First question comes from Ben of Goldman Sachs Group, Inc. Could you please elaborate on the impact of coronavirus on traffic and yield in February and March, and bookings in April? In March, April, you are cutting capacity by 65%. Is that also a reflection of traffic volume? What are load factors in March?
Let me answer that. Thank you for the question. Let me recap the capacity change as a result of COVID-19 for Feb to April so far. In Feb, we have cut our passenger capacity by around 30%. For March and April, we have cut our capacity by 65%. All these are measured in ASK terms. In terms of frequency, actually in Feb already, we have cut 65% of our frequencies. In March and April, we have further cut our frequency by 75%. Unfortunately, these are not reflection of our revenue dropped yet, because even with the capacity cut, our load factor has also come down. At the moment, our load factor, based on the reduced capacity, is hovering around 50% only. Also, we have seen substantial yield drop also.
You can calculate that based on the capacity drop, the revenue drop in these few months are actually more severe.
Okay. Thank you. The next question comes from Luya of BoCom. Could we get a sense of demand outlook by region for the first half of 2020? As we see COVID-19 accelerate in Europe and North America while Asia numbers decline, should we expect increasingly divergent regional demand growth in the coming months?
So far, I think the situation is still very fluid and dynamic. As COVID-19 broke out from February onwards, I think the first affected route in our network will be China. So far, we have cut our China network by 90%. After that, gradually, our routes in Asia have been affected also. Now, we're also seeing some long-haul regions like U.S., Europe, getting affected as well. I think so far at the moment, I think the regional routes are more affected, I would say, and the long-haul routes are relatively less affected. The situation is going to change as the situation develops in those countries. Also, I think it's worth emphasizing that our routes are all interdependent. As we close our routes in the regions, the long-haul routes will be affected as well.
For example, we have feed from China onto our European routes. If the China routes are closed, our European routes will be affected as well. I think the whole network, because of the transit traffic we carry, are severely affected, whether it's short-haul or long-haul.
Okay. The next question comes from Angus of Westpac. I think the first two parts is covered already, but the third part of the question is, what is the company's hedging position on bunker?
As we've mentioned over the period, we had our hedging difficulties in the past, and so we stick to our current policy. What we've done now is that, as we've mentioned, we're no longer an outlier. We hedge, like most airlines, up to a two-year period. We also hedge no more than 50% of our cover, and relying now that the fuel surcharge mechanism is back in place in that stage, too. In that sense too, we're taking advantage because we continue with the policy of hedging at the long end, although the curve is in contango at the moment, i.e., it's upward sloping, so you're not buying it at the low prices you see in the spot market. We very much still believe in managing the fuel risk, and very transparent with it.
As I mentioned, every $5 drop in per month is about $7 million.
Okay. Thank you. The next question comes from Kelvin of Daiwa Capital. The first part is also on hedging. That's already been answered. The second part of the question is, what is the passenger and cargo capacity growth guidance in 2020, given all the flight cancellations? The next part of the question is, what kinds of further cost-cutting measures would be launched in the second half of 2020?
Okay. Let me answer the question. For first half, in terms of capacity, I've mentioned that the capacity cut at the moment up to April is already pretty severe, as I mentioned in answering previous question. We are also looking at May and June, in terms of capacity cut. At the moment, we are making a more moderate cut compared to March and April. As I mentioned before, the situation is very fluid and is changing every day. We'll watch the situation very closely and make decisions around a capacity cut for May and June in the coming weeks. In terms of the further cost control, I think we have our current strategy in terms of cutting capacity, as well as working with our suppliers in controlling the cash flow outflow from our company. We've also got support from our staff in terms of special leave scheme.
I think we'll continue with all these directions in managing our cash flow as we go into the coming few months.
Okay. Thank you. The next question comes from Ajith of UOB, and there are a few parts, so maybe let me ask one by one. The first part is: Is Cathay planning to defer aircraft deliveries in 2020?
Yep. Let me answer that.
Yeah.
We've been working with our major suppliers, including aircraft OEMs, in deferring our aircraft delivery. We're working with Airbus, we're working with Boeing, to look at the potential of some delivery delays so that we can help our cash flow right now. We are in discussion with those suppliers at the moment.
Okay. The second part of the question is: Could you guide on 2020's CapEx, and would you rule out a cash call in 2020?
In terms of CapEx, as I said, we're working with our vendors to defer on that basis. The focus at the moment is to move our CapEx, as Ronald just mentioned. On the basis in terms of our access to liquidity and our relatively strong liquidity position, Ronald talked about the capacity cuts for April and May, and a very difficult first half. We are, at the moment, planning the recovery in the second half. Where we stand today, there's no need for a cash call. Obviously, if things deteriorate, we can't rule out anything at this point in time.
Okay. Thank you. The final part of the question is: Have the U.S. and European aviation agencies agreed to lower the slot utilization due to force majeure arising from COVID-19?
