Good afternoon, everybody. My name is Martin Murray, CFO of Cathay Pacific. Today, I've got Rupert, CEO, and Paul, Chief Customer and Commercial Officer. Usual format, we'll go through a quick presentation, then we'll take your questions. On February 20th, we obviously issued our profit alert with the group attributable profit of HKD 2.3 billion against the prior year numbers of a loss of HKD 1.3 billion. More importantly, the airline back in the black, HKD 241 million profit after tax against the loss of last year of HKD 4.3 billion. Overall, 2018 was a strong performance on the revenue side from both passenger and cargo. We saw a little bit of tail off towards the end of the year. The operating costs increased due to the higher fuel costs, overall, our underlying costs, as we'll show, were pretty much kept relatively stable.
A satisfactory performance from the subsidiaries. A weaker performance from associates due to the weaker renminbi, obviously stronger cash flow and our gearing coming down. This here shows the half-year trends. The attributable profit of HKD 1.1 billion for the second half of 2018 compared to the attributable loss of HKD 904 million for the first half, attributable loss of HKD 1.5 million in the second half of 2017. Again, this is the sort of slide you'll see from the first half there, second half 2017, 2018, the trend of where we're heading with our transformation and where we're trending, as we say, on track with our transformation goals. Our statistics there, ASK growing at 3.5%. As we've said all along, this is a different type of transformation in that throughout the 3-year plan, we're transforming through growth.
You'll see there the passenger yield up 6.7%, cargo yield up 14%, underlying cost per ATK without fuel at 1.9%. Again, we'll go through that in a little bit more detail. This is the sort of the trend at the airline level from the HKD 4.2 billion losses to the HKD 695 million. We have to strip out some new IFRS 15 and FX to make sort of meaningful comparisons. You'll see strong growth in the passenger and cargo revenue, other revenue, increasing fuel costs. Then, as you know, as we've said in the past, some of our cost base naturally increased, landing and parking charges going up, owning the assets, charges going up, other items there, we'll go into a little bit more detail later on in the presentation. In terms of data breach, not too much to update here.
We're still under a number of regulatory inquiries. No report yet to be issued, no material claims, no provision in the accounts for the data breach incident. Despite intense competition on the passenger side, we've had strong growth, 10 new destinations, load factors relatively flat. Yield strong, particularly in the premium end, strong yield management, obviously with the increase in fuel price, some cost pass-through in terms of fuel surcharge. In terms of lounges, we opened the deck and closed the cabin. Again, very much investing heavily in the customer side there. You'll see there in terms of revenue efficiency, that trend that we've been seeing since 2014 on decline. Since the beginning of 2017, our revenue efficiency increasing. New destinations, 10 new destinations, a record for us, including Brussels, Dublin, Washington. We stopped flying to Kota Kinabalu and Düsseldorf.
Part of the strategy and the transformation, the new aircraft lets us fly to new destinations that aren't served by other airlines from Hong Kong. Those are highlighted in green on this slide there. The 6.7% increase in yield, if we adjust for IFRS 15, which is a new revenue recognition SAP, the overall increase in yield, adjusting for that is 5.7%. These numbers have taken out that adjustment for comparison purposes too. You'll see strong growth, ASK growth in Europe, larger aircraft, also the introduction of Brussels, Copenhagen, Dublin, Barcelona. We did in the year, start having the denser configuration on the 777-300s. Southwest Pacific deployed larger aircraft. In terms of yield, we had strong premium front-end yield to North America and Europe. Strong demand from Japan in that side too. Southeast Asia, better revenue management, focusing more on individuals rather than groups.
2019, our ASK growth is forecasted slightly higher at 6.8% as we get the impact of the 10 new routes, new frequencies, new routes in 2019, plus the impact of the seat configuration on the 777s. As we like to stress as well is that the transformation, we are sort of seeing the trends in the financial performance. It has got financial targets. It's very much a brand-led, customer-focused transformation, investing heavily in the customer, on the planes, on the ground. On the ground, we've improved our Asia Miles reward program significantly. We've worked hard in terms of disruption communication. In the air, we've got the new in-flight entertainment systems, bigger screens, better choices, et cetera, and we've rolled out the à la carte menu choice in business class, which should be completed by the middle of 2019.
