Earnings Call: H2 2019

Mar 11, 2020

Good afternoon. Welcome to the Kathy Pacific 2019 Annual Results Analyst Briefing Webcast. Thank you for joining us. As this is the first time we'll be conducting the analyst briefing by webcast. Before we begin, please allow us 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 the 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 Hemmel. Have not received a copy of the presentation, kindly contact ir@gatherpacific.com. You're also invited to submit your questions at any time during the briefing by clicking the Q With that in mind, allow us to introduce our speakers for today. Martin Murray, Chief Financial Officer Kathy Pacific, and Ronald Lam, Chief Customer Commercial Officer. We'd now like to invite our Chief Financial Officer, Martin Murray, to begin the presentation. Thank you. Good afternoon, everybody, and welcome to the 2019 annual results briefing. What we'll do is take you through 2019, relatively strong first half given a very difficult year with a strong U. S. Dollar and the U. S.-China trade tensions impacting cargo throughout the year. Obviously, the second half was heavily impacted by the social unrest in Hong Kong, but we completed the successful acquisition of Hong Kong Express in the second half And then obviously, since the year end, we've had the onset of COVID-nineteen, a couple of quick collapse in demand. And whilst entering this latest crisis, the position of relatively strict good strength with gearing and liquidity The outlook remains very uncertain and we've already declared that we'll be making substantial losses in the first half of this year. So overall, from the group, we made a profit of 1,700,000,000 compared to a profit of 2,300,000,000 in 2018, small decrease in group revenue, ASK, up 5.1%. The impact of the unrest impacting both passenger in cargo yield, cargo yield impacted for the whole year down 7.9% passenger yield down 3.9%. In terms of what we can control, our operating costs ex fuel were down 2.7%. And even if we adjust for FX, the underlying costs adjusted for FX and IFRS 16 down 0.9%. I mentioned that we started the year with relatively strong balance sheet. Are after we take out this new standard for leasing, our net borrowings went up 6.6%. We have unrestricted liquidity at year end of over $20,000,000,000. And our gearing went up just from 0.92to0.96. Which is significantly below our financial covenants of 2.0. So for the full year, again, at both at the consolidated level, we made a profit in both the 1st and the second half And at the airline level, we also made a profit both this year and last year, although the second half of the year was a loss with the impact of the unrest in Hong Kong. It was the end of our 3 year transformation program, So this slide demonstrates the under our main tier of trying to get the business back to return on capital employed of above 7 or 3.2 percent in 2019. Transformation program started in 2017 you can see the progress that we made right through to even seeing in the first half of twenty nineteen, it was a good year despite the challenges and obviously the impact of the unrest impacted the second half of twenty nineteen. 2019 is very much that a big picture wise is just a big collapse in both passenger and cargo yields, particularly in the second half inbound traffic to Hong Kong was down around 40% and we were relying on the lower yielding 6 freedom traffic for the second half, offset in part by a lower fuel price. At the passenger level, again, we mentioned that of key metrics are down passenger revenue per ASK, down 6.2% in terms of revenue efficiency, patternsary yield down 3.9 percent, national load factor down 1.8%. Again, this is very much driven by the second half and the impact of the unrest. And even with our 6 freedom traffic, that was down more than usual because most of it had normally come from the mainland. Again, this again depicts the whole transformation period and how well we were doing on a revenue efficiency graph, and then the impact on revenue efficiency in the second half of 2019. Around the regions, again, if we just go around the block here, significant growth in ASK from the U S as we had the full year of Washington and Seattle, the A350,900, The trade tensions and also the unrest had a big impact on load factor and yield in that case. In Europe, we have the full year of Brussels and Dublin and we increased frequencies to Madrid, Paris, and Frankfurt. The yield, again, was more impacted by 6 freedom traffic, particularly quite a strong Tangaroo route from Europe to Australia. And hence, the Southwest specific, you see again relatively good load factor, but lower yield. Southeast Asia, Middle East And Africa, we had good traffic from India through to the U. S. And Southeast Asia also strong first half, weak second half and similarly the same with North Asia. CAGU was depressed all year, the U. S. Cargo trade tensions impacted the full year with a slight pickup at the very end of the year through the holiday season. And some new product to match the holiday season. And again, similarly, you'll see there from on the cargo side, the U. S.-China tensions in the first half, showing a big impact there in terms of our cargo revenue efficiency and then slowly picking up towards the end of the year in the second half. Our cost per ATK in terms of our operating costs, our operating costs came down 2.7%. And as I said, if you adjust for Hong Kong, IFRS 16 and foreign exchange movements. Our unit cost came down 0.9%. Again, our fuel costs were down significantly 9.9% and with the impact of hedging down 13.4%. On fuel, again, fuel relatively steady throughout the year, but lower than the prior year, in 2018. A few hedging, a few hedging current position, which we normally disclose. So we're normally around 40% hedged $64, $65 for the first half. Two things to note there. Obviously, the oil price has fallen, this week. And similarly, with the cutting capacity, the planned capacity of that 40% in the first half will be impacted. So we'll have a higher hedging cover and also be impacted by the lower fuel cost. For March, the average fuel cost to date is $48. And so if it was to stay at this price, Then for the month of how hedging losses of approximately $33,000,000. Our overall costs per day overall absolute costs are down, as I've mentioned, 2.7 0.9. In terms of cost per ATK, which we'll be measuring over the transformation period, it's down 0.9. Again, the big red