Thank you. Good afternoon. I am Eric Lin from UBS. I have three questions. The first one, apparently the hot topic, trade tension politics. What is the impact on Cathay? Can you please comment specifically on what are you seeing so far, like July, August so far on premium travel, say, your premium loads as well as your cargo loads and yields, July and August so far? I am more concerned on the impact of trade tensions. The second question, getting back to cost. If I recall, back when the transformation plan was being proposed, I think one of the key assumption is trying to hold unit cost, controllable unit cost, flat or even down, back then, correct me if I am wrong. What are we expecting to see in the next 18 months in order to achieve your ultimate target of returning shareholders' return above cost of capital?
Does the flat assumption still hold? I mean, my simple question is the third question is, the long-anticipated fuel surcharge for Hong Kong outbound. We haven't heard anything so far. What is going on? Is there still talks between the regulator? Can you comment on that? I think in addition to that, I have been seeing some airlines, they just don't have the fuel surcharge and just take a price right away. Is this something you are doing as well, or is there a plan B for you guys? That is my three questions.
Got it. Thanks, Eric.
Thanks.
Paul.
All right.
Can you take the fuel surcharge as well when you're answering the first one?
Yeah. Eric usually asks quite a number of question and always remember the last one, I'll start with the last one. No, we haven't heard anything, we are still waiting. That's the short answer. The standard practice of majority of the airlines in the market, all the major market we are flying to, fuel surcharge is still a standard practice. There are a small number go for all-in fares. At the same time, the trend is no matter which way you take, you just displays the way you structure your product upfront. That will be the trend. We are still waiting. That's Hong Kong fuel surcharge.
Just to remind everyone that we are collecting passenger fuel surcharge outside of Hong Kong in most of the cases when it's allowed, same apply for cargo, there is a cargo fuel surcharge regime in Hong Kong as well. That's where we are. Going back to your first questions, I think you're asking about the macroeconomic sentiment impact on passenger and cargo. The direct impact, we haven't seen anything significant for the time being, we expect if there is impact, it will be on cargo shipment, but we haven't seen that yet. Don't forget that any extra tariff or unsettled macroeconomic sentiment, it might impact on finance travel, business travel, that impose certain degree of uncertainty moving forward, just like what we outlined on the last page. More importantly, the volatility of currency movement is also not helping. We have been benefit from weak U.S.
dollars in the first six months, Renminbi, Hong Kong dollars, et cetera, has been weakening. That is not helping.
Yeah, I think on the cost side, Eric, we did say in 2016 when we started this transformation that we had to keep our unit costs actually have to come down marginally rather than be flat. We have said a couple of times at the analyst presentations since then that obviously the key metric is to get back to sustainable financial health. In 2016, the yield trends were negative and going one way, as we've mentioned, at that time we had cost targets that were released at that point. You have to be flexible to that extent. What we will do going forward is on the cost front, where we have obviously invested in the customer proposition, whether it's in the other costs through Asia Miles or in-flight, et cetera, we'll highlight that better in that sense there.
We have over 700 initiatives, and as we've alluded to, depending on where we are in the cycle, some are harder than others, and some we don't have to take because it's that weighing up what will it impact the customer or not. You'll see in 2017, if you look at how we held our cost flat, one of the key ones to pull is just sort of marketing spend, which we certainly don't want to do when we're getting the benefit of investing in the customer and the yield on that front too. To cut a long story short, I would expect the underlying unit cost to certainly come down in the second half. We can certainly target to hold them flat in 2019 at that level we had before, depending on what happens on the revenue side.
Forward booking for passenger, your forward booking is still strong, right?
We don't see any major weakness in our.
For passenger
for the time being.
For time being.
Yeah.
Okay.
Thank you. We found a very significant yield improvement for both passenger and cargo, and that's very good job. I would like to get more color, for example, this more than 16% Cargo yield improvement, how much was led by the currency? For the 7.6% passenger yield improvement, how much was led by the currency? That's one question. Second question is about the fuel hedging. We found that you disclose your coverage of the fuel hedging ratio, starting from 2019, declined from 45% to around 30%. The hedge, the price, was much lower, right? The question is why this coverage ratio decline? Why couldn't you hedge more on this lower price? Thank you.