Wi-Fi has been rolled out in the 777s starting in July 2018, and will be in all our long-haul fleet by the end of 2020. We've started introducing more self-service bag drop, bag tagging facilities, the ability to upgrade, to hold fares for 72 hours, et cetera. Very much a customer-focused transformation. Cargo's had a great year throughout. It started to tail off towards the end of the year, November, December, which we'll show in one of the graphs as a second. Overall, cargo revenue up 20%. Good metrics throughout here. Cargo mail carried up 4.7%, yield up 14.7%. That's the same whether you adjust for IFRS 15 or not. Very strong revenue efficiency on the cargo side. Transshipment is strong in India, Europe, Southeast Asia, Japan. E-commerce picked up. Machinery and food from Europe and America.
Higher value temperature-controlled pharmaceutical trade improved the yield in that. This is the slide here where you can see in terms of the load factors. The first there is 2013. Those of you who've been here a while, this was a sort of step change graph as cargo built in load factor over that period. It continued to build 2017 and 2018. You can see the last two months with the geopolitical and the sort of trade problems, the slowdown there a little bit in November and December in terms of cargo. In terms of our costs, total operating costs were up 8.1%, but we need to strip out the impact of FX and the accounting standard. Cost per ATK without fuel up 5.1%, but when we strip out those factors, it's up 1.9%.
We'll go through that in a bit more detail in a second. Fuel remains our biggest cost at 31%. Gross fuel increased by 31%, net fuel up 9% on that stage 2. You'll see fuel throughout 2018 for the first 10 months, slowly increasing, then again at the end of the year, a bit more of volatility introduced with the oil price coming down in November and December. Obviously, we have the benefit of the lower hedging losses, HKD 1.4 billion of hedging losses. As I said, net fuel up 9%, gross fuel up 31%. Our hedging book, the last of the old hedges are coming out in the first and second quarter of 2019. We are averaging our hedging book at 30%, around $65, but 30% for the whole year in 2019, then in 2020, around 20% at the $66, $67.
More loaded to the front of the year in terms of coverage. Here, in terms of the cost, we have stripped out on the underlying basis there. We strip out the exceptionals. Exceptionals are all included there. The net impact of exceptionals is about HKD 158 million. You can get the detail of that underneath in terms of the exceptionals. Big thing in terms of our cost base in terms of this is FX. We have benefited year-on-year from a slightly weaker U.S. dollar, as you'll see, as I said, we're short U.S. dollar, we like the U.S. dollar to weaken. In terms of headwinds with the oil price rising, the geopolitical tensions, and this increasing U.S.
dollar are all bad macro forces for us in that sense in terms of what we're facing from where we were back in the beginning of January 2018. IFRS 15 is more a revenue recognition piece. We've had to reallocate some of our passenger and services revenue from the catering and recovery side. Also you sort of gross up for its principle over agency theory. In terms of cargo trucking, et cetera, we've had to readjust that. If we strip out the impact of IFRS 15, no real impact on the bottom line. We take out the exceptionals, you'll see the impact of FX on the business there. Net benefit at a slightly weaker U.S. there, again, it increases the cost base.
When we strip out that's how we get to the 1.9% increase in our cost per unit ex fuel. Again, on that front, just going through there, our staff costs have come down. We did the reorganization in 2017. It has come down, we have paid a discretionary bonus in 2018, which we didn't do in 2017. That's why it hasn't come down as much. The inflight services and passenger side, as we've said on the customer side, we've heavily invested on our inflight services. That's been a decision of choice. Landing and parking, we've maintained despite lots of overflying and landing and parking government increases there. Aircraft maintenance, we've seen the benefit of productivity improvement and the new fleet. Owning the asset, we've had a reduction in our fuel consumption per RTK by 1.9%.
You've got the investment in new fleet that comes in your cost ex-fuel, the benefit comes in the fuel line in that piece there. In terms of other costs there, we've invested in Asia Miles, that comes obviously through the top line there. Digital and marketing, again, through choice. What I've tried to do in the next slide is look at our underlying costs of that and look at the pieces that actually impact the cost ex-fuel. We have, as we said, through the transformation, strategically invested in the business. The new aircraft, if we make that adjustment to the fuel efficiency that comes through, obviously when we launch new ports, we spend on marketing, so I've taken that out. Atlas, we've wet-leased some aircraft to Atlas on the cargo side there.
