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

Good afternoon. Welcome to the Cathay Pacific 2020 Interim Results Analysts Webcast. Thank you for joining us. Before we begin, we'd like to go over the rundown for the briefing and the house rules. Kindly note that today's briefing will be conducted in English. We will begin with a presentation, after which we will hold the Q&A session. Slides from the presentation will be displayed alongside the live video for your convenience. A copy of the slides has also been sent to you by e-mail. If you have not received a copy of the presentation, kindly contact ir@cathaypacific.com. You are invited to submit your questions at any time during the briefing by clicking the Q&A box at the bottom of the window and filling out the submission form. Our moderators will then read these out during the Q&A session. With that in mind, allow us to introduce our speakers: Mr. Martin Murray, Chief Financial Officer, Cathay Pacific; Mr. Ronald Lam, Chief Customer and Commercial Officer. We'd now like to invite our Chief Financial Officer, Martin Murray, to begin the presentation.

Good afternoon, everybody. The usual format, I'll go through a presentation and then myself and Ronald will take questions. So the first 6 months of 2020 have been the most challenging in our 70-year history. The impact of COVID-19 has been unprecedented on the global aviation industry. Our attributable loss for the first half is $9.9 billion compared to first half profit last year of $1.3 billion. Cathay Pacific and Dragonair reported a loss after tax of $7.4 billion for the first half compared to first half profit last year of $675 million. The share of losses of our subsidiaries and associates was $2.5 billion compared to $672 million profit last year. These results include over $1 billion of government grants in the first 6 months and impairment charges that we took out of $2.5 billion relating to aircraft and 2 of our subsidiaries. For CX, it's been a very difficult 12 months. Obviously, the social unrest started back in 20 -- August 2019. So we have actually reduced our passenger capacity from October 2019. And with the social unrest at the end of last year, we started building some cash reserves, expecting a difficult first half of 2020. However, COVID-19 was unexpected. We have reduced our passenger capacity by 97% from April this year. And on the upside, again, the cargo business has held up well. The overall performance, you can see the massive impact on our passenger revenue, ASK, as I said, down 97% from April of the first half year, ASK is down 66%. Our loan factors down 17% and passenger yield just up marginally at 1.1%. On the other -- on the flip side of that, strong cargo demand with yield up 44%. Our cost per ATK at the bottom there without fuel and adjusting for FX up 34%. That reflects a reduced capacity and the fact that a lot of our costs are fixed or semi-variable. So in terms of the impact of COVID-19, we sort of split it into these 4 segments: Survive, Recapitalize, Restructure, and Revive. I mentioned the impact on Hong Kong from the social unrest from August. But then the absolutely devastating impact of COVID-19 since February 2020. You'll see that from IATA, they are saying that the net losses globally will be around USD 84 billion with the Asia-Pacific region expected to be a largest hit. And as I mentioned before, a lot of the airlines build up carry about 2 months' cash reserves, and we had built towers to 2.3 months reserves by the beginning of the year. We've talked about this in the previous analyst presentations and our recent investor presentations for the prospectus. But our immediate response, clearly, about capacity, as mentioned. In terms of our workforce, we had introduced 2 unpaid leave schemes, and we've had 2 rounds of executive pay cuts. We've obviously been focusing heavily on our cash spend. And so we've cut all discretionary spend and have been working with vendors and the authorities in terms of deferring and saving cash. And in terms of capital expenditure, we have deferred our A321neos and A350s with Airbus, and we're in negotiations with Boeing on our 9X fleet. We are operating a skeleton crew since April. We are flying to over 21 destinations there, and Hong Kong Express has been suspended since the 23rd of March and to the 1st of August, Hong Kong Express suspended their flights. Our focus has been on customer and employee care. We put an awful lot of effort into the travel experience and the safety of both our customers and our employees during this time and have had some strong -- good feedback on the great service that we've been providing in this regard. And the focus on -- from a financial point of view has been very much on liquidity. As I said, we have received government -- our initial cash burn, as we pointed out earlier in the year, it was around $2.5 billion to $3 billion per month. All of that was servicing customer refunds. Now that, that has reduced our current cash burn is around HKD 1.5 billion per month. The $1 billion we received in government grants, $640 million related to income grants and $420 million it was in relation to cost reductions. In terms of the financial results for the first half, as I said, on the passenger side, revenue decreased 72.2%. ASK is down 66%. We -- ASK is down 97% from April. Load factors have dropped significantly as well as there and yield, as I said, relatively flat. Revenue -- passenger revenue per ASK, down 19%. And we can see the impact of the revenue per ASK there on that graph. And again, this is a normal slide that we show, but it just shows you the global impact on every sector around the world. On the cargo side, the cargo revenue up 8.8% despite the available cargo tonne kilometers, down 31% due to the fact that passenger belly, obviously, have been impacted by the reductions in the passenger ASK with a strong cargo yield of 44% up, and the load factor is up nearly 6% has resulted in our cargo revenue improving over the same period last year. And you can see that the difference in the curve there in terms of the cargo revenue for AFTK in the graph here. In terms of our costs, I mentioned that our cost per ATK without fuel adjusting for exceptionals and impairment and foreign exchange increased by 34% and that's reflecting the reduced capacity and that that some of our costs are fixed and variable. Fuel consumption per ATK declined 8.5%. Aircraft utilization decreasing by 55%. You see there our summary of costs. So that highlights some of our fixed and semi-variable costs. Obviously, things like depreciation, very much fixed, finance charges the same and then other costs are more variable, and some costs like staff costs, semi-variable as we take up the SLS. So in terms of forward, this is very much a profit/loss forecast. And as we talk about cash burn, the big elements in the cash burn are our salaries, our vendor payments, particularly maintenance and airport and cargo services delivery finance costs of aircraft. And we have some hedging settlements to make as well. In terms of our biggest cost fuel. So that reflects a 22% decrease