Why don't you let Paul do the yield, and you do the hedging? I'm happy with either. Sorry, the question was how much of the yield is currency? Do you want to answer?
We don't split the yield in terms of disclosing what percentages or how it's all made up. I think the key part to mention that clearly fuel surcharge and FX has a, particularly on the passenger side, is a significant part of that yield increase. What I would say was it's positive net yield on the passenger side and significant net yield increase on the cargo side. In terms of our fuel hedging position there, as we've mentioned before, one of the things we've done in the period is to, we do mean reversion. We hedge only two years out now. At lower fuel prices, we have the cost pass-through mechanism of the fuel surcharge. One of the key elements of the new fuel policy is not to hedge more than 50% and rely on the fuel surcharge in terms of the remaining exposure there.
Hence, the coverage piece of the fuel is at 30% in 2019 and 45% in 2018.
Hi, this is Ben Hartwright from Goldman Sachs. Couple of questions just on the accounting change. I think you've obviously, on slide 30, you've broken this out, which is helpful. Just wondering, in terms of the passenger and cargo revenue side, can you also give us further discussion of that and how it allocates? I think you've said 6.6% is the yield increase with excluding. That includes also the reallocation from others into passenger revenues. Is that correct?
Yeah.
Okay. In terms of the cargo side, the revenue impact seems isn't quite minimal from the notes, right?
Yeah. There's a couple of slides on the appendix that break that up. Actually, the media statement, the stat accounts have got very full disclosures of both the revenue and cost impact. As I said, it's a complete net zero game, in terms of just taking out a net commission on a risk basis to what you control basis. Both in the slides and in the appendix and in the stat accounts, it breaks it up into the different categories. I can take you through it later, Ben, if.
Okay. Just on the cost side, the landing and parking, just wondering why that's the line that gets affected most by that accounting change.
A lot of it is to do with the freightage handling, in terms of some of the commissions that we used to book on a net line on that basis too. It's grossing up a lot of the handling charges in terms of freightage.
Okay, great. Thank you. Just on the cost side, I think I had a couple of questions. One is depreciation. Just wondering, there's quite a big increase there in the first half, yet I think your fleet is basically flat in terms of the number. Just wondering if you could explain what's underlying that and how we should think about second half and going forward. The other question on the cost side is just on tax charges and how we should think about that. The underlying PBT, I think the tax charge is slightly higher than that. Again, how should we think about that going forward?
On the depreciation front too, the increase of the P&L and depreciation account, a lot of that's the move to the new aircraft. We've obviously got one of the youngest long-haul fleets in the world on the 350 there. As we transitioned off the 747s and some of the older fleet, which were fully depreciated, et cetera, and moved to the new fleet in the last couple of years, you've obviously got a steep rise in your P&L depreciation charge. In terms of the balance sheet piece there, in terms of the CapEx, there's been an awful lot investment in your in-flight product, as you've stated there. The majority or a good chunk of that is in-flight product and IT digital investment piece there.
On the tax front, we've got a charge on the deferred tax, a lot of it to do with the derivatives that are. In terms of that charge, you'll see that coming down in the second half.
Okay, great. Thanks. Just on the depreciation, is that the last part of the old planes coming out of that? Is this kind of a normalized level or?
Well.
We still see that in second half?
Yeah. You'll get a smaller increase in the depreciation charge, but you've got the new aircraft coming on. We've got six new aircraft coming on in the second half. We want, as part of the strategy, is moving to a younger, more efficient fleet and taking the efficiencies of that through the That the anomaly of looking at costs ex fuel is that you don't see the efficiencies as much, or you have to highlight it through different metrics. Yes, you'll still see the depreciation charge rising, depending on the fleet profile. That's, you just have to look at the forward fleet delivery schedule for that.
Okay, great. Thank you.
Hi, this is Lydia from DBS. I have two questions here. The first one is, how much of the operating profit improvement is due from the cargo versus passenger? The second one is, what's behind the other revenue?