That comes through in the revenue side, the costs obviously increase your cost base. We've taken that to do likes with like, and similarly the investment in Asia Miles we've stripped out. When you do that, you'll see that the underlying, we're calling it pro forma underlying, costs compared to 2016 are relatively flat. The 2017 number was HKD 211.78 there, we've added back what would've been the discretionary bonus just to show what would happen if we'd compared on a like with like basis there. Again, once we analyze our cost base, we think we've done a pretty good job on the transformation side in terms of looking after our costs that we want to control. In terms of the subsidiaries, they've all performed satisfactory in 2018. Again, we take 100% control of Air Hong Kong, we did at the end of the year.
Again, continue to invest in Asia Miles. In terms of the associates, a weaker result from Air China. We report those results three months in arrears, again, that's a softening of the renminbi. Cash flow, a big increase in net cash inflow from operating activities. Again, the trend at the bottom there, gearing starting to reverse for the first time we've seen in a while, which is best shown in this graph here. That gray line shows the turnaround in gearing as we turn the business around. 2018 return on capital employed of 4%. Our fleet, 202 aircraft. The impact in 2019 is that the IFRS 16 will put those operating leases onto the balance sheet. Again, that'll change some of the numbers that we show throughout the year on that.
We still have one of the youngest, our average long haul fleet is about five years old, which is one of the youngest in the world. New deliveries, 10 new deliveries in 2018. Eight Airbus A350-1000s and two Boeing 777-300s. One BCF freighter was returned to lessors and one Boeing 777 was returned, and three Airbus A330s returned to lessors. The fleet forward booking profile, as we've reported before. On the transformation itself, again, it's one of these ones that we've been talking about for two years now. We have over 800 initiatives, about 50% of those on the revenue side, around 50% on the cost side. We organized a change to head office in 2017. 2018, we've been restructuring the outports. We've had big investments in what we call the building blocks in terms of digital lean GBS.
Our digital capabilities are stronger than they were back in 2017. A lot better data visibility coming across through the whole of the business. Again, in terms of the customers, we've mentioned advanced seat reservations, better investment in Asia Miles, improved disruption information and alternatives, et cetera, coming through there. We've mentioned the slides in terms of investing in the customer. On terms of operational excellence, new crew management rostering systems. Again, these are all trends that we've talked about in the past, and very much a big focus on our high performance pillar, our people, and our internal feedback on how we can constantly improve. The fundamental building blocks of end-to-end process. We are transforming nine core end-to-end processes using digital lean. We've created 900 lean practitioners trained so far.
The beauty of lean practitioners is they have to come up with a measurable target, and they can only get the certificate once they've proved those targets are performing. It's a very good discipline in terms of managing measures and changing the culture of that side too. A lot more automatic processes going through our new Global Business Service Center. In terms of the overall outlook, as I said, you saw that in cargo the last two months of the year slowed down. The U.S. dollar, the macro part of the business, the U.S. dollar is strengthening, oil prices increasing. There are some tensions out there, macro forces or headwinds that are working against us at the moment. Transformation program remains on track. We are delivering, we believe, both in the revenue side and the cost front.
We're relatively positive at the moment that the transformation program is on track. Of course, long term, our goal is for sustainable profits, it won't end at the end of 2019. We will continue our relentless push for productivity and efficiency improvement. We will be growing the business continuously through to 2024. You've seen our fleet plans in terms of growing our regional and our long-haul fleet. The focus very much comes on the Greater Bay Area and our presence and penetration in there, and making Hong Kong International Airport a multi-modal connectivity and seamless access throughout. Again, we want to position ourself to take advantage of the third runways opening in 2024. With that, we had an announcement on the 5th of March that we are in active discussions with Hong Kong Express.
No agreement has been entered into, we can't talk any more about that at this stage. With that, we will open the floor to your questions.
Hi. Good afternoon. I'm Eric Lin from UBS. Congrats on the progress on transformation. If I may ask you to elaborate a bit more on outlook. Let me split it into passenger and cargo. On passenger, what are you seeing year to date in terms of loads and yields? Forward booking wise, can you share with us, your yield, your forward booking curve, what are you seeing in terms of yield and loads? Especially, I think you are going to grow 6.8% capacity gradually. Are we going to assume that strong yield momentum last year gradually fade away as a result of your accelerated capacity growth yield momentum? That's my question on passenger. On cargo, I would say apart from macro, it's a bit complicated because you've got fuel surcharge being more in line with oil price.