into-plane fuel prices, which are now 52% reduction in consumption. Our hedging losses there were $1.6 billion, with the average price of Brent for the period $42 and our hedging contracts at USD 65. Our hedging group, we continue to hedge on obviously lower forecast. So hedging group there, well, thanks to the rest of the year. Our own brand at $62 for 2021, we've got contracts in place around $56. And in 2022, around $46. I should mention that, obviously, with the reduction in consumption and that -- in the third quarter period at the interim results, that accounted -- in the forecast, we're about 18% overhedged. And so there's a HKD 95 million mark-to-market loss, which has been brought forward for third quarter contracts in 2020 into the interim results. In terms of the subsidiaries, I've mentioned that Hong Kong Express incurred a loss of $779 million in the first half and as I mentioned, the suspended flying from middle of March to the 1st of August. In terms of our other subsidiaries, Air Hong Kong. Air Hong Kong, made a profit of $363 million on the back of the strong cargo volumes. And as I mentioned, we had 2 impairment charges in the interims, one for Vogue Laundry of $658 million and for Cathay Pacific Catering Services, $526 million. A reminder, again, for this period that we account for Air China 3 months in arrears. So this period is in our 6 months just takes us up to the 31st of March 2020 in terms of your full year forecasting. But obviously, Air China Cargo, we account on a calendar year basis and have had strong results. Obviously, A Big Impact on our cash, net cash outflow before financing $9.7 billion outflow. The losses, et cetera, has brought our shareholders' funds down from $62.7 billion to $49 billion. Net borrowings up to $93 billion. We did receive Tranche C in June, and we did have some bridging loans were not drawn on Tranche C of the loan. So that will be available for us for 12 months and then an 18-month period of Tranche C. So that did mean that our liquidity balance at the interim is $15.4 billion. Our gearing, including operating leases is at 1.88x. And excluding operating leases, in line with our covenants, is 1.5x against our covenants of 2x. Again, this is just showing the increase since COVID of our gearing from 0.99x to 1.5x after -- on a covenant compliance basis. We have presented our recapitalization commitment from the government and our major stakeholders. The Hong Kong government committing a total of $27.3 billion. We had -- we received the facility, the ability to draw on the facility, which we haven't drawn off the $7.8 billion in June, hence, included in our liquidity balance. The $19.5 billion in terms of preference issues was received today, and our rights issue for $11.7 billion was received yesterday. So that's the 3 areas of tranches, of $39 billion. That reflect -- $31 billion of which we've received over the last 2 days. That has increased our equity from $49 billion up to $80.6 billion, reduced our debt from $93 billion down to $62 billion. And our gearing, as I said, from 1.88x to 0.77x and on a covenant compliance basis to 0.53x. So our gearing is now 0.53x compared to our covenants compliance of 2x. We then move to our next phase. And as we have announced publicly at the time of the recapitalization, we are continuing to observe over the coming months how the impact of COVID-19 impacts the industry. It changes on a daily basis in terms of that. And so by the fourth quarter of 2020, we have committed to go into the Board to check the optimum size and the shape of the group of what we think the go-forward position will be. So again, we'll come back at that point in time, but we will be bringing that -- taking that to the Board in November. So to date, as we've said, we have -- at the moment, we are down just over 90% of our passenger fleet. We have publicly announced a 1/3 of our passenger -- approximately a 1/3 of our passenger fleet are being parked overseas. We have announced some retirement. And in the interim accounts, as I said, 16 aircraft that we don't believe will return to the fleet between now and the summer of 2021, 10 lease returns and 6 on the aircraft. We impaired in the interim, interim seat. We have been working closely with our vendors. And in terms of our fleet, we have been negotiating with Airbus. And Boeing deferring some of these fleet. And so for the A350-900s and the A351-1000s, deliveries from -- in 2020 and 2021 are being pushed out between 2020 and 2023. And for the A320neos from 2020 to 2023 to 2020 to 2025. And again, we are in advanced negotiation stage with Boeing on delaying the 9X program. We have had one aircraft retire so far in 2020. And as I said, we have 16 other aircraft retiring or returning to now in the first quarter. And all have been impaired in the interim results. Going to the forecasting, obviously, it's the outlook remains bleak. On the passenger side, I've put in here, I asked this view. So I asked this view since 2020 being -- continued to be difficult. So the RPK is down more than 60% for the remaining of the year, in their view, and aviation not getting back to 2019 levels until 2024. And they're having on the side of this more downside risk to these numbers than upside. In that sense, our -- we -- that's the full year forecast. The first half -- the outlook for the second half must be better than the first half in terms of these forecasts. Positioning Cathay for the future in terms of the medium term, we presented these slides when we did the recapitalization. We do -- we are still the global aviation leader on these charts. We're proud of the awards that we've won over recent years. We are travel experience from about more than just an airline, as we see in the left-hand side there. And very proud of the network that we've built over a 70-year period. We are core to Hong Kong and the Greater Bay Area, and we still have -- we still see status as the -- Hong Kong International Airport as an International Hub and the global financial sector. And as we've spoken to at length at these briefings, we believe in the opportunities that the development of the Greater Bay Area is bringing to Aviation in this part of world. All right. Cargo, we said a lot of this cargo carrier, and we operate in the #1 global air cargo hub. So again, we remain bullish on cargo as well. And we have this slide that we showed before as well that the recapitalization did -- was that the rights issue was not only our stakeholders listed here. But the rights issue was over 40% oversubscribed. So even with a very difficult outlook, it does show the phase in Hong Kong International Airport as the Aviation Hub and the belief in the Greater Bay Area and the opportunities that are still available in the medium term. So the outlook, as I said, for 2020 remains bleak. We have committed to do a restructure in the fourth quarter. Our focus remains very much on safety with our customers and staff alike. And in the medium term, we remain very bullish of Hong Kong as both a financial center and an International Aviation Hub. And with that, I'll -- Ronald and I take your questions.

