Earnings Call: H1 2018

Aug 8, 2018

Thank you. Good afternoon. Eric Lynn from UBS. I have three questions. So the first one, apparently, the hot topic, trade tensions politics. So what's the impact on CAFE Could you please comment specifically on, what are you seeing so far? Like, July, August so far on premium travel, so your premium loads as well as your cargo loads and used, you know, July and August so far. So I'm more concerned on the impact of trade tensions. The second question came back to cost if I recall, like, back when the transformation plan was being, you know, proposed, I think one of the key assumption is trying to hold, unit cost controllable unit cost, flat or even non, back then the correct hand prong. So what are we expecting to see in the next 18 months in order to achieve your ultimate target of, like, returning shareholders return of cost of capital. How are we does the flat assumption still hold? I mean, my my simple question is, And then the third question is, the loan anticipated, future charge, for Hong Kong, outbound, So we haven't heard anything so far. So what's going on, I mean, is there still a talks between, like, the regulator, can you comment on that? And I think in addition to that, I've been seeing, like, some airlines, they just don't have the full surcharge and just raise, take a price, right, way. So is this something you are doing as well, or is it a plan b for you guys That's my 3 questions. Thanks. Paul, alright. If you'll search up as well when you're answering the first. Because, Eric, usually asked quite a number of questions and always remember the last one. So I was talking to the last one. No, we haven't heard anything, and, we are still waiting. That's the short answer. And, the standard practice or majority of the airlines in the market, all the major market we are flying to, future charge is still a standard practice. There are small number go for all in fares. But at the same time, the trend is no matter which way you take, you just displace the way you structure your product upfront, that will be the trend. So, we are still waiting. That's a Hong Kong fuel surcharge. Just to remind everyone that, we are collecting passenger fuel surcharge outside Hong Kong in most of the cases, when it's allowed. And, same apply for cargo, and there is a future charge cargo 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 a time being, and we expect if there is impact, it will be on, cargo shipment, but we haven't seen that yet. But don't forget that, any extra tariff or unsettled macroeconomic sentiment, in my impact on finance travel, business travel, that impose a certain degree of uncertainty moving forward just like what we outlined on the last page. And more importantly, the productivity of currency movement is also not helping. We have been benefit from weak U. S. Dollars in the 1st 6 months but, Renmin B, Honors, etcetera, has been weakening, that is not helping. Yeah. I think on the on the cost side, Eric, the, we did say in 2016 when we started this transformation that, we had to keep our unit costs actually coming up to come down marginally rather than be be flat. We have said a couple of times that Anna's presentations since then, that, obviously, the, that the key metric is to get back to sustainable financial health, in 20 seen the the yield trends were negative and and going one way. And as we as we've mentioned, at that time, we had cost targets that that are were released at that point. And that, and so you have to be flexible to that extent. And, 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 who major miles or or in flight, etcetera, we'll we'll highlight that better in that sense there. But, we have over 700 over 700 initiatives, and as we've alluded to, depending on where we are in the in the cycle, you know, some are harder than others and some we don't have to take because it would it's that weighing up, what will it impact the customer or not, And so you'll see in in 2017, if you look at the, how we held our costs flat, the, you know, the, one of the key ones to to pool 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 and that's into to cut long story short, I would expect the underlying unit costs to certainly come down in the second half, and we can certainly target to hold them flat in 2019. At that level we had before, if depending on what happens on the revenue side. Forward booking for passenger, do you say business sentiment? So your forward booking is still strong, right? We don't see any major weakness in our for the time being. Thank you. We found a very significant yield improvement for both passenger and cargo, and that's a very good job But I would like to get more color. For example, this more than 16% cargo yield improvement, how much was led by currency. And for the 7.6 percent, the passenger yield improvement, how much was led by the currency? That's one question. And second question is about the fuel hedging. We found that you disclosed your your coverage of the fuel hedging ratio, starting from 2019, declined from 45% to around the 30%. But the hedge price was much lower, right? So the question is, why this coverage ratio decline? Why couldn't you hedge more on this lower price? Thank you. Just you could sorry, the question was how much of the yield is currency? And we don't we don't split the the the yield, in terms of disclosing what percentages or how how it's all made up. I think the, the key part, to, to mention that, that, that, that, that, you know, clearly fuel surcharge and FX has a effect on the passenger side as a significant part of that yield increase, but what I would say was it's positive 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 recession, we hedge only 2 years out now and lower fuel prices, we have the cost pass through mechanism of the fuel surcharge. So 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, the fuel, the coverage, piece of the, of the fuel is at 30% in 2019 45 