Well, the growth in revenue, passenger and cargo together was 15%. Actually both passenger and cargo have done pretty well. Cargo has been continuing the good trend that we have seen in the second half of last year. Passengers, which was a yield story, and we start to pick up the yield from mid of September last year. So far this year, without adjusting the accounting changes, the yield growth was 7.6%. Your second question was?
The split in other revenue.
Oh, the other revenue are.
Describing the revenue
things like auxiliary revenue. We start to allow passenger to buy advanced seat reservations for those who book lower subclass, that was not qualified for seat selection in the past. Also now passenger can buy excess baggage in advance online. Those are the type of auxiliary revenue that we are rolling out.
Okay, thank you.
Hi, Andrew Lee from Jefferies. Two questions from me is, on the passenger side, on the yield side, what you saw was a strong growth in yields on both a year-over-year and half-over-half basis. Do you think that trend will continue into the second half? All right. Second thing is, looking at 2020, there is this IMO regulation. What is the impact and what do you think will be the impact on Cathay? The IMO 2020 regulation.
IMO, is it?
The IMO regulation 2020, the fuel, the low sulfur fuel.
The Yeah. Well.
Sure.
Well, in terms of the.
Okay, I'll take the first one. Passenger yield, 7.6% increase, it was a combination of currency movement, strong front end demand, fuel surcharge, as well as underlying real yield growth, mainly coming from more fare and flow, as a percentage, better yield mix within cabin, et cetera. Some of the factors are more under our control than the others, we'll continue to tighten up our revenue management, be finer in our segmentations, be more accurate in our pricing, time of day of week, getting more from not just peak season, but shoulder season as well. Those are more under our control. Other items like currency or surcharge, they are really external factors. Usually, second half is stronger than first half, but don't forget that we come from a higher base in second half than first half.
Andrew Lee, your second question is, how will it impact fuel price? One of the things that we've learnt the harsh way is, not to speculate on the fuel price. We risk manage, the new hedging policy takes that out. It's mean reversion on that basis. We do have monthly meetings where we have specialists come in and discuss that. Again, their view at the moment is up and down. Again, we've not learnt anything that would make us want to change our hedging booking or how we view fuel at the moment on that. Something that we just watch. Our policy at the moment doesn't allow us to adjust for any sort of speculation on that.
Good afternoon, this is Vivian from Citi. I have two questions. One on the cost side. If we look at our labor cost, the call last year, in the first half of last year, the labor cost including a one-off, HKD 224 million related to the redundancy cut. If we're excluding that one-off cost, the labor cost in the first half actually increased by around 3.3%. This is on the basis we actually cut 600 employees. That actually implies, our average compensation per employee increased by more than 5%. Actually this is one of the highest increase compared to previous years. I just want to confirm is that calculation is correct? Is that safe to assume in the second half, our labor cost per employee will increase at the same pace?
A follow-up question on this is that, we have read recently, Cathay has made announcement they will cut some of the overseas jobs. Will that result some one-off costs in the second half as well? This is the first question. The second question is on the cargo yield. Similar to passenger yield, right? Actually, we have noticed the cargo yield started a strong improvement since second half last year. We had close to 15% yield improvement second half of 2017, and we had a similar improvement in the first half. Is that fair to assume after a full year of improvement, the cargo year improvement will return to a much lower level, like in a single-digit level in the second half?
I'll address cargo yield first, when Martin is thinking about the other questions. You're right. Cargo recover starting from April last year, and the momentum has continued. There are 2 components behind the cargo yield. Well, actually more than 2. On the pricing part, there are the contracted part of cargo, that you sign contract in advance that cover a longer period of time. The second bit is the cargo that we sell at spot rate. All right? We have been increasing the contracted rate. When season is peak, when there are still demand out there are also good chance for you to sell high at spot. You're right that the base was already high in second half last year, it will be very difficult to maintain the same amount of growth rate in the second half compared with first half.
On the other hand, the room for further improvement on the cargo side will be utilizations. We have been able to manage to increase our available tonne kilometres by the same amount of fleet. Being able to keep up the utilization of the fleet during the peak season will be key for cargo business in the second half.
