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

Okay. Well, thank you, Lavinia and Rebecca, for your presentations. We'll now open the floor to questions. [Operator Instructions]. So let me open the floor. The gentleman on the left.

I'm Parash Jain from HSBC. I have two questions, if I may. First of all, maybe Lavinia, if you can talk a bit about passenger yield going into the summer of this year and probably for the later half of the year. And given the tighter demand and supply, given the rise in the fuel cost, would you see the passenger yield also will likely to settle at a pretty elevated level versus the pre-COVID on an ongoing basis? And secondly, maybe for Rebecca. In terms of hedging, can you remind me if this hedging happened at a Brent level? And like the recent surge in the jet spread, with respect to jet fuel prices, is there any hedging mechanism for you to protect from that? Or you remain open for that?

Okay. Thanks for the question. So I think -- well, high use -- yes, that's a reflection of currently, the air fares are still quite high. So I believe there are 2 factors behind the current high fares. So the first factor is because of -- it's a global phenomenon. It's not just in Hong Kong and not just Cathay Pacific. Everywhere, if you ask passengers, they will say that all fares are high. So -- and that is really a matter of -- well, we have to acknowledge that post-pandemic, the whole airline industry is facing a lot of -- or the whole supply chain is facing a lot of challenges, including people shortage, supply chain material shortage, and then there's also cost inflation across the globe. So all these actually add to the cost pressure for airlines operating and these cost pressure are being reflected in the air ticket fares. So that is one explanation of why ticket fares are high. The other, obviously, contributing factor is supply and demand imbalance. I think we are still seeing a good pent-up demand in the market. Again, that's sort of globally. We are also seeing pent-up demand continue to be there. And at this point, demand outstrip supply. So that also contributes to higher air fares. So to the question whether we can sustain a high use, that also is dependent on whether these high fares will continue down the road. I guess on the first part of it, the first part of the equation, global inflation and supply chain challenges, I think that will continue for quite some period. But for the second factor, yes, as long as we continue to introduce capacity. Other airlines will also be doing the same. So when supply starts to continue to build, obviously, I think fare will normalize a bit towards that. But obviously, there are 2 factors which affect air fares hence our views at this point.

Parash, so in terms of the fuel hedging, we do continue with our fuel hedging policy that we believe is quite prudent where we're hedging based on the fuel price and the consumption we project out for a couple of years. I'm not sure whether we disclose exactly whether we do it based on Brent or Jet, so I won't go there. So -- but all I can say is that, as you saw in the chart earlier, the sort of amount we have, we're doing it on an ongoing basis. So whatever the price is of the fuel at the point in time, we will be hedging progressively out for up to 2 years. And typically, the nearer term will be a larger proportion and the further out will be lower.

Thank you. Next question, gentlemen.

Jonathan Cher from Standard Chartered. Would you mind just sharing a little bit more around the circumstances that led to the reversal of the 3 impaired aircraft that you mentioned? And would we expect to see any more sort of meaningful reversals in the reserves over the coming year?

Sure. I can share a little bit more on that. When we do the assessment, originally, we're looking at will they be operating in the next 12, 24 months. And therefore, at that juncture, we didn't believe they would. In terms of the aircraft that we were looking at, it is aircraft that I think it's typically around 23 years old. So getting close to the end of their life that they typically have with us and the depreciation period that we're using. In terms of being able to operate these aircraft and bring them back earlier than we thought. Effectively, that's what we're doing now with these 3, and they will continue to operate for a while. In terms of commenting on others, not something that we've put in the public domain. I mean it's something we keep under review based on our fleet plan and the deliveries of new aircraft as to whether we need to reactivate some or all of them or not. So I can't really comment on the specifics of whether there will be others at this point, I'm afraid.

It's Tim Bacchus from Bloomberg Intelligence. So I wanted to talk a little bit more about the yield and what happened in the first half versus last year. So it was down 32%, but obviously, this is quite elevated still versus 2019. It's quite interesting when I look at the numbers, usually when passenger stage length goes down, the yields will go up, right? Yields on long haul are lower than they are for short haul, same with unit cost. So when I look at the numbers, it looks like stage length declined from 5,400 kilometers to around 4,100 kilometers, yet yields went down. So maybe you could just elaborate a little bit on what you're seeing in terms of why the yield was down 32%. And the second question would be just on cargo. Further to what you got in your slides. Can you talk about what you're seeing in terms of the typical peak seasonal cargo demand for this year? I know the shippers are locking in contracts already. Are we beginning to see that there will be a peak this year? Some other peers in the region are saying, no, they don't think there will be the typical peak this year.

I'll probably leave Lavinia for both of those.

Okay. So for the first question is about the passenger yield, right? So again, I guess, not just for cargo, I think in the past year -- in last year, actually, the passengers use are very skewed as well because at that time, we were operating -- well, in the first half, a lot of months, actually, we were operating at only around 3% to 5% of our capacity. So you can imagine that given the very limited seats at that point and demand was pretty inelastic, only those who really need to travel will travel and they will pay whatever price just to get a seat. So I think those are, again, very skewed yields. So I think this year is more like seeing more normal fares. And obviously, as we continue to normalize and rebuild our network, then I guess in terms of the different freedom mix, we are also starting to see more normalization. So I guess, last year, we might still not be carrying a lot of connecting traffic. So this year, obviously, as we continue to rebuild almost a hub, we'll start to see more connecting traffic. And so that will also affect the yield mix somewhat. So to the second question, so cargo, yes, I think we are expecting there will still be a peak this year, maybe obviously different from the historical highs. But yes, we are preparing for peak. I think one advantage that we have now in Hong Kong is although the general cargo -- globally general cargo demand has been a little bit softer this year compared to last year. But actually e-commerce is actually the star and especially out of GBA. So we saw really very, very good demand out of GBA for e-commerce cargo, and we are in the right spot to capture that. So I think that actually gives us some confidence about this peak.

I'd also echo Lavinia's comment. I think last year's numbers on the passenger side are really hard to use as a basis to then calculate into 2023. So I think, yes, they're too skewed.

This is Perry from UBS. I also have a question related to the passenger yield. I'm not sure if you can give us some color in terms of the sequential trend of the passenger yield, i.e., from Q1 to Q2. We want -- we sort of -- our interest to gauge the trend in terms of the normalization. And secondly, related to the cost, you mentioned the underlying cost per ATK has declined by 51%, which is impressive, and it is close to 2019 level despite that the passenger capacity remains pretty low. I'm interested in terms of how many percentage of the cost reduction is sort of permanent? I guess that's all for me.