Okay. Good afternoon, everybody. For those of you who don't know me, I'm Rupert Hogg, Chief Executive Officer of Cathay Pacific. We got a deck in front of us. Martin, CFO, I'll let you take us through the slide, and then the three of us will answer questions. Thanks.
Good afternoon, everybody. It's a rather deep room, so hopefully you can hear me if you can't see me at the back. At the last analyst briefing, we discussed some of the macroeconomic headwinds that we're currently facing in terms of the geopolitical and trade tensions, the weak cargo market, the impact that was having also on our passenger yield and the strong U.S. dollar, et cetera. We think we have produced some solid results with a group profit of HKD 1.3 billion, and also the airline after-tax profit of HKD 615 million. This slide just shows you that could trend. These are just looking at the last three years of first half results and that trend we've had since the first half of 2017, as we continue with our transformation program.
Overall, the group attributable profit of HKD 1.3 billion compares to a loss of HKD 263 million, same period last year. As mentioned, at the airline profit, HKD 615 million against a loss of HKD 904 million. Profit from associates, which is in the main Air China, is up to HKD 732 million compared to HKD 641 million. Again, just to remind you that we account for Air China three months in arrears, so that's the period up until the end of March. Group revenue up 0.9% on ATK growth of 3.6%, ASK growth of 6.7%. On the passenger side, the impact is on yield. Passenger yield down 0.9%. In terms of cargo capacity is up 1.1% in the main through passenger belly space. Cargo yield again impacted down 2.6%. Cargo carried down 5.7%. Cargo down across the board.
Again, on a cost front, our underlying cost ex fuel is marginally down at 0.9%. Big picture waterfall chart shows you the movement in the airline's profit before tax of the loss to the profit of HKD 907 million. You'll see the big two green bars being the passenger and cargo revenue. That's driven by the passenger revenue up 5.6% on the ASK growth of 6.7%. Cargo revenue was down 8.9% on its capacity growth of 1.1%. In terms of the other revenue there, marginally down. Cargo trucking is included in other revenue, which is obviously down with the weakness in the cargo market. Last year, you remember we had a couple of aircraft that we had leased for the buoyant cargo market, or the more buoyant cargo market from Atlas. We don't have those this year. Year on year, that's down.
You'll see that coming through on the cost side. Also, we have lower in-flight sales as we change the supplier there. Net fuel costs had a big impact. Gross fuel down 4.5%, net fuel down 7.7%. We'll discuss the costs later in the presentation. As mentioned, passenger revenue HKD 37.5 billion, up 5.6%. ASK growth 6.7%. That's a combination of the full impact of the 2018 new routes, new routes in 2019, increased frequencies, and also the use of larger aircraft and the seat configuration. Yield down 0.9%. That's intense pressure in both the premium and long-haul economy cabins, more transit passengers, and some unfavorable FX impacts. Our revenue efficiency down marginally at 1.1%. This slide has become a regular slide showing our new routes. We fly new routes to Seattle and Komatsu in 2019.
Again, we highlight the green areas where our routes that are not served by any other airline from Hong Kong. Around the board here, in terms of Europe, growth in Europe, in terms of the ASK growth, we've got the full year impact of Brussels and Dublin and increased frequencies to Madrid, Frankfurt, and Paris. The increase in the U.S. with increased frequencies that we had the full year effect of from last year. We've got robust growth from the Indian market here. In terms of yield, you'll see the impact in South West Pacific, North America, and Europe in terms of both the premium traffic and our long-haul economy class. Cargo is down across the board. Cargo revenue at HKD 10.3 billion, down 8.9%. Load factors down 4.9%. Cargo carried down 5.7%. Gross cargo yield down 2.6%. Weak overall market sentiment across the whole cargo market.
The cargo revenue per AFTK down nearly double-digit at 9.8%. So cargo volumes significantly down from the same period last year. In terms of our operating costs per ATK, we do get the benefit of the economies of scale from the introduction of the larger aircraft and the change in economy class seat configuration. We have a significant reduction in our net fuel cost of 7.7%, as mentioned. Our underlying unit costs, ex fuel, are down 0.9%, which we'll go through in more detail in a second. Fuel remains our biggest cost at 28%, when staff costs, aircraft depreciation, landing and parking, aircraft depreciation, aircraft maintenance being the big ones. Fuel remains our biggest cost. Of course, the challenge of the transformation is we're very much a fixed cost business as we go through our initiatives. Gross fuel, as mentioned, down 4.5%.
