Cathay Pacific Airways Limited (293) Earnings Call Transcript & Summary

Great, let's begin the Q&A session.

Okay. The first question comes from Ben of Goldman Sachs.

Could you please elaborate on the impact of coronavirus on traffic and yield in February and March and bookings in April? In March, April, you are cutting capacity by 65%. Is that also a reflection of traffic volume, what are load factors in March?

Okay. Let me answer that. Thank you for the question. First of all, let me recap the capacity change as a result of COVID-19 for Feb to April so far. In Feb, we had to cut our passenger capacity by around 30%. And for March and April, we have cut our capacity by 65%. All these are measured in ASK terms. In terms of frequency, actually in Feb already, we have cut 65% of our frequencies. And in March and April, we have further cut our frequency by 75%. Unfortunately, these are not a reflection of our revenue dropped yet because even with the capacity cut, our load factor has also come down. At the moment, our load factor-based on the reduced capacity is hovering around 50% only. And also, the -- we have seen substantial yield drop also. So you can calculate that based on the capacity drop, the revenue drop in these few months are actually more severe.

The next question comes from Luya of BOCOM.

Could we get a sense of demand outlook by region for the first half of 2020. As we see COVID-19 accelerate in Europe and North America, while Asia numbers decline. Should we expect increasingly divergent regional demand growth in the coming months?

Okay. So far, I think the situation is still very fluid and dynamic. As COVID-19 broke out, from Feb onwards, I think the first affected route on -- in our network will be China. And so far, we have cut our China network by 90%. And then after that, gradually, our routes in Asia have been affected also. And now we're also seeing some long-haul regions like U.S., Europe, getting affected as well. So I think so far, at the moment, I think the regional routes are more affected, I would say. And the long-haul routes are relatively less affected. But the situation is going to change as the situation develops in those countries. And also, I think it's worth emphasizing that our routes are all interdependent. As we close our routes in the regions, the long-haul routes will be affected as well because, for example, we have feed from China onto our European routes. If the China routes are closed, our European routes be affected as well. So I think the whole network because of the transit traffic we carry are severely affected, whether it's the short-haul or long haul.

The next question comes from [ Agnus] of [ Westpac. ] I think the first 2 part is covered already.

But the third part of the question is, what is the company's hedging position on bunker?

Well, as we've mentioned over the period, we had our hedging difficulties in the past. And so we stick to our current policy. So what we've done now is that, as we've mentioned, we are no longer an outlier, we hedge like most airlines up to a 2-year period. And we also hedged more than 50% of our cover and on relying that the fuel surcharge mechanism is back in place in that stage 2. So on that sense, too, we're taking advantage because we continue with the policy of hedging at the long end. Although the curve is in contango at the moment, i.e. it's upward sloping. So they're not buying it at the low prices you see in the spot market. But we very much operate to -- we still believe in managing the fuel risk and very transparent with it. So as I mentioned, every $5 drop per month is about USD 7.0 million.

The next question comes from Kelvin of Daiwa Capital. The first part is also on hedging. So that's already been answered.

The second part of the question is, what is the passenger and cargo capacity growth guidance in 2020, given all the flight cancellations. And the next part of the question is what kinds of further cost-cutting measures would be launched in the second half of 2020?

Okay. Let me answer the question. For first half in terms of capacity, I've mentioned that the capacity cut at the moment up to April is already pretty severe, as I mentioned in answering previous question. We are also looking at May and June in terms of capacity cuts. At the moment, we are making a more moderate cut compared to March and April. But as I mentioned before, the situation is very fluid. And it's changing every day. So we'll watch the situation very closely and make decisions around our capacity cut for May and June in the coming weeks. In terms of the further cost control, I think we have our current strategy in terms of cutting capacity as well as working with our suppliers in controlling the cash flow outflow from our company. We've also got support from our staff in terms of special leave scheme. So I think we'll continue with all these directions in managing our cash flow. As we go into the coming few months.

The next question comes Ajith of UOB. And there are a few parts. So maybe let me ask one by one.

So the first part is, is Cathay planning to defer aircraft deliveries in 2020?

Yes. Let me answer that. We've been working with our major suppliers, including aircraft OEMs in deferring our aircraft delivery. So we're working with Airbus. We're working with Boeing to look at the potential of some delivery delays, so that we can help our cash flow right now. So we are in discussion with those suppliers at the moment.

Okay. The second part of the question is, could you guide on 2020's CapEx? And would you rule out a cash call in 2020?

