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

Good afternoon. Welcome to the Cathay 2023 Q1 Analyst Briefing Webcast. Thank you for joining us. Introducing our speakers for today, Chief Financial Officer; Ms. Rebecca Sharpe; Chief Customer and Commercial Officer, Ms. Lavinia Lau. We will begin with the presentation by Rebecca, after which we will hold a Q&A session with our speakers. [Operator Instructions]. We now invite Rebecca to begin the presentation.

Thank you, and good afternoon or indeed good evening or good morning, depending on where you're watching this briefing. I'd like to add my welcome to the afternoon session, and thank you for joining us. If I turn to the agenda slide, I have to say, as I sit here today, this is a very different world than it was 12 months ago. If I recall back to that time when we were talking about our position at that particular point in time, I was talking about passenger capacity around 2%. So a very different world today. We've come a long way since then. And actually, today is a pretty big milestone for us as the Cathay Pacific Group. Today, we've made our first payment of preference shares dividends. So the amount of HKD 1.5 billion that we owed in deferred preference share dividends has been made -- paid. We've paid that today. So a great milestone on our rebuild journey. Now for those of you who follow our briefings and have done so over the last couple of years, you'll notice that the agenda here today is slightly different. The last few years, we've been talking all about our response to the COVID-19 pandemic, whereas today, we've changed that. And we're talking about how we're rebuilding Cathay as a group and not just about rebuilding back to where we were prepandemic, but how we rebuild a better Cathay Pacific than we were before. I'll then cover information on our year-to-date operating performance, so that number is to May 2023. We'll then touch on outlook and then move to questions. So at Cathay Pacific, when we think about our rebuild, we look at it from a number of different aspects. These include our people, our fleet, and the combination of these 2 and the capacity they then generate for our customers and then, of course, the financial outcomes of these elements. So if I talk about the entire aviation ecosystem, but not just in Hong Kong but globally, is facing resource challenges everywhere. However, in terms of our people, there are a number of different dimensions that we consider. So we do have sufficient pilots, cabin crew and operational employees to support our current schedule. We have a lot of training ongoing to recertify some of our pilots who didn't fly during the pandemic to support promotions for our people and, of course, for new recruits that we've been taking on. And although we have been continuing to recruit, we're confident that our ongoing training and recruitment plans will be sufficient to meet our projections that we're talking about in terms of capacity and that we will have sufficient resources as we rebuild. So just as a reminder, 2,000 people joined our group in 2022, so last year, and we're targeting to recruit a further 3,000 during the course of 2023. And the other element, of course, when we're talking of people is remuneration. We are committed to being a competitive employer, and we do continually review the remuneration of our people. We want to make sure that they are being recognized whilst at the same time, ensuring our business remains competitive and sustainable in the long run. In terms of our fleet, the second element I show on here. At the end of May, we had 225 aircraft in our fleet. We still have 27 of these aircraft parked overseas. And this year, we've had taken delivery of 5 new aircraft up to the end of May 2023. And these are A321neo aircrafts for both Cathay Pacific and our low-cost carrier HK Express. Capacity, I'll talk in a bit more detail on the next slide. So we've included the key numbers here for your reference. But in terms of our financial-related matters, we continue to be operating cash generative this year so far. You'll recall that overall, in 2022, we are operating cash generative. So our liquidity is healthy, which is why we did not need to draw down on the HKD 7.8 billion bridge loan from the HK -- Hong Kong SAR government and we let that lapse on the 8th of June. We are, of course, very grateful to the Hong Kong government for the provision of this loan facility because it gave us additional flexibility with managing our liquidity through the pandemic. And as we look to the future, the levels that we kept of liquidity through the COVID pandemic, in order to manage the uncertainty, it's not necessarily, as I think I've mentioned before, where we will keep it, but we will be looking to bring that liquidity level down progressively into the future. Also, our operating cash generation is the reason we've been able to repay our deferred dividend on the preference shares that was outstanding. So this is the first time we've made payment of dividends on the preference shares. And so that HKD 1.5 billion was paid to the Hong Kong SAR government today. And as we noted in our most recent traffic report, we do expect to generate a consolidated profit for the first half of 2023. So if I move on to our capacity aspect of our rebuild journey. We are on track. You've seen this slide before. I think we shared it in the March annual briefing. And what this shows is the 2 lines of capacity for both our passenger and our cargo parts of the business as a percentage of the prepandemic levels. So you can see at May 2023, for example, on the passenger side of the business, we are operating at 56% of prepandemic levels and for cargo 72%. And we're on target, as I say, with our recruitment and training plans to achieve the 70% by