That's a 6.5% decrease in fuel price, 2% increase in consumption, and net fuel down 7.7%. The crack spread has widened a little bit over recent months. In terms of our hedging book, we are 33% hedged in 2019 at US dollar Brent price of $62, marginally above where we are today. In 2020, 30% hedged at $65. In 2021, 8% hedged at $62. Overall costs per ATK down 2.6%, underlying costs down 0.9%. That's after adjusting for FX movement, the introduction of the new accounting standard on leases, which is IFRS 16, and our exceptionals, which are outlined at the bottom of that slide. Big impact is the strengthening U.S. dollar. U.S. dollar, as we've mentioned in many of these briefings in the past, there's sort of three significant impacts to us.
One is the translation of our foreign revenues into Hong Kong dollar, which obviously impacted by a stronger U.S. dollar. The second is more harder, which is the overall sentiment of travel when the U.S. dollar, Hong Kong just becomes a more expensive place to travel to. The third is the revaluation of balance sheet items at that balance sheet date. The big two currencies that we look at is the Hong Kong dollar, U.S. dollar, and obviously the impact on the renminbi both for us and our associate, Air China. Taking that out, we've adjusted the cost base there, as mentioned, to look at our underlying costs. We've adjusted it for the currency, IFRS 16, and the exceptionals. I would say the impact on currency doesn't look too significant there, but you can see the impact of the revenue of HKD 650 million.
In others there, of the HKD 309 benefit on the cost front, a lot of that was the Hong Kong dollar going to the stronger 7.85, moving, strengthening down at the end of June. Since then, it's gone back to the 7.85 range. Again, that will reverse in the second half should it stay like that through to the end of December. In the overall cost per unit side there, again, these are sort of the graph looks a big step change, but we're only going from 229-227. Again, the trend is in the right direction. On the staff costs, we've seen productivity improvement, and we've started the output reorganization on that side. On the landing and parking, we've seen the benefit of the bigger fleet.
Owning the assets, again, we mentioned that in terms of the Atlas aircraft, we saw that reduction in the other revenue. We also see the benefit of it coming out our cost there. Some of our costs per ATK, as we mentioned in the past, we continue to, since we started the transformation and saying we're trying to keep our cost per ATK down, we did say that we re-thought about that in 2017 in terms of investing in the customer and brand and also obviously investing in new aircraft. We're very proud of our fleet and our investment in in-flight entertainment. On that new fleet, you get that benefit in the fuel side. Our fuel unit costs are down per unit 1.5%. 2% increase in consumption on our ATK growth of 3.6%. We're seeing that benefit not coming through that metric.
In terms of our subsidiaries, the cargo terminal and everything else, again, it doesn't have a massive impact across the board, our subsidiaries here. Air Hong Kong, we own 100% of now. In terms of Air China, the big thing too, as I pointed out, Air China, we report the results three months in arrears. The impact of the strengthening U.S. dollar in May will come through in August, as we previously mentioned. The main impact on their results will come through in our August results. In terms of our balance sheet, we've got shareholders' funds of HKD 65 billion. In terms of cash flow, we've got nine aircraft coming in 2019, five already delivered. We'll talk about that in later slides.
That cash outflow includes the HKD 2.25 billion that we moved into escrow for the acquisition of HK Express. These results, you'll see the net debt equity ratio there of 0.94. That's the prior to the introduction of IFRS 16, which is the lease accounting, which we introduced from the start of this year. The impact of that is to put operating leases onto your balance sheet. Property, plant, and equipment increases by HKD 17.4 billion. Your lease liability goes up HKD 18.6 billion. Your impact is mainly through your reserves, HKD 2.3 billion, but your impact on your gearing goes from 0.92 to 1.25. Banks still remain, looking at the calculation on the previous assumption of how we calculate it. Still very healthy in terms of our financial covenants. In terms of the impact of IFRS on our P&L account, it has a very negative impact.