percent in in 2018. Hi. This is, Ben Hartright from Goldman Sachs. A couple of questions just on the, the accounting change. Just wondering, 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 mean, I think you've said 6.6% is the yield increase with excluding. So that that includes also the reallocation from others into passenger revenues. Is that correct? Yes. Okay. And in terms of the cargo side, the the revenue impact seems is it quite minimal from the notes, right? Yeah. There's a a couple of slides on the appendix that break that up. Actually, the the the media statement, the actual the start accounts have I've got very full disclosures of both the revenue and cost impact. As I said, it's a complete net zero game in terms of the, you know, just taking out a net net commission on on a risk basis to what you control basis. And so 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 major benefit if And 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 us to do with the freight handling, in terms of some of the commissions that we used to book on a net line on that basis, too. So it's gross grossing up a lot of the handling charges in terms of freight. Okay, great. Thank you. And then just on the cost side, I think I had a couple of questions. 1 is depreciation. Just wondering, I mean, there's quite a big increase there. In the first half yet, I think your fleet is basically flat in terms of the number. So just wondering if you could explain what's underlying that and how we should think about second half and going forward. And then the other question on the cost side is just on tax charges and how we should think about that. I mean, the underlying PBT, I think the tax charge is slightly higher than that. So again, how should we think about that going forward? Taking the on the depreciation front too, the increase of the P and L and depreciation account, a lot of that's the the move to the new aircraft. You know, we've obviously got the longest sorry, one of the youngest long haul fleets in the world and the 350 there. And as we transitioned off the the 747s and some of the older fleet, which were fully depreciated, etcetera, and moved to the new fleet in in in the last couple of years, you've obviously got a steep rise in your P and L depreciation charge. Terms off the balance sheet piece there, in terms of the CapEx, there's been an awful lot of investment in your in flight product as you stated there. So the majority or a good chunk of that as as in flight product and IT Digital Investment piece there. On the on the tax front, we've got a charge on the on the deferred tax. I love it to do with the derivatives that are terms of that charge, you'll you'll see that, coming down in the second half. Great. Thanks. I mean, just on the depreciation, is that the last part of the old planes come, you know, coming out of that? This kind of a normalized level or Hey. Well, the You'll see that in second half. Yeah. You'll get a I think you'll get a smaller increase in the depreciation charge, but you've got the new coming on. So we've got 6 new aircraft coming on the second half. So the, the, we want as part of the strategy is moving to a younger, more efficient fleet and the and taking the efficiencies of that through the and that the anomaly of looking at costs ex fuel is that you don't see the efficiencies as much or or you have to highlight it through different metrics. But, yes, you'll still see the the depreciation charge arising, depending on the fleet profile and that's you just have to look at the forward fleet delivery schedule for that. 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 their cargo versus passenger? And the second one is towards behind the other revenue. Well, the growth in revenue, passenger and cargo together was 15% And, 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 and, passengers, which was our youth story. And we started to pick up the youth from middle mid of September last year. And, so far this year, if you include the with without adjusting the accounting changes, the yield growth was 7.6%. And your second question was split in other revenue. Oh, the other revenue are things like exterior revenue. We start to allow passengers to buy, Avanci Reservations for those who book lower subclass that was not qualified for since production in the past. And also now, passenger can buy excess baggage in advance online those are the type of exterior revenue that we are rolling out. Hi. I'm Andrew Lee from Jefferies. Two questions for me is on the passenger side, on the yield side, what you saw was a strong growth in yields on both a year on year and half and half basis. Do you think that trend will continue into the 2nd half, right? Second thing is looking at 2020, there's this IMO regulation. What's the impact and what you what do you think will be impact on Cathay, the IMO 2020 regulation? At Kale, is it? The IMO regulation 2020, the fuel the lost sulfur fuel. Okay. I'll take the first one. Passenger yield 7.6% increase. It was a combination of currency movement, a strong front end demand, future charge as well as underlying real yield growth, mainly coming from more often and forth, as a percentage, but you mix within cabin, etcetera. So some of the, factors are more under our control than the others. So we'll continue to tighten up our revenue management, be finer in our cementations, be more accurate in our pricing, time of day, day of week, getting more from not just peak season, but solar season as well. So those are more under our control, but, other items like currency or, surcharge, they are really external factors. So 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, your second question is, what's our how will impact fuel price or how will impact fuel cost? Well, you know, we, you know, one of the things that we've we've learned the harsh way is, not to speculate on, the fuel price. We risk management. So the new hedging policy takes that takes that out