I think on a cargo yield perspective, are we going to expect that fuel surcharge component is going to be down year-on-year, affecting your blended cargo yield? That's my first question on that. Secondly, you also have Air Hong Kong coming in as 100% consolidated, and correct me if I'm wrong, if Air Hong Kong is more like a contract business, so it's more stable. What's going to be the blended cargo yield looking like in 2019 on the back of these two factors? Better stop here. Thanks.
Do you want to handle the passenger?
All right. Eric always asks very elaborate questions that by the end of it, I forget what were you asking. I think when we look at passenger yield and performance of 2018, as usual, this is early in the year, there are a lot of uncertainty. What we have seen so far this year, peak continue to be peak, similar to what I said in the past, but is more polarized. Slack is very slack. It's absolutely important to get revenue management right, and you want to make sure that you can capture the best quality revenue during the peak, and open up a flight during the slack. We have a reasonable Chinese New Year. We expect to have a reasonable Easter. In between peak season, is quite slack.
If you compare with last year, we came from a relatively high base in terms of yield, it will be challenging. In terms of low, there are in general, in line with what we expected with some specific point of sale, relatively weaker. I would say mainly driven by weak in currency. Southeast Asia countries, also Mainland China, these are the market that as a point of sale, relatively weak. You have places like Taiwan, during the elections, quite quiet. People were not traveling, but as soon as the politics is over, we see rebound in number of passengers. You want to talk on cargo or?
Yeah, why don't I talk a little bit about cargo, Eric? I think you were asking how we see the sort of future looking forward. Well, I mean, as the backdrop, there's no doubt that trade uncertainty is not good for cargo volumes. We have seen a bit of a tail off on volumes. On the issue of fuel surcharge, of course, we've collected fuel surcharges throughout the period, both in Hong Kong and overseas, that's just a straight reflection of the price of fuel. Whilst there's some pressure on the cargo market at the moment, some of the underlying fundamentals are positive. The first of those is that the growth in e-commerce, and particularly cross-border e-commerce, continues and is much less seasonal than previous trends.
The second is that the traditional imbalance as the largest cargo hub in the world of outbound is being better matched with inbound. The third is that we're picking up increasingly, what we call high-value cargo that needs to be handled with care, and where people are discerning about who they ask to do that.
The long-term fundamentals are good for us in cargo, but there's no doubt there's a weakness at the moment. There's one other point I would add, it's relevant to our expansion of destinations and frequencies, in that notwithstanding the fact we've got 20 freighters, we're now carrying a higher volume of cargo in our bellies. All of those things in combination, they don't take away the impacts, but they protect us against the impacts.
Air Hong Kong?
Air Hong Kong. Yeah. I can't remember what the question was on Air Hong Kong.
How has that been changed?
You want to answer that?
Air Hong Kong, we take 100% of it. The way that it's structured, we're not expecting any significant big deal over the next two to three years.
Thank you. This is Kelvin from Daiwa. I got two questions. One is regarding a previous announcement on acquisition or talking about stake, taking stake in the Hong Kong Express. I want to ask, what makes management there thinking about, if you compare previously, you probably are not very favorable on LCC. What factors have been changed in the past that makes you, "Oh, maybe it's the time for rethinking about that?" That's the first question. Second question is that for the cargo, you mentioned that you see some slowdown. Is it a kind of a result for the maybe of the China-U.S. trade talk that people might defer on the shipment, or you see it's actually the whole macro or consumer sentiment is very weak?
You don't like Express.
Maybe more color on that.
Yeah. I'm sorry to disappoint you, the announcement that we made on HK Express is pretty much the totality of all we're going to say at this moment. If a deal gets concluded, obviously we'll talk much more extensively to you and the stock market at that stage, we're really not going to elaborate on any of the wider factors around that at the moment. On the issue of cargo and what's driving it, I'll let Paul-
Yeah. On the issue of cargo, just like what we talk about when we met back in November, definitely there were quite a bit of front-loading back in October or starting from mid-September last year. The peak last year was super peak. It takes time to digest the inventory level. Also, the current trade talk between U.S. and China have certain effect on people delaying to place extra order, et cetera. If the fundamental economy continue to be strong, the dispute is over, we might see some rebound later on this year.