Impact is a loss of HKD 23 million. In terms of cash flow, there's no cash flow, but there's a reallocation between your net cash inflow from operating activities and your net cash outflow from financing activities. There, that just shows you the trend before and after the introduction of IFRS, and the impact on the gearing. In terms of fleet, as mentioned, we have nine aircraft coming in 2019. Four A350-1000s, two A350-900s, and three used aircraft, B777-300s. Five of those aircraft have already arrived. You can see that in the A350-1000s there, up four there, and one 777-300, 777-200 has left the fleet. You'll see we've got 69 aircraft, two of them used aircraft, coming over the next five years, mainly in the form of the A321neos and the 777-9X.
Going to our transformation, as we mentioned before, we launched, in the second quarter, our service brand, Move Beyond. Very proud of that. We always said that the transformation, that it's more than just getting back to financial health. We have to be brand led and customer focused. The reaction so far, I mean, obviously, it's a service brand, so it takes a long time to invest in that and rally behind it, but the feedback from both staff and customers has been very positive to date. We rally behind words like thoughtful, progressive, and can-do spirit, which goes behind the themes of what we're trying to achieve. In terms of our transformation program, we've talked at length over the last three years of this. We've now got over 1,000 initiatives in our tool that we call WAVE that tracks those.
We're operating them under the four pillars, as we said, through customer, operations, productivity and value management, and high performance. In the customer side, we have our award-winning lounge proposition with the new lounge in Shanghai. We've put an awful lot of effort into digital and disruption management on that side. On the air, we've gone to inflight connectivity. We're rolling out our new business class proposition in terms of dining on demand. We're looking at all sorts of new fare preparation, using digital in our cargo business to improve time to market and space utilization. On the operational side, again, under that pillar, we're working with our suppliers, big one being the example of HAECO on lean initiatives with them, looking at things like fuel consumption. On the high-performance part, again, across, we're looking at the revamped service delivery training program for our front end staff.
In the back office, in terms of the productivity and value management, we've gone to guided buying, Ariba guided buying. We're rolling out that GBS, which is the end-to-end process review. We've moved the whole of accounts payable, and accounts payable across the airports into GBS, and we're trying getting the benefits now of automation and robotics. Outlook, very fluid. As you can imagine, the geopolitical and trade tensions have escalated, and they will be expected to continue to impact our business negatively in the second half. Protests in Hong Kong have reduced our inbound passenger traffic in July and are adversely impacting forward bookings going forward. Our passenger business continues to be affected by that intense competition. The U.S. dollar, as expected, and in these times, has strengthened, which is negative to our side.
Whilst we're seeing the benefit of lower fuel costs, we do expect that to be volatile. The short-term difficulties and challenges are there. In the meantime, we remain very confident in Hong Kong's position as the largest aviation hub in Asia, its connectivity to the Greater Bay Area. We're very focused on our transformation program still, which we do believe we said that our initial objective to be to ROCE by the end of this year, will be extended and beyond. We do believe we are on track to achieve our objective of sustainable long-term financial performance. In July, 19th of July, we did complete on the acquisition of Hong Kong Express. I mentioned the fact that we had to move money before that into escrow, HKD 2.25 billion. Total consideration, HKD 4.93 billion.
Again, we think overall this is a great investment, both for ourselves, HK Express, the traveling public, and the Hong Kong hub. With that, we'll open the floor to your Q&A. Somebody got a microphone for.
Sure, Eric.
All right. Eric Tang from UBS here. I've got two questions. The first one, let's talk in the near term, second half, can you discuss your passenger yield and cargo yield performance? What I took away from the last meeting a month ago was a faster pace of decline in terms of passenger and cargo yield, which is that yield page. In relation to that, how comfortable are you with H2 second half than first half? That's my first question.
Second question?
Second question, Hong Kong Express. Appreciate the short-term focus to build the transition plan. Can you elaborate a bit, like in the medium term or longer term, what's your vision for the LCC and how is it going to help the group, especially for a shareholder of the group?
