Earnings Call: H2 2019

Mar 11, 2020

Annual report

The first question comes from Ben of Goldman Sachs. Could you please elaborate on the impact of coronavirus on traffic and yield in February March? And bookings in April. In March, April, you are cutting capacity by 65%. Is that also a reflection of traffic volume? What are low factors in March? Let me answer that. Thank you for the question. First of all, let me recap the capacity change as a result of COVID-nineteen. For fab to April so far. In fact, we have cut our passenger capacity by, around 30% And for March April, we have cut our capacity by 65%. All these are measured in ASK terms, In terms of frequency, actually in fab already, we have cut 65% of our frequencies. And in March 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 low factor has also come down. At the moment, our low factor based on the reduced capacity is hovering around 50% only. And also the, we have seen, substantial yield drop also. So you can calculate that, based on the capacity drop, the revenue drop in these few months, actually more severe. Okay, thank you. The next question comes from Lulya of BOCOM. Could we get a sense of demand outlook by region for the first half of twenty twenty as we see COVID-nineteen accelerate in Europe and North America, while Asia numbers decline, should we expect increasingly divergent regional demand growth in the coming months? Okay. So so far, I think the situation is still very fluid and dynamic. As COVID 19 broke out, from fab onwards. I think the first affected route in our network will be China. And so far, we have cut our China network by 90%. And then after that, gradually, our roots in Asia have been affected also. And, now we're also seeing some, long haul regions like US, Europe getting affected as well. So 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 effective. The situation is going to change as the situation develops in those countries. And also, I think it's worth emphasizing that our roots are all interdependent. As we, close our roots in the regions, the long haul roots will be affected as well because, 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. So I think the whole network because of the transit traffic we carry severely severely affected, whether it's a 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 banker? Well, as we've mentioned over the period, we had our hedging difficulties in the past. And so we stick to our current policy. So what we've done now is that, as we've mentioned, we no longer an outlier. We hedge, like most airlines to a 2 year period. And we also hedged more than 50% of our cover and relying that the fuel surcharge mechanism is back in place in that stage 2. So in that sense too, we're taking advantage because we continue with the policy of hedging at the long end. All of 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. But we very much operate to we still believe in managing the fuel risk, and very transparent with it. So as I mentioned, every $5 drop, per month is about $7,000,000. Okay, thank you. The next question comes from Kelvin of Daiwa Capital. The first part is also on hedging, so 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? And the next part of the question is, what kinds of further cost cutting measures would be launched in the second half of twenty twenty? Okay. Let me answer the question. For first half, in terms of capacity, I've mentioned that, The capacity cup at the moment up to April is already pretty severe, as I mentioned in answering previous question. We are also looking at May June in terms of capacity cut. At the moment, we are making a more moderate cut compared to March April. But as I mentioned before, the situation is very fluid and is changing every day. So we'll watch the situation very closely and make decisions around a capacity cut for May 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. So 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 18th of UOB. And there are a few parts. So maybe let me ask one by one. So the first part is is CAFE planning to defer aircraft deliveries in 2020? 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. So we are in discussion with those suppliers at the moment. Okay. The second part of the question is, could you guide on 2020s CapEx? And would you rule out a cash call in 2020? So in terms of CapEx, as I said, we're working with our vendors to defer, on that basis. So So the focus at the moment is to move our CapEx, as Ronald just mentioned. On the basis, in terms of our access, too liquidity in a relatively strong liquidity position, we are we've Ronald talked about the capacity cuts for for April May and a very, very difficult first half. And we are at the moment of planning, the recovery in the second half. So where we stand today, there's no there's no need, for a cash call. Obviously, if things deteriorate, we can't rule out anything at this point in time. 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 majeures arising from COVID-nineteen? We've been working with different authorities in terms of, wafer for slot utilization in different airports, including those in U. S. And in Europe. And I think it varies by countries. So, but we're working hard with them to so that we can get the necessary way for in terms of slot. But when it comes to Hong Kong, I think we've been working very closely with evo aviation department, and we've already got wafer, until end of this summer season anyway. So I think we would like to thank the situation department for helping us with that. Okay. Thank you. The next question is from Sean of JP Morgan. I wanted to kindly ask what is Catapacific'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 Cafe 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. But as the passenger flights get canceled, significantly, our cargo capacity overall also got affected. And at the moment, I think our cargo capacity has gone down by nearly 1 third because of the cancellation on the passenger side. Having said that, I think supply on the cargo space. So we have been providing, using passenger aircraft to provide cargo services in the region. So 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 a dedicated freighter services from our subsidiary Air Hong Kong to provide more cargo space to the market. So all in all, I think we are trying to contain the shortage of supply, make sure that the supply chain is stable. The next question comes from Eric of UBS. There are 3 parts and I'll ask the cargo part first. Any signs of cargo recovery, how much benefit from Hong Kong international airport terminal hardware. So that's the question. Okay. But currently, cargo demand is still, on a decline. Because partly because of the, trade war still going on between U. S. And China, but more short term is partly due to the, well, the resumption rate in the manufacturing, and particularly in China is not fully resumed yet. So demand is still depressed, but, 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 an airline perspective at the moment. The second question is about, can you remind me again? Hong Kong is a national airport terminal charge waiver. Is it going to benefit the cargo? Yes. Okay. So we have working, we have worked with airport authority and from 1st April onwards, we're gonna reduce our terminal charge out of Hong Kong by 20%. And we do it in order to boost the competitiveness of Hong Kong Airport as an international air cargo hub. So we believe that the reduction