More importantly, even if transpacific route volume is not growing as the speed as before, it is important for us to have the network to be able to be agile enough to redeploy our capacity so that we can serve the different trailing, whether it is within Asia or between this part of the world and Europe.
Thank you.
My name is Edward Chiu from Morgan Stanley. First of all, regarding your ASK guidance for this year, we see about 6.8%, so it's significantly higher than the last two years. I just want to know, this is due to your fleet plan or due to you see better demand outlook? What's your expectation on the load factor for this year? The second, regarding the cargo business, could you just give us a sense of how much profit did you make from last year contributed to your bottom line? Thank you.
All right. I'll take on ASK. The 6.8% is our plan for this year. Remember, every year we put out our plan, and for operational reason and other reasons, we may or may not be able to operate to what we plan. Far, year to date, we are. Among the 6.8%, quite a substantial amount was driven by full year effect of extra flight we launched last year, whether it's new destinations or extra frequency. The reconfiguration of our 777, both the ER on long haul and the 777-300 serving the region, also have an impact on the growth rate. Unlike last year, we launched 10 new destinations. We are still having some new destination, but not to that extent. That also contribute to part of the growth in ASK. We don't expect load factor to be very different from previous year.
The load factor of 2018 was marginally down from 2017, the trend is continued to be around a similar level.
The only thing I'd add to that is that you can see ASK growth is driven by long haul. If you do seat count instead of ASK, we're still confident that network is well-balanced, and the feed will be balanced across that. On the issue of cargo, we don't separate cargo out as a profit center. I can't really answer that question. We don't look at it in that way. It's a very important contributor, not just for the freighter fleet in its own right, but to the viability of many of the routes that we fly passenger aircraft on. Worth remembering that our fleet is about 80, I think it's 85% wide body. Our belly capacity in our passenger fleet is very high.
Hi, it's Andrew from Jefferies. Could you comment a little about the cost outlook? Because last year you mentioned landing cost, depreciation, finance cost would increase on a year-over-year basis. What about for this year? Any one-off big costs?
Other than what you see in terms of the depreciation and our investment in our fleet, in that sense, we've got nine aircraft coming on this year. Similar new aircraft coming on board. We still have that sort of underlying pressure in terms of some of our costs. I would say that the focus that we have on measures, metrics, lean dashboards, et cetera, is coming through. We're starting to see that trend. You do have to strip out a lot as we've tried to demonstrate there in terms of how FX and new accounting standards can impact on that. Where I sit today, I'm pretty confident that underlying cost trend is, as we said, sort of flat to reducing in 2019.
If I can just add to that, Andrew, we've always said that there's no one silver bullet here. On the productivity side, the work that we've done around getting people better data and the ability to analyze data better is just making for better decisions. We're stripping out a lot of waste. We have nearly 800 initiatives, I think, at its peak, all of which are being tracked as business cases. All of which are either driving more revenue or driving productivity or driving higher asset utilization or some combination of those things. As we cement that in the business and people get better at it and the tools get better and our data infrastructure gets better, we hope to be able to become more productive year-over-year and then start investing back into the customer experience. A virtuous circle.
Hi, this is Ajit from UOB. Perhaps you could share some light in terms of the outlook for corporate travel. Do you see any deterioration, especially to and from North America? Also, could you share in terms of whether you see any pickup in leisure premium travel?
On front-end corporate travel, we see year-to-date pretty solid demand. We haven't seen any softening. With the new route that we are going to launch, Seattle, from end of March, another new destination that we expect good support from corporate travel in the front end. Another IT hub that we link up Hong Kong with. When it comes to leisure travel, we have been introducing our premium economy class cabin for a number of years. We have seen year-on-year growth in revenue, and we have also seen the trend of passenger are getting used to it and they like the product, they enjoy the service, and they are willing to pay a bit more to have the extra comfort as well as differentiation in service. This will be continued to be our direction moving forward.