Thank you. Gary to you.
All right. I'll deal with the yield questions. Actually, I'll deal with the revenue question rather than just single out yield. First of all, when we talk about second half is better than first half, we're referring to the bottom line. Cost is a major component of it as well, in addition to top line. Going back to revenue, when we described the short-term challenge, it's quite clear that there are a lot of headwind. On the cargo side, I'll talk about the cargo side first. We have seen the drop in volume year to date, which we have shown that in the first half results, down by 5.6% in terms of volume, as well as yield was also a negative decline. What we have seen, is the gap is stabilizing compared with same time last year.
That is all up to two days ago, before the next round of tariff was announced. To be honest, we haven't been able to comprehend and reforecast if that is really going ahead from September 1st, what will be the exact impact. I think in general, that cargo will continue to be pretty tough. Volume will have negative growth from last year. Yield will also be under a lot of pressure. The key question is, will there be a peak? If there is a peak, how long will it be? I think if there will be a peak, it won't be very long, and also at the same time, you won't be able to see the same type of rate that we have seen last year. That's the general view on cargo.
On the passenger side, it is a lot more than just what's going on in Hong Kong because we are looking at a basket of issues. Global economy sentiment has not been great, and many corporate cut their travel budget. Strong U.S. dollars is not good for us. Quite a lot of weakness in the first half already. We managed to grow our revenue by 5.5%, 5.6% on top of a capacity growth of 6.7%. You see a lot of excessive capacity out there in the market. Many of the airlines are offering very cheap deals, so we got to stay competitive. The yield decline is no longer just at the back of the cabin. Front end has also very strong competition as well. Coupled with what's going on in Hong Kong, you can imagine that there is a lot of impact on inbound booking.
With the stock market going down, sentiment in Hong Kong, you can foresee that in the coming near future, outbound from Hong Kong will also be weak. What we have seen so far is we managed to be able to find replacement traffic with Sixth Freedom passengers, but that is at a much lower yield than current form. If you see that we managed to be able to maintain our load factor for the rest of this year, that will be at the expenses of yield.
Yeah, Eric, HK Express. When we talk about early days, it's obviously early days, completion on the 19th of July. The first order of business for us is to stabilize, understand what we've got, make sure that it runs smoothly and efficiently. There are some things that we would like to improve, aircraft utilization being one. We're also looking at how the group can help it. We've said very clearly that we want this airline to remain a low-cost carrier, and that enables it to offer low competitive fares and stimulate demand and serve a segment that's not unique, but it certainly is a stimulatory type of model. I think probably, in terms of growth, yes, we would like to grow thereafter, but probably, when we meet again at the final analyst briefing, we'll have more information on what that might look like.
Yeah, if I could just address your question about second half, first half. We said at the analyst briefing the last time, where prior we'd been saying we were on track for a transformation. We said in a very difficult industry, there are headwinds and tailwinds, and when the headwinds are ahead of you and they're all lined up against you, it becomes tough to do that. Whilst we are focused on the things we can control and we think we've got that fantastic strategy, the big headwinds are the three big ugly sisters, so to speak, in terms of the oil price, FX, and the political situation that we find ourselves in. I would say on the FX, it's working against us as we know we've got the impact of the strengthening of the U.S. dollar will impact us in terms of China in August.
We know what's happened, that you can all see what's happened in July in terms of the strengthening U.S. dollar and the impact on that. On the counter of that, the fuel price is now down below 60. That counters to an extent the FX situation there. Therefore, you're looking at the political situation, which is very early days in that sense. Where you all sit, just look at Bloomberg, you're at the HKD 3.3 billion-HKD 5 billion range. Everyone in this room currently has thought that we're doing a better second half than the first. It's a true statement as sort of where we sit today.
I think the only other thing I would add to that on this second half versus first half is, of course, if you look at the cycle of this industry over one year, it's just a fact that there are more peaks where, both for cargo and passengers, than there are in the first half. That's traditionally why it's always been stronger. As Paul says, that allows growth, and with that comes economy of scale and things like that. All the factors mentioned can impact that.