On the staff costs, what we did last year was, it was a head office reduction of 600 staff, which we completed at the end of last year. As we said at the time, it doesn't have a massive saving in terms of the staff costs as such, but more on how you run the business, single point of accountability, looking at end-to-end processes and driving efficiency improvement. Yes, we did get savings at head office. Our staff costs have gone up 0.9% on ASK growth of 3.2%. Obviously, as a company, we're growing significantly with pilots and crew, at the same time as reducing our head office staff complement.
Sorry. In terms of our overseas operations, as I talked about before, we started a process by which we're aligning now the organizations overseas with the new organizations that we have in head office, because we changed the structure. It's different in every region and jurisdiction. In most places, you start with a consultative process, and that's the stage we're at now. We're not able to talk about what the impacts may or may not be.
Hi, I'm Parash from HSBC. I have two questions. First, maybe follow up on the cargo side. Can you help us understand, given the some sort of imbalance compared to passenger, is 65% is pretty much the 85% on a max where cargo utilization can head to when you talk about focusing on cargo yield? Second question is sticking to the cargo itself. What sort of trend have you seen in terms of competition and in terms of cargo's growth driven by e-commerce, which probably has a longer lag and more structural in nature? On the passenger side, I appreciate that you don't explicitly disclose the variable moving parts in terms of yield improvement. Can you help us visualize on a like for like basis, let's say economy versus economy, what sort of yield have we captured in that 7% number?
Is it smaller than probably low single digit, or it's a large part of that increase? Thank you.
All right. On cargo first. I'm not quite get your first question, but I assume you are asking about the percentage of-
I think the cargo imbalance. Is it?
Optimal utilization like that probably you intend to achieve. For example, in the passengers, your utilization goes to high 80s.
Oh, you're talking about load factor. I was talking about aircraft utilization on the cargo side. I was not talking about load factor on the cargo side.
Okay.
Okay? Does it answer the first question then?
If you want to comment on the load factor, how should we see about how much more room do you think you have?
In the second half, that's the peak season of cargo. We do expect higher load factor in the second half. Actually, this is related to your second question about the competitive landscape and the structure in the market. Because of the current macroeconomic climate, we haven't seen the usual extra sectors charter capacity on the cargo side during the peak season. That may have an effect on the supply and demand to our freight. All right. That's the short-term landscape. Longer term, if the current trade dispute continues, you might see more fundamental changes along the entire value chain. People may start to grow certain trade link and reduce their reliance on certain trade link. That may have a fundamental change.
Your last question, I think in general, the comment we can make is yield improvement is focused more on front end than back end. It's very much premium traffic driven.
One further point I'd make on cargo. We have 20 freighters, as you know. We also are about 85% wide-bodied. Those wide-bodied aircraft can carry between 15 and 25 tons. We're now at a stage where.
Half of our tonnage is carried in our passenger aircraft. If you think of the new destinations and new networks, we're continually opening up connectivity for the big shippers as well.
Geoffrey Cheng of BOCOM. Following on some of our colleagues' questions. One is, again, on the cargo stats. Basically, you mentioned that the yield and load factor is kind of stay high. If we look at the chart that you have produced for the passenger on page 14, can we have a feel on which particular routes that you are seeing yield increases, particularly in the first half? Because it is kind of interesting, as we know, is that air cargo seems to be particularly flourishing for the North America trading, but your capacity seems to be restricted there. Obviously, you can use freighter. It is kind of interesting for us that what kind of routes that you are seeing significant yield improvement over your network in the first half? I think that's the first question. Second question is, again, on the cost side.
Is about on the slide 30, particularly on your, take-off landing cost. You have mentioned that you have make adjustment because of the No. You make breakdown to show us that the impact on the accounting standards, there is a HKD 761 million increases. I think Martin had mentioned that there's some gross up because it used to be net-offs . Now you have to show it on the gross level, something like that. But if we look at the top line, the revenue side, it seems to be, not only on the cargo but as well on the passenger, on the others, revenue that has been impacted by the accounting standard change. I kind of want to know, first thing is, if we look at, the impact of the accounting standards in 2017, obviously, there is no reinstatement now.
