Earnings Call: H1 2018

Aug 8, 2018

Good afternoon, everybody. Welcome to the Cathy Pacific incident results. My name is Martin Murray. CFO. And, with me today, I've got Rupert Hogg, CEO and Paul Lou, the chief customer and commercial officer. Usual format, Rupert will see a couple of words, and then, and then I'll go through the financials, and then Rupert will see something on the transformation And then the 3 of us are here to answer your questions. So with that, I'll pass over to Rupert. I think you have the agenda in front of you. Look, recall the goal when we launched this transformation program, at the beginning of last year, a 3 year transformation program, and the goal for 2019 is to get ourselves to a point where the airline, is returning above its cost of capital. So that's the trajectory that we're aiming for halfway through the program now. Now, obviously, we're not yet in the black, so I must acknowledge that to start with but there are some things that I'm pleased about. The first is this slide shows you, I think, very clearly, that the results are largely airline led. That's what we manage. That's important to us. Second point I would make is that the revenue performance, in many ways, is gratifying that's critical to us. You'll recall that we had 3 years of negative revenue growth on the passenger side. This is a holistic transformation. It's all about improving every aspect of our business, but basically in both cargo and passenger, all of the revenue matrix have been, positive. On the cost side of the business, and this is a thin margin business at the best of times, no doubt it's challenging. We'll dig into that because there are some factors that affect the headline numbers that you see. We have big external pressures. That the underlying unit cost rise is 3% without fuel. We have still a lot to do and we're moving into the 2nd phase of the transformation now, and I'll talk about that later. But I guess the key message is that we have a plan There is no one silver bullet. We've got lots of initiatives on, and we're very, very focused on the execution. We're also much better placed than when we started last year, we got a lot of building blocks in place, digital technology, great fleet, and we invested in the customer experience. So we're on it. So I'll just take you through the big factors that I think contribute to this result, and then I'll let Martin dig into the numbers with no further do. So as I said, strong revenue across both sides of the business. We've had a big focus on customer service. We've done quite a lot in terms of investing in the customer experience. That's what makes us different. That's what make the customers come back, and that will continue. Cargo has been very strong, in every respect. Operating costs, obviously, wheat U. S. Dollar has been problematic for us at the beginning of the period in question. New accounting standards mean that we need to make some explanations to you, and we've invested a lot in our fleet. You can see that come through on our cost per ATK without fuel. And because the revenue has been being strong, we've taken a decision to invest in some of the customer initiatives a bit earlier. Our subsidiaries are doing well, Air China, Maarten will elaborate on, basically in second half of the year, there's a renminbi factor, And finally, before I hand over to Martin, I would say, it's encouraging to see much stronger cash generation from the business and we've been able to reduce our debt too. Martin? Thank you. So the is just an underlying trend in attributable profit, the key statistics. So again, just repeating group attributable profit 263,000,000 loss compared to the 1,000,000,000 at the same period last year at an airline level, 900,000,000 loss compared to the $2,800,000,000 loss there. It is, as we keep repeating, a transformation of growth. And so we are growing around 4% per annum. So ATK growth, 3.7% ASK in the first half, 3.2%. It's a it's a yield story, passenger yield, up 7.6%, a cargo and mail yield, mail yield up 16.3% And then our costs with your up 4.8% and our underlying costs, up 3.3%. This slide here, basically reconciles to the first slide on airline loss before tax, there's a couple of things to point out in this slide just to make sense of it, in 2017, in the first half, there were 2 exceptional cost items in that, the au fine of 498,000,000 and redundancy costs are 24,000,000. So there's 722,000,000 in that 2017 number. And on the 2018 number, we sold carbon credits for 110,000,000, which was again. And so in a like with like basis there, you're looking at 3,000,000,000 to 850,000,000 in that piece there. And then on the cost front here, we have a new accounting standard that we will explain later in the presentation, but it's basically added a $1,000,000,000 to the revenue side and the $1,000,000,000 to the cost side, mainly in landing and parking and in the other table there. So Again, we'll