Hi, I'm Parash Jain from HSBC. I have two questions, one on passenger, one on cargo. Maybe quickly, first on the cargo, I understand that with the new aircrafts coming, there's nothing much we can do in terms of managing belly capacity. With pretty much certainty that cargo trend is softening, how much lever do we have to adjust the cargo capacity, both as an industry and perhaps more importantly, at capital disposal? With respect to passenger, to your comment that you mentioned about, I didn't get your point about replacement traffic, which replacement traffic are we referring to at a lower yield?
Second, with pretty much Boeing 737 MAX not returning to the market for much of 2019 and perhaps for early 2020, are we not seeing some tightness, especially in certain route where your competitor used to have a lot of Boeing 737 MAX, maybe in that case could be Indonesia or any other market? How should we read about there's a lot of capacity despite usual tightness because of the MAX issue?
Cargo capacity. It's true to us and also to most of the airlines as well, nowadays, the growth in cargo capacity is mainly coming from passenger aircraft belly space. People are still buying freighters, but in a very small scale. There are more airlines actually opting out from the freighter business. We are still one of the biggest freighter operator in the world. We are constantly on the top three. You're right that when the market is not strong, how to manage capacity is important. As a result of that, we have already decided to early retire one of our oldest converted 747-400 freighters. It meant to be fly for another one and a half, two years, but we are going to retire it this year. That's one thing that we can do.
Also, in the short run, when we deploy our freighters, there are short-term readjustment we can do to change routing and redeploy to places that there are still growth in cargo volume. That's on cargo capacity. On the question of MAX, actually, if you go back to the time when MAX stopped to fly, there are very few operator flying MAX to Hong Kong. In fact, among all the routes that we compete, very few operators flying the MAX. As we understand, many of the MAX operator, they have been extending their lease or delaying retirement of their 737-800s. There are still capacity out there.
Hi, Andrew Lee, Jefferies. First question I have is on the cost side. First half costs were lower, 0.9%. Looking at the second half, for second half to have better earnings than the first half, I assume that there'd be more cost savings. First question I have is, where would that cost savings come from? Then for next year, do you think that cost savings will continue?
The answer to both your questions is yes. Currently, in terms of your overall cost, the biggest one that's changed is your fuel cost, and that has come down since that bit. In terms of our underlying costs, you've got two factors there. You have the second half, in terms of if it is a stronger second half, you get better unit cost per ATK on that front. You get those efficiencies. A lot of the transformation initiatives you can take, as we've talked about in past, that you can make a quick impact in 2017 by short-term things that are non-sustainable, stopping the bonuses and other things in terms of short-term measures. If you want to transform the business, it becomes much more medium-term pieces and looking at end-to-end process reviews.
As I said, a lot of those changes just take multiple months beyond a year. I do genuinely believe that our underlying unit costs will continue to fall. Our controllable costs will continue to fall as the airline grows.
Just to add to that, Andrew, obviously, we've set ourselves up to bring about effective change in the business and fundamental change and increase productivity. One of the goals of keeping our unit cost without fuel flat is, at the same time, to be able to invest in the customer experience, so maximize our chances of quality revenue. That infrastructure that we set up in terms of how we redesign the business, we will consolidate and keep going as a business improvement department, as a through train beyond the end of this year. The infrastructure that we've set up to affect change will remain.
Hi, this is Ben Hartwright from Goldman. Just a question on the passenger side and performance by region. I notice, as you mentioned, the long-haul yields down, Europe, Southwest Pacific, and U.S. Just wondering what's driving that, and particularly around the competitive pressures, which areas or which particular players are driving that competition? Secondly, just on the yield side, just wondering if you could give us a sense of the trajectory in Q1 versus Q2, then a little bit, as I was saying, how are we looking now in terms of the passenger yield year-over-year into Q3? Thank you.
Competition is actually very keen almost across the board. If you are looking for some specific examples, take American carriers, for example. They are still doing extremely well in their domestic market, and they can afford to sell a lot cheaper when they competing on long-haul market. That's one of the many examples. Another example is our Australian route. That was the challenge, if you remember, full year last year. Actually, first half this year stabilized quite a bit. We have seen Middle Eastern carrier and some Southeast Asia carrier pull out capacity from Australia. Same apply to mainland Chinese carrier flying to Australia. There are some reduction in capacity. If you look at the route that we have launched, many of them, we are the only operator along the route.