in terminal charge would definitely increase and help Hong Kong's competitiveness as air cargo hub. But it's yet to start. So I think the effect is yet to be seen Okay. The last part of Eric's question is on Hong Kong Express. So and the question is, Is there any chance of writing down some goodwill for Hong Kong Express due to the recent challenge? Hong Kong Express, as I said, when we bought it back in last year, and it's a very exciting growth story for the Cathay Pacific Group, we're very much a long term investment, and that was the plans when we bought it way too short term to to even see that that, still remains a very strong and good investment. So no plans to, to write off any goodwill in Hong Kong expires. Okay. The next question is from Andrew of Jefferies. First part is also on cargo. So how much have cargoes increased in the past few weeks. What is driving this, and is it sustainable? CX using passenger frames to carry cargo only with no passengers. So some of that has been re private. So that's Well, as I mentioned, there's a short term imbalance in supply and demand at the moment in the cargo market. So our cargo yield has improved. I can't review the actual figure, but it has improved, more than double digit I would say. But this is, I emphasize, this is short term, and we are trying to provide 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 is I think it's about the usage of The usage of passenger, print Yes. I've already answered that previously. Yes. Correct. So the second part of the question is specifically on hedging loss. So checking on fuel hedging loss, if Brent remained at $48, does it mean that there will be a loss of $33,000,000,000 loss US each month? So that's the question. No. No. So I said the average brand price for March is $48, if it's stuck 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 $7,000,000 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, but he wants to know the any kindly 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, and the situation is still very fluid. And it hasn't stabilized yet. So I think it will 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. The next question comes from Fang Thian Lei of Morgan Stanley. And the question is, any delay to operating lease payments now any changes to operating these plan? Again, there's no changes to the key plans. Obviously, we're working with all vendors to discuss with them on a relationship basis. But nothing that's not being negotiated would say on a relationship basis? Okay. The next question is, from James of Bloomberg Intelligence. And the first part of the question is, how much of your cost 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. And the third part is what low factor do you need to cover the variable costs? So it's a cost question. Again, I think our accounts are pretty transparent and, and, pretty full in that sense. So the split between direct and indirect costs are kind of shown on the P and L account and in the notes to that, to do your own analysis on that front. Obviously, we are normally quite a fixed cost business. And as we said, we're working with our key relationships to defer and discounts some of that cost. So, again, you, it's, it's in the account 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, but this last question is from, Wei Fang, And the question is, is there any change for CapEx plan in 2020 and also 2021? So I think we have touch about the 2020, but 2021 this way? There's no I mean, our biggest form of CapEx is our aircraft deliveries And at the moment, other than speaking with the vendors in terms of timing, etcetera, there's no plan to change our order book at this stage. Okay. Okay. I haven't got any more questions and Ah, there's one more that just come in. It's, again, from Ben of Goldman Sachs. Okay. The question is, the bank covenants you mentioned 2 times net debt to equity ratio. Is that including these liabilities? That's the question. And, Suno, so the Hong Kong IFRS 16 was the leasing that you're operating onto the book. So in our in the financial results, you'll see that our gating jumps quite significantly from 0.92to1.35. If you take that out, which is the calculation that our bank covenants are on close to 0.96. So the the like for like comparisons 0.96 to 2. And, I think since I mentioned the last question, a few more questions come in. So, there's a question on There's a question from Jenny of JP Morgan, on, park, park aircraft. So how many aircraft have been grounded at the moment. Do we still need to book DNA and operating these for these air crops? So that's the first part. And the second part is has Hong Kong international airport provided some landing fee or passenger fee discount to us. So two parts of the question. How many aircrafts have been grounded? Well, at the moment, again, the situation is very fluid, but we have around 100 parked at the moment overnight in Hong Kong International Airport. And in terms of we leave 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 the press release. But we are still working with them. To look for further relief measure because we believe the 1st round of relief measure is insufficient compared to the scale of the crisis the airlines are facing at the moment. Okay. We have one more question from Kelvin of JPMorgan. And 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 have we are having a very detailed discussion with our aircraft manufacturer So I cannot go into too much detail on that. But for this year, just to provide a bit more information, we have delivery originally planned, we have 17 aircraft delivery this year. And we're looking to adjust the delivery, by various degree. We've got, a number of A350-nine 100, 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. So we've been working with different parties to talk about, the potential delay of some of these aircraft? Okay. The next part of this question is on the, voluntary, special needs scheme. So 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 let me see here if it's suddenly 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 3 weeks were probably between March June. So I think the next 4 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 this situation is very fluid. So we have to review, continue to review the situation. I think we have time for one more question. And the question comes in from Rebecca of Credit Suisse. The question is more on demand. So do you expect a pent up demand to be really east, when the COVID-nineteen situation is over. And if it comes back, what which region do we expect a better recovery, when the situation improves? So that's the first part. We take the first part first Sure. Well, 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. And if that happens, we believe, and we hope that there will be pent up demand for both leisure and, business travel. But we don't know when it's gonna happen. And, I think we are in no position to protect that. And 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 routes. Okay. And the last part of the question is, passenger yield stands 3.9% year on year and low factor stands 2 percentage points year on year. But passenger revenue is still up by 1% in 2019. Where I ask, what's the driver behind this tried 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 ircafepacific.com, and we'll endeavor to respond to them as soon as possible. This concludes the Catholic Pacific 2019 annual results and list of leafreen. Thank you for joining us.