strip those those out and we'll look at it on a like for like basis later in the presentation. So on the passenger side, very much a strong yield despite the intense competition, passenger revenue up 10.4 percent, as I said, on ASK growth of 3.2%, 7.6% increase in passenger yield, 6.6% if you strip out, the for this 15 impact. So on that graph, there's your your yield growth there. Yes, we had some benefit on the weaker U. S. Dollar at the start of the year and the higher fuel price with fuel surcharge. But also good revenue management, stronger front end, better third and 4th freedom. And, I'm sure Paul will talk for that in the Q And A. And then passenger revenue growth passenger efficiency up 7.1% there too. Keep reiterating the the transformation being a growth story. 3.2% increase in ASK. So here we have our new routes to Brussels, Copenhagen and Dublin for Kathy Pacific and for Cathy Dragon, Nanning and Janan, we've done this so that, again, sort of highlighting this strategy the destinations being in green, we're the only airline 7, these destinations from Hong Kong, which normally, leads to a higher yielding destinations. Here is our our route map here. So again, we're seeing, we're growing at 4% per annum to the transformation. So you'll see the bottom there, plan growth for the year, 4.3%, 3.2% in the first half, planned growth for the 2nd half, 5.4%. You'll see the big ASK growth being there on the top left in Europe, which is pretty much driven, a lot of it's driven by the new destinations. And then in the Southwest specific there, you've got there, the the move that's sort of slot constraint there. So we're moving to the 350, 777s from the 3 30s there, which is creating the ASK growth there. Good yield growth across the board. Some of the bigger ones are driven by currency. But particularly the India, Middle East route India, the throughput through to the U. S. Has been particularly strong. Because of the strong yield growth, I'm sure a Rupert and Paul will touch on on on this later too, but has allowed us to continue our our strategy of investing in the customer there's been an awful lot of investment on the ground, particularly in the Asia Miles enhancing that program, 20% more redemption seats our mobile applications, heavy investment in that. Obviously, the deck opened in terms of our lounges, in the air. We've got our new seat configuration in the economy class and the new in flight entertainment systems. We're rolling out restaurant style delivery in in business class there. And then so much going on in terms of the digital space, the A350s all come with WiFi And we're adding that to the 777s and the 330s, and it'll be an all our fleet by 2020, and a lot of work doing in terms of improving the self-service of the customer feedback and also a digital in terms of instant feedback, as well from both our lounges and our flights. So a lot of work in doing in terms of enhancing the customer experience. In terms of cargoes, a good story throughout. So, again, cargo mail revenue up 25% and all the metrics strong on a AFPK growth of 4.1%. Load factor up 2.1% and CAGREN yield up 16.3%. And as we've mentioned before, it's a good mix of sort of ecommerce coming out of Hong Kong and machinery and food coming back in. And as our premium carrier, obviously, carrying specialist equipment, whether it be food, pharmaceuticals, bulk size, etcetera, and higher yielding, too, is helping on the cargo front. Strong yield Again, this graph also highlights again the expectation that, despite the politics going on at the moment, the second half You can see there on the green bars, the second half's normally a lot stronger than the first half with with summer Thanksgiving, Christmas, Peaks, etcetera. This one here, you'll see the improvement in the load factor in cargo over the last couple of years The dotted graph there is the 2013 to 'seventeen period there. So again, a significant pickup in cargo over the period and a 20% increase in our cargo efficiency. Moving on to the cost front. As we mentioned at the last Analyst Briefing, there is a pressure on our cost here. Yeah, I've got to strip out the impact of FX. Obviously, over the period, we've actually benefited from a weaker FX, which is good for the business. Higher revenue, but it does impact the cost front and there has been a change with IFRS 15 which is a revenue recognition accounting practice. So we'll strip that out. But underneath all that, on the cost front, yes, there's been a 30% increase in the fuel price, which is also bad for all airlines, 7% if we strip out our hedging. We have got the new fleet. We're heavily investing in that. So as we alluded to significant increase in owning the asset costs, depreciation and our finance assets. And the benefit of that actually comes through the fuel consumption and consumption per RTKs, you'll see in the operating stats is down 2.5%. So that comes through on the fuel efficiency side there