In general, the third and fourth freedom yield is better because we are the only game in town. On the other hand, for Sixth Freedom traffic feed through that route, there are alternative. People can fly through different hub. The competition is a lot keener. Your second question was on the I don't have a breakdown between Q1 and Q2. Even the months within the quarter, behavior is quite different. For example, May was not a good month, but June was much better than May, so there is no continuous trend, if you like.
Could you comment a little about the forward bookings? You've mentioned that it was weak across the board. In your June traffic announcement, you said it was high load factors in the premium class, but yields were down. Is that trend still continuing? Also, the trend for the next three months, are you still seeing the same pressure?
Let's talk about front end without the impact of what's going on in Hong Kong. We want to look at the underlying. June front end demand was strong. Load factor reflect that. Competition is strong at the same time, as I mentioned that we have seen many of the corporate, they now really going for lowest logical fares. There are competitions out there. People have choices, and you've got to continue to deliver great schedules, product, and service to make sure that you are competitive. I think front end, what we are seeing now is demand is still out there. Definitely, pressure is on yield. Booking overall, moving forward, the weakness we have already witnessed. We have already seen weakness in inbound coming to Hong Kong.
We start to see more weakness for traffic leaving Hong Kong, and we may be just seeing the beginning of it. August is a summer peak, so many of the booking, they came in actually quite early. They have been around and will be around. September will be a challenge, definitely. October is a little bit down the line. The history has been telling us that once things settle, every single downturn, when things settle, people come back pretty quickly. We would like to see that things going back to normal as soon as possible, and we'll be ready for that.
Just two small housekeeping questions. The first one, can you remind me your capacity plan? Just want to make sure there's no change to that. Secondly is still on the course. I'm focusing particularly on the landing charges, because in the first half, basically it's marginally downwards as capacity increase. Just don't want to miss out anything one off in these items, or else I'll just assume this run rate is going to carry on in the second half.
I'll address capacity. Since we have last met, we have been adjusting capacity a bit based on demand. On the passenger side, I think full year, you're looking at roughly somewhere between 6.5%-6.7% growth ASK. ASK growth is around 1% because we retire one of the BCF. We don't renew the Air Lease contract.
There's nothing exceptional in that number, so you can continue with the two.
[Eddie] from Macquarie. I want to ask any guidance on the staff and the aircraft maintenance cost in the second half?
On the staff side of things there is productivity improvements as mentioned, and also the reorganization. We would expect to see continued trend on that front. On the aircraft maintenance side, similar things. There's many initiatives, as I mentioned, particularly working with suppliers and looking at lean tools and productivity improvement, et cetera. We would expect to see those unit cost trends in both those areas continuing. As we said, the focus is on those controllable costs. The ones that we're using discretion with is in the customer facing, marketing, distribution costs and that side where we've got the flexibility. On the controllable costs, we do expect efficiencies improvement to continue going forward.
Sorry. If I can ask another follow-up question on cargo. Alongside the global slowdown, we've also witnessed a bit of downturn in terms of tech cycle, technology sector with the product launches and all. How are you seeing this, probably this tech cycle than the one that we have witnessed in the past? Is it also adding extra pressure on how the cargo is going to perform in the second half of 2019?
On cargo, actually, we still see launch of new product. Definitely there are still new generation of electronics coming out. Overall volume, we don't know what will happen to this new product. E-commerce growth is still there. In terms of volume, there is still demand. If we go back to eight, nine months ago, there was a period that really a lot of front-loading. Back in October, November last year, there was a super peak. You need to go back and think about how's the inventory being burned by the consumers and how soon they need to replenish. That's point number one. Number two is definitely everyone's impacted by the trade dispute, and maybe when a deal is concluded, some of the pending demand will come out, but we don't see it at the moment.
Okay. If that's the final question, I can be around for the next five minutes for those who want a quick one-on-one. Thank you very much for your attendance