one there is in others, which is, again, planned as we've been talking about through the transformation program, This is spend on marketing and, on Asia Miles And Investment And Asia Miles, the cost in terms of what we control staff costs down slightly, obviously, we had the organization design in the outputs, reduction in a number of staff in the outputs and lower bonuses through the year. Productivity in the in flight services, landing and parking down slightly due to the lower cargo volumes there. Aircraft maintenance, we had lower, lease return costs. In July, we had the successful acquisition of Hong Kong Express, and so we the purchase consideration of $4,800,000,000 resulting in a goodwill figure of $4,000,000,000. Very excited about what Hong Kong Express will bring to us in the medium term. We've already announced the movement of 16 of the A321s in 2022. So for Hong Kong Express, it made a small loss in 2019 again, driven particularly by the Hong Kong Social And Rest, and 24 aircraft with an average fleet age of below 5 years. And with an average load factor of 91.5 percent over the year period. In terms of other subsidiaries, Air Hong Kong, we took control of 100% of Air Hong Kong under the new block service agreement with DHL, the business there, and profit went up slightly, but a lot some of that was to do with, some asset sale overall marginally down. Asia miles performed relatively well. And the other subsidiaries made small losses, during, again, due to the cargo and downturn in passenger. Air China had a good result. We reported Air China 3 months in arrears, impacted slightly offset by the strength of the U. S. Dollar. And here, China, cargo, our shareholding changed in 31st October from 49% to 35% as part of the mixed ownership reform in the freight logistics business in China. I mentioned the star on terms, of 2019, despite the difficult year, relatively strong cash flows, balance sheet, again, net borrowing up just a mere 6.6 percent, unrestricted liquidity, relatively high at CHF 20,000,000,000. And our gearing, 0.96 against the covenants of 2. And again, that shows the impact of the new accounting standard on our gearing and where it would have been on a like for like basis. Return on capital employed on the bottom layer hitting 3.5% in a difficult year compared to our target of 7%. That leads us on to the transformation program. And as I mentioned, the whole point of the transformation program, the big goal was to get a return on capital up above our weighted average cost of capital. And we didn't achieve that for all the reasons just mentioned. Our ASR growth, we said that this was an unusual transformation in that we were growing all the way through to the 3rd runway at an average of about 4% per annum. Obviously, that has been impacted by the unrest and also events this year. On the cost front, we have over that period did what we set out to do and reduced our cost per ATK ex fuel. And as you know, back in 2017, we took, we reduced our head office headcount and management level by 30%. The foundations of the transformation are still very much in place. These are slides that we showed the last time, so I'll be quickly go through them. But we do still move to period of constant improvement, the foundations that the transformation set are still in place. We carry out with the workshops. We carry on creating new initiatives. And we carry on executing to those. So moving on to, COVID-nineteen, The first thing to say is obviously the priority is safety and our customers and our staff. We've had great feedback from many customers on what we've done in terms of market polar points, what we've done in terms of working with refunds and rescheduling and the guides we've given in terms of the virus. Similarly with staff, taking all sorts of cautions and provisions there looking after the safety and, thanking them for the effort that's happened over the last month's been tremendous. In terms of the business impact, I can't underestimate the significance of it. Again, the numbers there speak from the sales. We normally are traveling with about 90,000 passengers for Kathy Pacific and K. That's down to 16,000 this week and falling. Euro, Hong Kong Express, normally carrying 12,000 down to 4000 terms of frequencies, returns 120,000,000 in Kathy, 10,000,000 to 35,000,000 dollars, $80,000,000 for Kathy Dragon, $10,000,000 to $15,000,000. 34 over Hong Kong Express down to around 5, 90% of our flights demand in China is suspended, and the outlook remains very uncertain. We continue to monitor the market and cut on a daily basis. This is where our current capacity expenses are. So we have 45 destinations in Kathy and Drag and Kathy Dragon Network, and we have 20 destinations in Hong Kong Express. So as I said at the start, we started this period with relatively strong position with, relatively low gearing as compared to our financial covenants and with unrestricted liquid funds of 1,000,000,000. These remain extremely challenging times. As the last slide showed, it's very uncertain times. So the focus has been, which has been made it very public, the need to preserve cash at this time. And doing all sorts of things. So the special leave scheme was highly public, and it's great to see that over 80% of the entire staff signed up for that. We're working hard in both operating costs and capital costs with our strong relationship vendors. The key vendors, but 25% of our vendors make up the significant part of our costs And we have strong relationship with them, and we're working hard in both deferring and getting discounts from those. So lots of work being done on that front. So the outlook, even before COVID-nineteen with the situation second half of twenty nineteen was going to be challenging. We had reduced capacity and forward bookings on that basis. COVID-nineteen has absolutely compounded that challenge. And as I've mentioned, the outlook remains very uncertain. We're focused heavily on liquidity, and that when we do believe that the business can weather the immediate challenges that we face, we have cautious optimism on the cargo side of things, as the U. S.-China trade tensions ease. But despite all our best efforts, as we've announced already, in early March, we will have substantial losses in the first half of twenty twenty. Our commitment to our customer remains the top priority and we're grateful for all the staff and hard work and support they're doing during these challenges, challenging times.