We've been working with different authorities in terms of a waiver for slot utilization in different airports, including those in the U.S. and in Europe. I think it varies by country. We're working hard with them so that we can get the necessary waiver in terms of slot. When it comes to Hong Kong, I think we've been working very closely with Civil Aviation Department, and we've already got waiver until end of this summer season anyway. I think we would like to thank the Civil Aviation Department for helping us with that.
Okay, thank you. The next question is from Sean of JPMorgan Chase & Co. I wanted to kindly ask, what is Cathay Pacific's plans over cargo-only services on passenger aircraft? One example includes cargo customers to and from Japan. Is this service commercially viable, and how does Cathay differs from other dedicated freighters such as DHL?
Right. Maybe before I answer the question, let me give a brief overview on the cargo situation. Cargo business is also affected by the cancellation on the passenger flights. Normally, we carry half of our cargo on freighters and the other half on our passenger aircraft. As the passenger flights get canceled significantly, our cargo capacity overall also get affected. At the moment, I think our cargo capacity has gone down by nearly one-third because of the cancellation on the passenger side. Having said that, I think we are trying every means to stabilize the supply on the cargo space. We have been using passenger aircraft to provide cargo services in the region. I think with the fuel price dropping coming up, hopefully we can provide more of that capacity to make up for the shortage of supply in the market.
We've also been using dedicated freighter services from our subsidiary, Air Hong Kong, to provide more cargo space to the market. All in all, I think we are trying to contain the shortage of supply, make sure that the supply chain is stable.
Okay. The next question comes from Eric of UBS. There are three parts. I'll ask the cargo part first. Any signs of cargo recovery? How much benefit from Hong Kong International Airport terminal charges charge waiver? That's the question.
Okay. Well, currently, cargo demand is still on a decline, partly because of the trade war still going on between U.S. and China. More short term is partly due to the resumption rate in the manufacturing, and particularly in China. It's not fully resumed yet. Demand is still depressed. In terms of supply side, because of the massive cancellation of passenger flight capacity by our own airline and also other airlines in the market, actually supply has dropped more than demand, and therefore, we are enjoying a favorable market, from a airline perspective at the moment. The second question is about Can you remind me again?
Hong Kong International Airport terminal charge waiver, is it going to benefit the cargo?
Yes. Okay. We have worked with Airport Authority, and from 1st of April onwards, we're going to reduce our terminal charge out of Hong Kong by 20%. We do it in order to boost the competitiveness of Hong Kong Airport as a international air cargo hub. We believe that the reduction in terminal charge would definitely increase and help Hong Kong's competitiveness as a air cargo hub. It's yet to start, so I think the effect is yet to be seen.
The last part of Eric's question is on HK Express. The question is: Is there any chance of writing down some goodwill for HK Express due to the recent challenge?
HK Express is, as I said, when we bought it back last year, it's a very exciting growth story for the Cathay Pacific Group, and very much a long-term investment. That was the plan when we bought it. In fact, way too short-term to even say that that still remains a very strong and good investment. No plans to write off any goodwill in HK Express.
Okay. The next question is from Andrew of Jefferies. Its first part is also on cargo. How much have cargo yield increased in the past few weeks? What is driving this, and is it sustainable? Are CX using passenger planes to carry cargo only with no passengers? Some of that has been repriced. That's the question.
Well, as I mentioned, there's a short-term imbalance in supply and demand at the moment in the cargo market. Our cargo yield has improved. I can't reveal the actual figure, it has improved more than double digit, I would say. I emphasize, this is short term, and we are trying to increase our capacity for air cargo to stabilize the market. Sorry, what was the second part of the question again?
The second part of the question.
I think it's about the usage of passenger aircraft.
The usage of passenger planes to carry cargo.
Yeah. I've already answered that previously.
Yes, you already answered it. Yes. Correct. Yeah. The second part of the question is specifically on hedging loss. Checking on fuel hedging loss, if Brent remained at $48, does it mean that there will be a loss of $33 million loss U.S. each month? That's the question.
No. As I said, the average Brent price for March is $48. If it's stuck at today's price of $35 and continued, which is a big hypothetical, then that was the case there. Again, the hedging price is quoted at $65, and every $5 movement is about $7 million a month.
Okay. Thank you. I've got a question from Paul of DBS Bank, and I think you have already answered some of them, but he wants to know, can you provide guidance for overall passenger and cargo capacity growth or reduction for the whole year of 2020?
Well, I think it's too early to say. We are monitoring the COVID-19 situation every day. The situation is still very fluid. It hasn't stabilized yet. I think it would be premature to forecast our capacity for the remainder of the year. We can only look ahead, for the next few months, as I explained.
Okay. The next question comes from Qianlei Fan of Morgan Stanley. The question is: Any delay to operating lease payments now? Any changes to operating lease plan?
There's no changes to the key plans. Obviously, we're working with all vendors to discuss with them on a relationship basis. Nothing that's not being negotiated with them on a relationship basis.