So in terms of CapEx, as I said, we're working with our vendors to defer on that basis. So the focus at the moment is to move our CapEx, as Ronald just mentioned. On the basis, in terms of our access to liquidity and a relatively strong liquidity position, we are -- Ronald talked about the capacity cuts for April and May, and a very, very difficult first half. And we are, at the moment, planning the recovery in the second half. So where we stand today, there's no need for a cash call. Obviously, if things deteriorate, we can't rule out anything at this point in time.

The final part of the question is, have the U.S. and European aviation agencies agreed to lower the slot utilization due to force majeure arising from COVID-19?

Well, we've been working with different authorities in terms of a waiver for slot utilization in different airports, including those in U.S. and in Europe. And I think it varies by countries. So -- but we're working hard with them to -- so that we can get the necessary waiver in terms of slot. But when it comes to Hong Kong, I think we've been working very closely with civil aviation department, and we've already got waiver until end of this summer season anyway. So I think we would like to thank the civil aviation department for helping us with that.

The next question is from [ Sean ] of JPMorgan.

I wanted to kindly ask what is Cathay Pacific's plans over cargo-only services on passenger aircraft? One example includes cargo customers doing from Japan. Is this service commercially viable and how does Cathay differs from other dedicated freighters such as DHL?

Right. Maybe before I answer the question, let me give a brief overview on the cargo situation. Cargo business is also affected by the cancellation on the passenger flights. Normally, we carry half of our cargo on freighters and the other half on our passenger aircraft. But as the passenger flights get canceled significantly, our cargo capacity overall also get affected. And at the moment, I think our cargo capacity has gone down by nearly 1/3 because of the cancellation on the passenger side. Having said that, I think we are trying every means to stabilize the supply on the cargo space. So we have been providing -- using passenger aircraft to provide cargo services in the region. So I think with the fuel price dropping coming up, hopefully, we can provide more of that capacity to make up for the shortage of supply in the market. We've also been using dedicated freighter services from our subsidiary Air Hong Kong to provide more cargo space to the market. So all in all, I think we are trying to contain the shortage of supply, make sure that the supply chain is stable.

The next question comes from Eric of UBS. There are 3 parts, and I'll ask the cargo part first.

Any signs of cargo recovery, how much benefit from Hong Kong International Airport terminal charges charge waiver? So that's the question.

Okay. Look, currently, cargo demand is still on a decline because -- partly because of the trade war still going on between U.S. and China, but more short-term is partly due to the -- while the resumption rate in the manufacturing, and in particularly in China, is not fully resumed yet. So demand is still depressed. But in terms of supply side, because of the massive cancellation of passenger flight capacity by our own airline and also other airlines in the market. Actually, supply has dropped more than demand. And therefore, we are enjoying favorable market from an airline perspective at the moment. The second question is about -- can you remind me again?

Hong Kong International Airport Terminal charge waiver? Is it going to benefit the cargo?

Yes. Okay. So we have working -- we have worked with airport authority. And from 1st of April onwards, we're going to reduce our terminal charge out of Hong Kong by 20%. We do it in order to boost the competitiveness of Hong Kong Airport as a international air cargo hub. So we believe that the reduction in terminal charge will definitely increase and help Hong Kong's competitiveness as air cargo hub. But it's yet to start. So I think the impact is yet to be seen.

The last part of Eric's question is on Hong Kong Express.

So -- and the question is, is there any chance of writing down some goodwill for Hong Kong Express due to the recent challenge?

Hong Kong Express, as I said, when we bought it back in -- last year, it's a very exciting growth story for the Cathay Pacific Group, very much a long-term investment, and that was the plans when we bought it. In fact, way too short-term to even see that. That still remains a very strong and good investment. So no plans to write-off any goodwill in Hong Kong Express.

The next question is from Andrew of Jefferies.

Its first part is also on cargo. So how much have cargo yield increased in the past few weeks? What is driving this? And is it sustainable? Are CX using passenger planes to carry cargo only with no passengers, so some of that has been required but. So that's the question.

Well, as I mentioned, there's a short-term imbalance in supply and demand at the moment in the cargo market. So our cargo unit has improved. I can't reveal the actual figure, but it has improved more than double digit, I would say. But this is -- I emphasize, this is short term, and we are trying to provide -- increase our capacity for air cargo to stabilize the market. Sorry, what was the second part of the question again?

The second part of the question, I think.

I think it's about the usage of passenger aircraft.