its minversion on that basis. We do have financed monthly meetings where we have specialists come in and discuss that. And, again, their view at the moment is is up and down. So again, we've not we've not learned anything that would make us want to change our our hedging booking or how we view fuel at the moment on that, something that we just watch, but policy at the moment doesn't allow us to, to adjust for any sort of speculation on that. Good afternoon. This is Vivienne from Citi. I have one question on the two questions, one on the cost side. And so if we look at our labor cost, they call it a Nazi in the first half of last year, the labor cost including a one off 20,000,000 dollars, $24,000,000 related to the redemptions cut. So if we exclude that one off costs, so, and then the labor costs in the first half actually increased by around 3.3%. And this is on the basis we actually cut 600 employees So that actually implies our average compensation point employee increase by more than 5% So actually this is one of the high risk increase compared to previous years. I just want to confirm if that calculation is correct. Is that safe to assume in the second half of a labor cost or actually a labor cost per employee will increase at the same pace? And a follow-up question, this is that we have recently Cassay has made announcement. They were some of the overseas drops? Or is that without some wild costs in the second half as well? This is the first question. The second question is on a cargo yield. Similar to passenger, right? So actually, we have noticed the cargo yield started a strong improvement in second half last year. We had close to 15% year improvement second half of twenty seventeen and we had a similar improvement in the first half. So is that fair to assume after like full year of improvement, the cargo year improvement will be between 12 much lower novel, like in a single digit novel in the second half? I'll just cover you 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 types of, 2 component behind the cargo yield, well, actually more than 2, but on a pricing part, there are the contracted part of cargo that you sign contract in the vans that cover a long, a longer period of time. And the second bit is the, cargo that we sell at spot rate. Alright? So, we have been increasing, the contracted rate. And when, seasonally speak, when there are still demand out there, there are also good chance for you to sell high as spot. You're right that the base was very high in second half last year. So, 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, ton carriage, by the same amount of fleet. So being able to keep up the utilization of the fleet during the peak season will be key for cargo business in the second half. Yes. On the staff costs, what we did last year was a head office reduction of 600 staff, which we completed at the end of last year. And as we said at the time, don't have a massive, saving in terms of the staff costs as such, but but more on on how you run the business single point of accountability, looking at end to end processes and driving efficiency improvement. And so yes, we did get savings ahead of it. So your staff costs have gone up 0.9% on ASK growth of 3.2%. So obviously as a company, we're growing significantly with pilots and crew, at the same time, is reducing our, our head office, staff compliment. And on terms of output, what do you want to Okay. 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, every region and jurisdiction, but in most places, you start with a consultative process, and that's the stage we're at now. So we're not able to talk about what the impacts now may not be. Hi. I'm Piras from HSBC. I have two questions. First, maybe follow-up on the cargo side. Can you help us understand? I mean, 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? And second question is sticking to the cargo itself. What sort of trend have you seen in terms of competition and in terms of cargoes growth driven by ecommerce, which probably has a longer lag and more in nature. And on the passenger side, I appreciate that you don't explicitly disclose the variable moving parts in terms of yield improvement. Okay. 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 77% number? Is it smaller than, smaller than probably low single digit, or it's it's a large part of that increase? Thank you. All right. On cargo first I'm not quite yet your first question, but I assume you are asking about the percentage of digitalization. Like, that's probably you intend to achieve. So for example, in the passengers, you're utilizing the close to high 80s. Oh, you're talking about low factor. I was talking about aircraft utilization on the cargo side. I was not talking about low factor on the cargo side. Okay. Okay. So does it answer the first question, Dan? On the comment on the load factor, how should we see about how much more room do you think you have? Well, in the second half, that's the peak season of cargo. So we do expect higher load factor in the second half. And, actually, this is related to your second question about the, competitive landscape and the structure in the market. Because of, the current macroeconomics climate, we haven't seen the usual extra sectors, charter, capacity on the cargo side during the peak season. So that may have a effect on the supply demand to our freight forward. Alright. So that's, the short term landscape. Longer term, if the current trade dispute continue, you might see more fundamental changes, along the entire value chain. People may start to, grow certain trailing and reduce their reliance on certain trade link, so that may have a fundamental change. Your last questions, I think in general, the comment we can make is new improvement, focus more on front end and back end, it's very much a premium traffic driven. One further point I'd make on cargo, we have 20 freighters, as you know, We also, about 85 percent wide bodied. So those wide bodied