the end of this year in terms of passenger and 85% in terms of cargo and then continue on to reach 100% back to similar levels of capacity as prepandemic by the end of next year. A number of you you've asked me in the past, what do we think about when we're thinking about rebuilding our capacity and the routes et cetera, what are the different aspects that we consider. So I just wanted to share a little bit on that here. So of course, demand, where do we think the highest demand is definitely an element that we're looking at. We also consider the profitability of the routes. But there's other elements that we need to think about. So because we carry a large part of our cargo tonnage in the bellies of our passenger planes, a route might not have such strong demand for passengers, but it may be strong for cargo. So the cargo opportunities are another aspect that we're considering. Then of course, we have to think about our resources. So our pilots, for example, are trained or certified on different aircraft types. So which aircraft type have we got available to put on what route? And does it match the resources we've got available. So the sort of aircraft type availability and the resources availability is another dimension we're looking at in here. And then in terms of our flight patterns, these need to be optimized. You can't just have a demand for 1 flight to go in 1 week and then you leave your aircraft there because that's not good resource -- use of resources in terms of asset or people. So the flight -- the schedule that we can build around the demand is another aspect. So I just give you those few sort of indicators to give you a bit more flavor around how we are looking at our rebuild in terms of our network and destinations. The next couple of financial slides, I've included for your easy reference. I know I often get questions about these. There's nothing particularly new on them other than the bridge loan facility expiry because we've not published any updated liquidity information so far this year. And just a reminder that when you look at this slide, you can see in the HKD 27.2 billion figure for the end of last year, undrawn facilities were HKD 9 billion. Within that HKD 9 billion, the HKD 7.8 billion Hong Kong SAR government bridge loan was included. So as we let that lapse, we didn't draw it down, that will be removed from that undrawn facilities number. As I've said, we continue to be operating cash generative and our liquidity balance does remain healthy. The next slide covers the question that is often a favorite of everybody's around our fuel hedging policy. So I can't share any updated data. But again, I include for reference, the December position. So you can see on the left part of the chart the fuel hedging, on the right the interest rates and how -- or interest rate profile rather, how we split between fixed and floating rates against our borrowings. I can confirm that we do continue to follow our fuel hedging policy. And there have been no changes and no plans to change. So just as a reminder, this has a clear pricing matrix that governs the hedges we make based on the prevailing price of fuel at the time and our forecast consumption levels, and then we execute in accordance with that matrix. So for example, you can see that at the end of December last year, the first quarter, we'd got approximately -- just over 40% of our fuel consumption hedged at that point. In terms of our interest rate profile, obviously people are concerned at the moment with interest rates going up. We do operate a policy of making sure we have a balance in fixed and floating rates in order to protect some of that volatility around interest rate movements. So you can see that at the end of December, we had about 52% of our interest -- our borrowings rather on fixed interest rates. If I then move on to operating performance. And starting on our premium travel side of the business, Cathay Pacific. I'm sharing a slide that we've shared a number of times before. I'm looking forward to the days where this is all back to normal and it's not so interesting to look at the history. We can see that passenger numbers are on the increase -- starting to increase. And you can see that started following the removal of the quarantine requirements back in late September last year. The dark green, this is a reminder, representing the Cathay Pacific Group passenger numbers, the light green being the balance. But you can see there's a healthy growth in that asset number of passenger numbers at the Hong Kong international aviation hub. So then if I take that green part of the bar and break it down a little bit by looking at these metrics specific to the Cathay Pacific business, you can see the strong rebound in demand through the very high percentage variances when I compare the first 5 months of this year with the same period last year. We carried 6.3 million passengers in the 5 months to May 2023, which compares with only 185,000 in the same period last year. As I've already mentioned, we continue to increase our flight capacity. And at the end of May, Cathay Pacific will serve on its own, that's excluding HK Express, we're serving 64 destinations and operating more than 600 flights per week. The next slide sets out the 6 monthly capacity and load factors dating back to 2019 and includes as the last bar on the very right, the first 5 months of 2023 for as an additional column. So you can't directly compare that last column with the others as it's a 5-month period, but it gives you a sense of what the numbers are looking at. So you can see quite clearly there, the step change in capacity. Our capacity for the first 5 months of 2023 was 50% more than the total capacity in 2022. You may recall, we only operated about 4% of prepandemic capacity in the first