Hi, this is Ben Hartwright from Goldman Sachs. I have a couple of questions. One is on the transformation program. I think in the announcement you mentioned, obviously that it's starting to contribute already and your expectation is for that to increase in 2019. Is there anything you can give us in terms of quantifying the contribution in 2018 and then sort of guidance in terms of what we should expect in terms of either revenue or cost this year? That's on transformation program. The second question, just on the data breach, wondering whether there's anything you can tell us in terms of where the regulators are. Is there any risks or are they looking into it still, particularly around the GDPR in Europe and is there anything you can tell us there? Thank you.
There's nothing specific, and we've talked about this at length in terms of When you're transforming through growth and you can't sort of cut significant costs or, as I said, there's over 800 measures that we're implementing on that piece. We've given you our overall target for the year is to try to get our return on capital employed up above our weighted average cost of capital. We've given that target of 7.5% at the end of 2019. It's a big turnaround for the airline in that piece. When we started the program back in 2016, we were seeing our net yields declining with the oversupply in the market in that point in time. In that knowledge, we knew that in order to achieve the overall target, we were going to have to keep our cost base flat to reducing ex-fuel.
Things change as you go, and we are managing a business. We have seen yield improve in that sense, which makes you able to adjust the different sort of transformational initiatives that you want to. We are seeing the benefits of investing heavily in marketing, in new routes, being cleverer on that front in terms of yield management too. Again, it's a moving feast in terms of the aviation's impacted by a number of different factors. What we have now is we have tools where we have all those initiatives ready. We have different initiatives that we can start executing on as different factors impact us. As I say, we are confident in the overall strategic direction, the structure that we've built, the platforms we've built, the dashboards that we've built to measure trends.
It's overall looking at trends and adjusting the business to that to get back to the ultimate goal of getting returns that are satisfactory to investors, staff, everybody, et cetera.
Sorry, your second question was on the data breach. The answer is that obviously we're working with the authorities, and we, as Martin said earlier, have had inquiries from a number of authorities. Nothing further than that at this stage. Any other questions?
Hi, I'm James from JP Morgan. Can you give any guidance on cargo capacity growth for 2019? That's the first question. Second, could you talk a bit more about Greater Bay Area initiative? Is that positive, negative, or how do you see it in general for Cathay? Lastly, any updates on the negotiations with the pilots at all? Yeah. Thank you.
I only heard the first question, I'll let Paul answer it, which was cargo growth.
That low cargo capacity growth this year is projected to be around 3%. Just want to correct on the freighter numbers. We actually are operating 21 freighters, 14 of them 747-8F, six ERF, and we had one BCF return from lease. Now we are operating 21. We are about to finish our contract with Atlas, so that is not going to continue. Altogether, 3% growth in ATK.
Yeah. Let me answer both Greater Bay Area and pilots. First thing I'd say is that our pilot community is a very important part of our team. Clearly, we value that relationship a lot. Our key objective here is that like everywhere else in the airline, we become more productive. We do that in a way with new pattern deployment and roster tools that allows the pilots to have greater control over their lifestyle as well. It should be a win-win in that. In terms of how we engage with our pilot community, it's difficult because, of course, by the very nature of their work, they're not here the whole time. They have a union. We engage with the union, as you know. The union has a committee and they have a negotiating committee who negotiates on their behalf.
This is the second time in four years actually that we've come to an agreement with the committee and the negotiating committee, and the pilots have said no to that. It's clearly a process challenge for us, we're committed, I think, to engaging with our pilots going forward. To achieving those first goals that I talked about. That's where we are with the pilots at the moment. On the Greater Bay Area, in sum, we see this as a big opportunity, not just for us, but for Hong Kong International Airport and indeed Hong Kong with respect to aviation. What are we doing about that?
We have code shares as a for instance on the ferries, both the ferries going to Macau and the ferries going up to the Pearl River Delta, so that people booking in Los Angeles or London can effectively use Hong Kong Airport as a multimodal hub, and their bags will go right the way through to final point of destination in both directions. We are also, of course, growing our network. Every time we grow our network, we grow the attractiveness of Hong Kong Airport as a big international gateway to and from the Greater Bay Area. Finally, I think, the overall thrust will be to make Hong Kong Airport and therefore the Cathay Pacific network, as accessible as possible going forward. That will include land transportation and things like that going forward.