Thank you, Martin. I'll now hand over to our moderator, Andy Wong, who is General Manager of Corporate Affairs, to begin the Q&A session.

Thank you, Greg. Our first question comes from Ben Hartwright of Goldman Sachs. It's a 2-part question. Part 1, can you give us a sense of the current thinking about your fleet plan and the longer-term plan you will disclose by Q4? Do you expect further impairments?

As I said that we are committed to going back to the Board in the fourth quarter, and that is a very, very dynamic situation. The impairment that we have made to date is the 16 aircraft that we don't believe will fly between now and the summer of 2021. And so that full assessment of network will be made later in the year.

Okay. Thank you. So Part 2, you're currently adding back some services. Is this a response to better demand? And how would it impact load factor and passenger yields?

Let me take that. Well, first of all, we have only added back a few passenger flight in the past few months. Currently, we are still only flying to only 22 parts worldwide. So it's a very small addition. And our forecast for August as a whole, on the passenger side, we will only be operating around 8% of our normal capacity. So this is still a very drastic reduction. Having said that, since the relaxation of the Hong Kong transit band around 2 months ago, we have seen a small increase in terms of passenger volume. Currently, around 1/3 of our passengers that we carry every day comes from that transit via Hong Kong volume, which has helped compared to the period before where we have the transit plan.

Okay. Thank you. Our next question comes from Lok Kan Chan of Crédit Suisse. 2-part question again. Part 1. How many transit flights to China do you have pre-COVID? And what is that as a percentage of total? And second part. What are the trends looking like for passenger and cargo?

Well, the flights to China before COVID-19, we used to fly between Hong Kong and Chinese Mainland, around 20-something flights. But as of today, we only fly to fall those points with less than daily frequency on those parts, Beijing, Shanghai, Xiamen and Chengdu only. So at the moment, our connection between Hong Kong and Chinese Mainland has been greatly reduced. In terms of the passenger and cargo trends, on passenger side, we haven't seen any major tick-up in the coming 2 months yet because this is mainly driven by the travel restrictions as well as the quarantine requirements, which we haven't seen any sign of relaxation yet. On the cargo front, our outlook is pretty positive for the rest of this year. We are actually going to enter into the peak season of the year from September onwards. And currently, based on the market supply and demand, we believe the market supply will still be under a lot of constraints because the passenger network resumption by us and other airlines will still take some time. On the other hand, we are pretty confident about the demand side with new products launching in quarter 4 of this year. We are pretty optimistic about the performance on the cargo side for the rest of this year.