half of 2022. The lower chart on -- at the bottom, you can see the continuing increase in our load factors. We've seen this in the first 5 months of the year. And that is such that it's actually higher than the load factors we saw in 2019, again, reflecting the very strong demand that we're seeing this year so far. I wanted to include another aspect of our business here to share with you in terms of part of our rebuild journey. As you all are very aware, the last few years have been extremely challenging for the Cathay Pacific Group. And our rebuild journey is not without challenges of its own. So it's really heartening to receive a little bit of encouragement from our customers and from the industry with a number of accolades that we've received. So earlier this month, we returned to being in the top 10 of the AirlineRatings.com World's Best Airlines for 2023. This accolade recognizes impeccable safety standards as well as innovations that make a difference to our passengers' experience. Also this month, we received 12 distinguished honors, including the Ground -- the Grand award, sorry, from the Hong Kong Association of Customer Service Excellence. These awards -- there's not a picture of these, sorry. These awards recognize the remarkable achievements of our colleagues, both in our in-flight service, our airport service, customer care and our learning academy. So it's a great recognition for all the hard work that they do. And we were most recently recognized as one -- in one of the aviation industry's most prestigious event, The Skytrax World Airline Awards at the Paris Air Show. We are back in the top 10 airlines in the world and ranked eighth. Now of course, that's not really quite where we want to be, but it's definitely moving in the right direction. And I would like to also recognize that none of this would be possible without the hard work, dedication and professionalism of all the people that work in the Cathay Pacific Group. So we do want to sincerely thank everyone for that. So if I now turn to the cargo line of business, which also received recognition early this year when Cathay Cargo was named Cargo Airline of the Year by Air Transport World in its Airline Industry Achievement Awards. We have rebranded our cargo line of business as Cathay Cargo, aligning it with our vision to become one of the world's greatest service brands. And I'd like to share a short video clip with you about this. [Presentation]

As you can see from the video, we continue to expand our range of specialty services. I think I've touched on some of these before when -- in talking to a number of you. So things like Cathay Pharma, Cathay [ Mayo ]. These solutions provide a range of specialized and professional air cargo services underpinned by innovation, technology and expertise. And this is an area we're looking to grow. Looking then at the specific statistics around cargo for the first 5 months of this year, you can see the step change here in capacity when compared to the same period last year. And that, of course, is reflective of the passenger planes and their bellies that we use for cargo space coming -- or generally coming back. You'll recall that the change in crew quarantines way -- requirements way back in December 2021 had a big impact on our cargo capacity in the first half of 2022, which is part of the reason for the big variance. You'll also see that in terms of cargo carried specifically, that we carried more cargo in the first 5 months of this year than we did in the first 5 months of last year. And in February of this year, as part of our Greater Bay Area strategy, we became the first cargo airline and the first cargo terminal operator to have shipments accepted in the Dongguan Logistics Park and transported to Hong Kong by ship such that they could go as outbound freight. So this is an exciting development in our expansion into the Greater Bay Area. Similar to the chart I shared a few minutes ago on the passenger side of the business, this slide sets out the capacity and load factors for the 6-month periods from 2019 with the year-to-date figures for May added as the last bar on the right. You can see the increased capacity in 2023 to May compared with the first half of 2022, as I said, provided by the bellies of our passenger aircraft as the passenger network rebuild. In terms of load factors, these have reduced from what we've been seeing and the very high levels we saw through the pandemic when there was less capacity available globally, albeit they are still slightly higher than the first half of 2019. Turning to the lifestyle part of our business. We continue to develop our lifestyle portfolio and work on further opportunities to grow this line of business. We've seen strong momentum on our co-branded Cathay Mastercard in terms of spend on the card and also new cards issued. And additionally, I hope a number of you have noticed on board our flights that in May, we launched our new Cathay magazine. And I hope that you had a chance to take a look at this and interested in you giving us some feedback. HK Express, our low-cost carrier is making good progress in the rebuild journey. So just to talk through a couple of points about that. In late March, we celebrated the arrival of HK Express's first A321neo aircraft. This aircraft provides increased operational efficiency, particularly with respect to fuel and an array of exciting new features for our customers. And by the end of May, HK Express was operating approximately 430 flights per week to 18 destinations and their flight frequencies are already back to prepandemic levels. In terms of the subsidiaries and major associates, their operational performance generally reflects the passenger or cargo story depending on which sector they're most closely aligned with. This is also the