too. There are known costs in terms of overflying and landing and parking. And as we've alluded to, our benefit and yield has allowed us to bring forward investment in the customer experience, Asian miles, etcetera, there. So fuels are 30% of our costs. The biggest one there ups, 31% savings in our, in our hedging losses, down 7.4%. And then our hedging book to date, 45 percent hedged at an average Brent price of $80. And then going forward, that's the end of our legacy the end of 2018. So going forward to 2019, we have 30% hedged around $68 for the first half of twenty nineteen 31% hedged at $60 2nd, 3rd quarter, 25% at 61 4th quarter. And so, those that follow the balance sheet, the hedge reserve is now positive for today's spot price and the forward curve and 75 Brent today. So we've got about 900 1,000,000 positive credit in the hedges there, which is, a first for a number of years. Here's the cost front here. So on the cost side, as I said, these have been heavily distorted by the FX and the new accounting standards. So once we strip those out and the exceptionals, you'll see that, underlying costs without fuel goes up 3.3%. So two things there. This graph here, you'll see this graph here starts in January 2017 and takes is right through to today. So you'll see that overall in the period, even though everyone's talking about a strengthening US dollar at the moment for the period we're comparing here, compared to the first half of twenty seventeen, the U. S. Dollar has weakened. And so that's a good thing for a number of reasons for Kathy makes Hong Kong a more attractive destination to come to improves our revenue in terms of FX translation and it has the net but partial offset on the cost front there. So if we strip out there, this first time we've shown this, if you strip out the currency fat there, we've got a net benefit in the first half of 275,000,000 at the Airline level there, 500,000,000 additional costs the new accounting standard is revenue recognition. So you're increasing your costs are increasing your revenue there. No impact on the P and L account, but obviously in terms of looking at your comparisons, you have to take that out, and then the exceptional being the the EU commission sale of 101,000,000 there. So if you look at that, once you've stripped out the the impact of the accounting standard and the currency movement, then this is where our underlying costs, which we're trying to hold flat, is is impacted here. So a 3.3% increase there As mentioned, the biggest factor of that by far is, depreciation and finance costs, the the owning the asset element. And, again, the benefit of that comes through in the fuel side. We also expected the first half of twenty eighteen to have this increase And as you have the more ASK in the second half with the fleet joining, the cost per ATK will come down in the second half. So this is, as expected, part of that. And then in the others and in flight services and passion expenses, These are customer facing costs. You can see the benefit in terms of the Asian miles commissions and in flight stuff and the customer piece there. And landing and parking up a little bit with the charges there. So those are the main drivers of our costs operating costs. In terms of our, subsidiaries, subsidiaries are all performing satisfactory. No real impact on the group financial statements in terms of how you look at it there. Just pointing out, Eric Hong Kong does become 100% owned next year and gives us options for our cargo business going forward. Rupa alluded to, Air China and Air China Cargo, we do have a slight anomaly in that, we had a sort of strong June for Air China and a very weak, June for Air China Cargo, and it's all to do with the revaluation of our of the remnant B because we count for Air China 3 months in arrears. So March had a had a strengthening of the renminbi and then junior was a weakening, which means that come September, there will be, an impact on the once there will be an impact, whatever Air China names, you'll see it shortly in terms of what will happen in September from our associates, we'd expect a weakener results in September for Air China as we saw in here, China, cargo in, in June. In terms of the cash flow and the balance sheet, you'll see the trend continues. So very strong operating activity cash flows. We only have one delivery in the first half of twenty eighteen. We have we did get that revolver credit there. So we have paid down our debt, some of our debt there. So you see the gearing has reduced to 0.85 from 0.97. And so I think you're going to see from that slide, it's the first time in my 7 years that the gearing is now starting to come down and, is at 0.85 as we sit today. In terms of the fleet, overall fleet profile, we've gone through this over the last number of analysts briefings and how we've simplified both the fleet and the sub fleets in terms of helping with the efficiencies, the new deliveries