Okay. The next question is from James of Bloomberg Intelligence. The first part of the question is how much of your costs are variable cost? Given capacity cuts of 65%, what level of cost reductions can we expect, considering your various cost control measures and lower oil prices? The third part is what load factor do you need to cover the variable cost? It's a cost question.
Again, I think our accounts are pretty transparent and pretty full in that sense. The split between direct and indirect costs are kind of shown on the P&L account and the notes to that, to do your own analysis on that front. Obviously, we are normally quite a fixed cost business. As we said, we're working with our key relationships to defer and discount some of that cost. Again, it's in the accounts in terms of what's fixed and what's direct and what's indirect.
Okay. I've got a last question on my list. I think some of the other questions have been answered. This last question is from Wei Fang. The question is: Is there any change for CapEx plan in 2020 and also 2021? I think we have touched about the 2020, but 2021 as well.
I mean, our biggest form of CapEx is our aircraft deliveries. At the moment, other than speaking with the vendors in terms of timing, et cetera, there's no plan to change our order book at this stage.
Okay. Okay. I haven't got any more questions. There's one more that just come in. It's again from Ben of Goldman Sachs Group, Inc. The question is, the bank covenants, you mentioned two times net debt to equity ratio. Is that including these liabilities? That's the question.
No. The Hong Kong FRS 16 was the leasing that put your operating onto the book. In the financial results, you'll see that our gearing jumps quite significantly from 0.92x to 1.35x. If you take that out, which is the calculation that our bank covenants are on, it goes to 0.96x. The like-for-like comparison is 0.96x to 2x.
Okay. I think since I mentioned the last question, a few more questions come in, there's a question from Jenny of JP Morgan Chase & Co, on parked aircraft. How many aircraft have been grounded at the moment? Do we still need to book D&A and operating leases for these aircraft? That's the first part. The second part is, has Hong Kong International Airport provided some landing fee or passenger fee discount to us? Two parts of the question. How many aircraft have been grounded?
Well, at the moment, again, the situation is very fluid, but we have around 140 to 150 aircraft parked at the moment overnight in Hong Kong International Airport. In terms of relief measure by the Airport Authority, last month, they have announced a first round of relief involving some rental discount as well as deferral payment, as mentioned in their press release. We are still working with them to look for further relief measure because we believe the first round of relief measure is insufficient compared to the scale of the crisis that airlines are facing at the moment.
Okay. We have one more question from Kelvin of JP Morgan Chase & Co, the question is: In terms of deferrals of aircraft deliveries, what sort of timeline are we looking at in terms of progress in the ongoing discussions? What is our target for aircraft delivery delays? In light of the current situation, are we looking to push back as much as possible?
It really depends. I think we are having a very detailed discussion with our aircraft manufacturer. I cannot go into too much detail on that. For this year, just to provide a bit more information, originally planned, we have 17 aircraft delivery this year. We're looking to adjust the delivery, by various degree. We got, a number of A350-900, a number of A350-1000, a number of A321neo, with our KA, Cathay Dragon Airline, and also a number of A320neo with Hong Kong Express that are due to deliver this year. We've been working with different parties to talk about the potential delays of some of these aircraft.
Okay. The next part of this question is on the voluntary special leave scheme. The question is: In terms of the voluntary special leave scheme, it was mentioned that we could extend this. How sustainable is the scheme? At what point would we look at more significant layoffs?
Well, first of all, our special leave scheme, it covers us for the next few months until June. We are asking our staff who participate to take three weeks' worth of leave between March and June. I think the next four months are already covered by this special leave scheme. As to more drastic measure in terms of staff costs, again, it's too early to say. We will not rule out anything, but, the situation is very fluid, so we have to continue to review the situation.
Okay. I think we have time for one more question. The question comes in from Rebecca of Credit Suisse. The question is more on demand: Do you expect a pent-up demand to be released, when the COVID-19 situation is over? If it comes back, which region do we expect a better recovery, when the situation improves? That's the first part. Maybe take the first part first, yeah.
In terms of recovery, I think it would have first be driven by many of the governments lifting their travel restriction. I think that's the first condition of recovery. If that happens, we believe, and we hope that there will be pent-up demand for both leisure and business travel. We don't know when it's gonna happen, and I think we are in no position to predict that. In terms of the regions of recovery, because the COVID-19 situation, I think, started in China and in Asia, and our expectation is that if there's any recovery soon, I think it will come from the region and then the long-haul route.
Okay. The last part of the question is: passenger yield was down 3.9% year-on-year, and load factor was down two percentage point year-on-year. Passenger revenue is still up by 1% in 2019. May I ask, what's the driver behind this revenue growth?
Well, the driver behind the revenue growth is the capacity growth of 5.1% in 2019.
Thank you for your questions. Kindly note that the slides from today's presentation will be made available to download on our investor relations website later this afternoon. If you have any further questions, do write to us at ir@cathaypacific.com, and we'll endeavor to respond to them as soon as possible. This concludes the Cathay Pacific 2019 annual results analyst briefing. Thank you for joining us.