How can we make the projection and have a fair base to make the projection for the full year for this particular cost item, given the fact that it has 20% increase in the first half? It's pretty significant increase.
I'll address cargo again. There are multiple front, but to give you a short answer, the yield improvement is more prominent over long haul, both Transpacific and to Europe than short haul, which might be contradict to the common sense. Because over Transpacific, we have not been growing capacity very fast, so supply-demand is to our favor. And to Europe, currency also play a big effect. But more importantly, the traditional thought of yield leaving Asia, going to long-haul market is much stronger than inbound, while it still holds. But the inbound from long-haul market coming back to this part of the world actually has been stepping up. So the yield of inbound, which was crap in the past now has been gradually coming up. And also, we talk about more than a half of our revenue cargo coming from belly rather than just freighters.
All this new route, especially on route that we are the only operator, we have a more higher command in pricing power. That's also helped to increase the yield.
Yeah. Sorry, on the landing and parking charges there. Sorry I jumped it. On the slide there on the revenue, IFRS 15 is adjusting for the 2018 numbers. The accounting standards allow you to do a modified implementation, you didn't have to backdate the prior year. Obviously, moving to our new accounting standard, sorry, SAP, and moving to SAP away from our old accounting systems, it was much easier on that basis to adopt that as the standard allowed. Hence, in order to do the like for like comparison, we've taken out the impact in 2018 on that period too. Again, that purely is just going to be a grossing up depending on how our freightage and commissions increase over that period. The impact of that standard will be just grossed up on that basis too.
The landing and parking, once you strip that out, is still going up, which is the three-year implementation of landing and parking fees from the Airport Authority Hong Kong, which is public.
One last question? Okay. Oh, Eric, last question then. Last question.
Last two questions, if I may. The first one is more housekeeping. Can you share with me how many planes are going to be retired in the second half? In relation to that, will there be any return, maintenance, that kind of factors driving up cost in the second half? That's first question. Second question, I think we've mentioned a couple of times about connectivity. There are a couple of interesting events coming up for Hong Kong. You have the bridge, you have the train, and people talk about the Greater Bay. What's Cathay assessment on this point? Probably my question is how is the PRD originated traffic looking like Cathay at the moment? Say, percentage of the traffic, if there's any sort of numbers you can share, that would be great. Thanks.
All right. On plane, we have been returning three on lease Airbus A330 first half. We'll return one Boeing 777, four class Boeing 777 in the second half. Long haul Boeing 777. We are taking six more Airbus A350-1000 in the second half. We have two flying. The next one, the third one, will come end of this month. We expect altogether we'll take eight. We have two more Boeing 777 regional 300 used aircraft joining our fleet. They are replacing our oldest Boeing 777-200. All these two are one-on-one replacement. The rest of the fleet, which we have three more, will happen next year. By next year, probably by the time we meet again this time next year, we'll have all the Boeing 777-200 retired from our fleet. That's on the fleet side.
Your second question was about Pearl River Delta, the bridge, and high-speed rail. There are certain opportunities that we are looking at, both selling from PRD with passenger traveling out on the bridge or, more importantly, we have launched our code share with Cotai Water Jet end of first quarter this year, which is important. This kind of intermodal code sharing, we'll look forward to continue to expand it. We are doing ferry to Macau. Ferry to PRD. We'll expand it to coaches, hopefully over the bridge, and eventually with high-speed rail. Don't forget that the opportunity is not just drawing traffic out from PRD, as well as through our international network around the world, selling through Hong Kong into PRD.
Can you share with me how much of your traffic passengers is currently originated from the PRD? Just want to get a sense of how significant it is.
Okay. I don't have the exact number of passenger, but in terms of PRD as a sales territory, I carve out PRD from the rest of China, then you're looking at constantly among our top seven point of sale.
Okay. Just to go back to that last question of how do you split, it's just shown as passenger and cargo revenue. In note two in the accounts, it splits it between what's been charged to cargo and what's been charged to passenger. On that, thank you very much.