coming through, moving to 22, 835900s, I know in service. We've taken our first A350 1000. We have another, we'll get to now and 6 more in 2018. And then we move on to the e 321s and the 9 Xs. And with that, I will pass back to Rupert to update on the transformation. Thanks, Martin. So I mean, we briefed you in, in June, the background context, competition is still there. We see that as the as the new normal. It was one of the drivers for transforming our business. Terms of the economic context is always a relevant driver, of course. You'd have to say that the global economy by and large is positive, but uncertainty is increasing. I'm sure we'll talk about that in question times. Transformation itself we're halfway through. It's built around 4 pillars, but we've been doing some things, if you like, to create a strategic, platform, organizational change were largely finished in head office, we've just finished, restructuring of subsidiaries management, and at the moment, we are now working through our overseas operations, not just make ourselves leaner and more agile, but actually to change the way that we work, modernize the more we work and interface with head office. On the digital side, which is absolutely critical to better understanding our business, and driving productivity, we've done a lot of work there invested a lot, and we're at the stage where we have much better data, not just to show us what our customers think, but for asset utilization and other aspects. In terms of the customer, Martin's talked about it, we've got a program of investing to make sure that we're different and better. Just in terms of the 4 pillars themselves. The first is putting the customer at the center of everything we do. I'll let you read most of this. It's the 1st year we've launched 9 new destinations. So we're improving connectivity, at the Hong Kong hardware improving connections to Hong Kong and we're deploying our new fleet on routes that we couldn't do before, we're also retrofitting, a very large part of our 7 77 fleet introducing better seats, better in flight entertainment and Wi Fi. On the operational side, a lot of programs are in place now. Crew rostering system, which is helping us as we go through each of the fleets, and drive patterns and then rostered against it and various other things that allow us to be more productive, and we're doing a lot of work with our people, particularly our frontline people. To make sure we're higher performing teams. But I would say the biggest, single focus now is redesigning the whole business. If you like, the next part of our transformation program, the end to end process redesign, and we are taking the big 9 processes or work streams that together comprise everything that we do in the business, and we are mapping them out, and we're redesigning them, but we're not just redesigning them in the traditional way of business process reengineering, we're applying new technologies, we're applying, digital and better data so that we make better decisions and we're able to improve the customer service. That's a big piece of work we're confident that it will structurally change the way this business operates so that we become productive, more productive year on year and we're well underway with that. We've got 5 of the big processes already started. A 6 will start this year, and we've greatly enhanced our investment in digital and lean and also, Global Business Services which are if you like shared services. So that is the the biggest single driver of future productivity and we've got it underway, we've got a plan, and we're onto it. If I can take you then to the outlook, and we will then talk about or take questions. Broadly speaking, we think the environment's going to remain challenging, obviously, the strength of the U. S. Dollar has another a number of implications for us benefits us on the cost side, there are also concerns about the global trading environment. We think competition will continue and fuel prices are higher than they've been before. But as Martin pointed out, we're working through the end, or through the last period of what has turned out to be adverse fuel hedging impact. And I think the cost pressure, particularly external costs will remain Having said that, we always, have traditionally done better in the second half than the first, not least, as Martin pointed out, we've learned 3% ASKs or ATKs in the first half of the year will fly 5% to let the phrase fix costs, to arrive at an average 4%. We think that yields will improve, and it's worth noting that we've had underlying growth when you strip out the benefits of currency, etcetera, on our yields to date. Our fleet continues to improve the customer experience allow us to fly to new destinations and take our unit fuel consumption cost down and our program to transform our business is ambitious, wide ranging, but it remains on track. So that is how we see the world at the moment.