With a population of 70 million and an economy the size of Australia and growing at the rate that it is, we see it as a huge opportunity for both us as a big premium network carrier and Hong Kong. Yeah.
I'm Parash Jain from HSBC. My question is more with regard to the competitiveness in the medium term with China Southern pulling out from the SkyTeam. The verdict is yet to be out, but they're increasing code share with other oneworld members in the foreseeable future or they being part of the oneworld. Does it in any manner change the competitive landscape for your one part of the business, which is transiting or taking the passengers all the way to North America? Thank you.
Well, there's a whole raft of things in that. I often think that particularly a lot of commentators see Aviation and air travel is a zero-sum game. If you look at IATA at the moment, I think it's 1.7 billion people in Asia Pacific. By 2037, they see that as being 3.9 billion people. That is a massive growth market. If you look at alliances in particular, the three big alliance groups have become relatively well delineated over the last 10 years. It's a very obvious and attractive customer proposition where people can be treated well when they go beyond their airline of choice and beyond its network. I don't see that fundamentally changing. However, I think everyone in each alliance acknowledges, and I think oneworld is more flexible than that traffic flows and markets do change.
In oneworld, we have quite clear agreements that people will be able to do bilateral arrangements outside of oneworld, and oneworld will still exist. I guess Qantas Emirates is a very good example of that. Turning to China Southern, yes, there are lots of people who have code shares with China Southern. In oneworld, JAL and Qantas have very big code shares with China Eastern. The coexistence is fine. The market's developing. It's going to be a growing market, and it's just who you choose as your non-alliance partners as well as your alliance partners that makes for the best customer product at the end of the day. This is a question for Paul, Eric.
Actually, it's more like a housekeeping question for Martin, I believe.
Okay.
Well, actually, looking at the 2018 other revenues, we've seen a big jump on that line. I just want to understand, putting also the transformation of how much of it is revenue-driven, how much of that transformation, revenue-related, has actually fallen on these lines, other revenue, catering, recoveries, maybe Asia Miles. How would you gauge how should we look at this line in 2019?
A big part of that jump is due to the revenue recognition piece there, the grossing up of the cargo handling and the intermodal trucking goes through to that. It takes about half of it in terms of that. Percentage-wise, though, on the other revenue piece, it is growing, and particularly in Asia Miles. I'd say going forward, you're taking out the impact of IFRS 15, which we've taken out in terms of that. You can strip that out in terms of the percentage change. You'll see a continued improvement on the other revenue line, but it's not a big number in the whole.
I saw it's gone up like HKD 2.5 billion year-over-year.
Sure.
I think it's slide 31, isn't it?
Yeah. On the IFRS 15 line there, the HKD 1.6 billion in cargo handling revenue grossed up, and the freighter revenue goes in there, and then there's the reallocation from other two to passenger-
on the bottom there. Net those two off, and then you'll get your underlying.
I see. It's purely accounting, whereas organic growth or transformation is insignificant on that line, right?
It makes up about half the % change.
Okay.
Percentage-wise, it's growing significantly, but as you say, on absolute numbers, it's.
Got you. Good.
Hi there. Just a couple of small questions from me as a follow-up. One is on the cost side. Maintenance costs have fell last year. Just wondering how sustainable that is and how we should think about that. Second one is Air Hong Kong, again, follow-up to Eric's question. How big was the profitability of that business? I guess we should expect some lower minority expenses to come out of that. Thank you.
Sorry, the first question was? Sorry.
The maintenance costs.
The maintenance cost. Sorry. Maintenance cost, on that side, that's been quite volatile over that last few period. We've moved to power-by-the-hour contracts on that side. We amortize the lease return conditions through that thing. You'll see the maintenance cost side growing, but a low, steady pace going forward, I would hope.
Yeah,
Sorry, Air Hong Kong. Air Hong Kong, again, we've restructured the deal, as we've mentioned in the past. We got a new 15-year agreement with the DHL contract we had. Basically, at the end of the day, the profitability from Air Hong Kong at the moment will be much the same under the terms of that contract. We're not expecting a significant jump in the bottom line because of the increased shareholding in that sense. It does give us ability to grow that business beyond that one contract.
Okay. Good. Any other questions from anyone? Okay. Thanks very much for coming.