aircraft can carry between 15.25 tons. So we're now at a stage where, half of our tonnage is carried in our passenger aircraft. So if you think of the new destinations and new networks, we're continually opening up connectivity for the, for the big shippers as well. Oh, it's Jeffrey Shingle. Bocum, following on some of our colleagues questions. So one is again on the, the cargo stops. Say, basically, you mentioned that the UN, say, say low factor is kind of stay high. And So if we look at, the chart that you have produced something like for the passenger, on Page 14. Can we have a feel on which particular routes that you are seeing you, increases particularly in the first half because it's kind of interesting, as we know, is that their cargo seems to be particularly flourishing for the North America training, but your capacity seems to be restricted there. Obviously, you can use freight rates. So is kind of interesting for us that what kind of risks 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, safe, take off lending costs, you have mentioned that you have made the adjustment because of the, no, you make, say, click down to show us that the impact on the accounting standards, there was a 1,000,000 increases in 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 growth level, something like that. But we look at the, the top line, the revenue side is actually, it seems to be say not only on the cargo, but as well on the passenger and the other, say, revenue that has been impacted by the accounting standard change. So so I kind of want to know first thing is if we look at, say, the impact of the accounting standards in 2017. Obviously, there's no reinstatement now. So how can we make the projection and have a fair base to make the projection for the full year for this particular course item given the fact that it has 20% increase in the first half is pretty significant increase. Right? 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 Trans Pacific and to Europe and ShawHo, which might be, contradict to, in common sense, because over time Pacific, we have not been, growing capacity very fast. So supply demand, is to our favorite. And to Europe currency also play a big effect. But more importantly, the traditional, thought of you 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 scrapped 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 rod and just freighters. So all this new route, especially in route 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. Yes. Sorry. On the landing and parking charges there, sorry, jumped to the on the on the slide there on the revenue, IFRS 15 is adjusting for the 2018 numbers. The the accounting standards allowed you to do a modified implementation, so you didn't have to backdate the prior year. And obviously, moving to our new accounting standard, sorry, SAP moving to SAP away from our old accounting systems it was much easier on a on that basis. So adopt that as the sound that allowed, hence, in order to do the like for like comparison, we've taken out the the impact in 2018 or on that period too. So again, the that's that purely is just going to be a grossing up depending on how, our freightage and commissions increase over that period. So, you know, the impact of that standard will will 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 3 year implementation of landing and parking freeze from the April authority in Hong Kong, which is public. Okay. Oh, Eric, last question. Last question. Last two questions, if I may. Okay, the first one is actually more housekeeping Can you share with me how many claims are you gonna be, retired in the second half? And in relation to that, will there be any, return, you know, maintenance that kind of factors driving up costs in the second half. So that's first question. Second question, I think we've answered a couple of times about connectivity. Actually, there are a couple of interesting events coming up for Hong Kong. Now you've had the bridge, you have the train, and people talk about the grid convey, you know, So, what's kind of assessment on this point is that probably my question is, how, how is the PRD originated, chart looking at the moment, say, percentage of the traffic, you know, if there's any slot numbers you can share, that would be great. Thanks. Alright. On plane, we have been returning free, on lease Airbus 3, 30, first half, and then we'll return 1, 777, 4 class 7 in the second half, long haul777. And, we are taking 6 more, 351,000 in the second half. We have 2 flying. The next one for third one will come end of this month, and then we expect altogether we'll take 8. And at the same time, we have, 2 more, 777, regional, 300 use aircraft joining our fleet, and they are replacing our oldest 777 dash 200. And all These two are one on one replacement and then the rest of the fleet, which we have 3 more will happen next year. So by next year, probably by the time we, meet again this time next year, we'll have all the 777 dash 200 retire from our fleet. So that's on the fleet side. Your second question was about Rifadelta, the Bridge and, ISP Rail, there are certain opportunity that we are looking at both selling from PRD, we're passenger traveling out on a bridge or more importantly, we have launched our culture with Cotai Ferry, 1st end of first quarter this year, which is important. This kind of intermodal co sharing, we'll, look forward to continue to expand it. We are doing ferry to Macau. Next is, again, ferry to PRD. And then we'll expand into cultures awfully over the bridge and eventually with high speed rail. But 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 among constantly among our top 7 product sale. Okay. Just to go back to that last question, it's how do you split it's just shown as passenger and cargo revenue. In note 2 to the in the in the accounts, it splits it between the what's been charged to cargo and what's been charged to passenger. On that, thank you very much.