes the Cathay Pacific 2020 interim results and less webcast. Thank you for joining us. Thank you.