case to a large extent for our major associates, Air China and Air China Cargo. With respect to Air China, you'll recall, as we noted in our annual report, that Air China issued new A shares in January of this year. As a result of which our shareholding in Air China was diluted from 18.13% to 16.26%. And from an accounting perspective, this is treated as a deemed disposal. And so as a result of the deemed disposal, we will be recognizing a one-off noncash gain of HKD 1.9 billion in our first half results this year. My final slide in this section is about our sustainability journey, which, of course, for the aviation industry is a very challenging journey. We believe that real progress in this area can only be made together with governments, industry bodies, suppliers, partners, customers and other stakeholders. And this is reflected in our communication platform we have recently launched. And I'd like to share with you a short video about this. [Presentation]

I hope that gave you a little flavor of some of the things we've been doing. We very much believe that it is about us all working together to be greener together in order for us to make real strides in this area. And we do continue to work on a few other things that aren't mentioned in the video, securing sustainability-linked financing for our aircraft, and we have extended our Fly Greener, our voluntary carbon offset program, not just to our passengers or customers that book through our websites but also to our cargo customers. Additionally, the other picture on here is around the fact that we saw the return of the Cathay Community Flight at the grand finale of the Strive and Rise program that we were part of. And we had about 170 students who were able to experience their first chance of flying together with their volunteer mentors on a 90-minute flight above the skies of Hong Kong earlier this year. We did offset the carbon we've utilized in the flight, I should point out. And in terms of our sustainability matters or development, generally, we do have a report available that you can access online if you want to know more about what we're doing in this area. So now if I turn to a little bit of commentary on our outlook for the business. As you'll be aware, based on reports from many other airlines, the aviation sector is returning to profitability. For us, at the Cathay Pacific Group, our rebuild journey started somewhat later than our industry peers. However, I'm pleased to advise that we do expect that the group will generate a consolidated profit for the first half of 2023. In terms of our travel business, so this Cathay Pacific and HK Express. The outlook for this part of the business, demand is extremely strong. However, the whole aviation ecosystem does face resource constraints. So there's a bit of caution, I guess, around that really strong demand. However, we are on track with our training and recruitment in support of meeting our group targets of 70% of the prepandemic capacity by the end of this year and 100% by the end of next year. Destinations and frequencies, some of which I've noted on this slide, will continue to be added to our passenger network progressively. In terms of cargo, as our passenger network rebuilds, this will progressively increase the capacity for cargo to such that we expect to reach 85% of our prepandemic capacity by the end of this year. And then, of course, 100% by end of next year. The cargo market dynamics are changeable, being more closely linked to the global economy. So we see demand changing amongst different sectors. So for example, we're seeing an active e-commerce market, but less demand for high tech and new consumer products. So our approach to tackle this changing market dynamics is to be as flexible as we possibly can to adapt to these changes such that we can optimize our schedules accordingly to meet our customer requirements. So finally, to summarize, we are on track and committed to our rebuild journey. And we are doing more than simply returning to where we were prepandemic. We're wanting to rebuild Cathay group that is better than before. We acknowledge that there will be challenges along the way, but we believe a measured and responsible approach is our route to success. As I said at the start of the presentation, the key aspects of our journey are our people and our fleet, and therefore, the capacity we can create and our target of recruiting 3,000 people this -- for the whole of this year is part of that. I've also included on this slide of your easy reference, because you often ask about the new aircraft deliveries. So our new aircraft delivery is, of course, part of our rebuild journey. These are the ones we've already ordered, 11 in total for this year. So as I said, to May, we delivered 5 and overall, 48. The big order within there is the 21777-9 Boeing aircraft that we'll start delivering in late 2025. The capacity figures, of course, the outcome of our people and our fleet I've touched on, so I won't repeat that. And in terms of financial outcomes as a result of this rebuild journey, our continued ability to generate cash means our liquidity is healthy, and we will look to reduce that from the elevated levels that we've kept through the pandemic uncertainty. We've been able to pay the HKD 1.5 billion deferred dividend as a result of being operating cash generative, and we do expect to generate a consolidated profit for the first half of this year. Thank you.

Thank you, Rebecca. We'll now turn to the questions. We have a question from HSBC on the preference shares. So Rebecca perhaps you'd like to take that. What is the plan to repay the preference shares in part or full and any time line? And does the payment of arrears on the preference dividend, pave the path for a resumption of dividends to equity holders?