Okay. Next, we have Shawn from JPMorgan. I understand Cathay is currently doing a thorough fleet and network assessment. Can we gain further clarification on the 16 aircraft type and schedule impairment evaluation process? Do we expect any further impairment losses?

So the impairment -- the way the Cathay rules work is that the impairment of our aircraft that you have stopped that will not come back to that fleet. So those are, as I said, there were 6 owned aircraft and 10 lease returns, mainly all of the older ones in terms of the A330 fleet and some of the smaller aircraft there. Again, if aircraft are parked and then come back at a later day, maybe we continue to depreciate them. So that the extent of future network, et cetera, that's a piece that changes all the time. And we're committed to going back and assess that in the fourth quarter.

Okay. Thank you. Next, Ian Wong from UBS. Can you please update us on the cash burn for the month of July and August? It was mentioned that the cash burn narrowed from $2.5 billion to $3 billion in February to April, down to $1.5 billion in May.

Yes. So well, the skeleton cash burn, as I said, there's -- the $2.5 billion to $3 billion, a lot of that was at the start of the year where there was a lot of forward bookings through Easter, Chinese New Year, et cetera, that were canceled. So there's a lot of refunds included in that cash burn. Once we've -- obviously, the future bookings at the moment as we have no flight schedules, there's no bookings in that sense. And so the cash burn at the moment has reduced to $1.5 billion. July actually picked up a little bit. July included about over $1 billion, $1.5 billion of vendor to federal. So as we talked about in the first half of the year, the -- a lot of the work was done and speaking to suppliers in terms of deferring costs or canceling costs, it's obviously easier to defer. So a lot of the work that was done in January, February, and February came back in July, that's a one-off again. So we're expecting the cash burn, all else being equal to be around $1.5 billion going forward.

Okay. Thank you. Again, next question from Ben Hartwright, Goldman Sachs. Can you comment on the news that the new airline, Greater Bay airlines is applying for AOC? How does that impact you?

We welcome competition. And in fact, we compete with around 100 airlines in Hong Kong already, whether they're local based or foreign carriers. So we don't see this will become a major issue for us. We welcome competition, and we will watch the development closely.

Thank you. And a follow-up question on maintenance cost. What drove the decline in the first half? And is this sustainable or just a short-term cost saving?

Well, on maintenance cost, some of those different components of maintenance, but some of it's on power-by-hour. So we had some savings on that. And as we park some of the aircraft, obviously, you get savings in the base maintenance costs and so we can defer some of our maintenance costs as we have the aircraft parked.

Okay. Thank you. Our next question is from James Teo from Bloomberg Intelligence is about hedging. You have given your few hedge volumes by quarter. But can you comment on the actual volumes of fuel being consumed at the current levels of flying?

Sure. As the slide there shows you that we were 18% overhedged for the third quarter in terms of where our current consumption is. So you can work at that. The remainder of that just remains a forecast.

Okay. And what -- and for hedging, how many barrels should we -- are we using in first quarter of 2020?

That's disclosed in the slide that you have.

Okay. Thank you. And I've another follow-up question from -- on hedging as well. What management -- what would management further reduce the hedging ratio?

How would management...

Would management further reduce the hedging ratio?

Well, our hedging policy, where we explained over the period. So we only hedge -- we hedged 2 years out and we hedge no more than 50% of our plant consumption in that sense because of the fuel surcharge mechanism. Obviously, that's based on forecast. And the longer rate we are, the less hedging we take on because of the uncertainty of forecasts. We obviously revised our forecast back at the beginning of COVID. So we are taking on a lot less our forecast in terms of consumption 2 years out or less. And obviously, as we mentioned, the -- but we're still buying fuel in the $40 range now 2 years out at lower consumption levels based on our revised forecast.

Next question, Parash Jain from HSBC. Do we expect any write-down on aircraft values?

We expect any write downs? Well, as I said, we've taken $1.2 billion of impairment on our aircraft for 16 aircraft that we don't believe will return to service at that point in time. We'll continue to watch it. If at year-end, that your guess as to what happens with COVID, but depending on the outlook, at the year-end, we may have to pay them more, but not at this point in time.

Okay. Thank you. And the next one from Andrew Lee of Jefferies. It's a multiple-part questions. Some of the topics have been covered. But a specific question on, if Hong Kong allows China transfer flights, how significant is that to the passenger traffic?