Cebu Air, Inc. (CEB) Earnings Call Transcript & Summary

Good day, everyone. We are delighted to have you join us for Cebu Pacific's Investor Call. Our team will be sharing with you today our business and financial highlights for second quarter and first half of 2023. We also wish to provide you with some key commercial and operational updates, including some of the recent operational challenges we've encountered. We are eager to discuss concrete actions we have taken to effectively address these issues, and ensure the continued growth and success of the Cebu Pacific. Let's now dive into the presentation, starting off with the business and financial highlights. Cebu Pacific flew 36,000 flights this second quarter, just 1% less than same period 2019. That's 6.3 million seats flown, a 96% capacity restoration versus 2019, while available seat kilometers were 7.1 billion, only 3% lower than 2019. With our seat load factor averaging 86.4%, we flew 5.5 million passengers for the quarter, 8% lower than 2019. Fares averaged about PHP 2,900, 3% lower than 2019, driven by lower domestic fares. Ancillary yields, on the other hand, at over PHP 1,000 per passenger, were notably higher than 2019. On cargo, both volume and yields trending lower. Competitive pricing, coupled with an overall weaker demand for airfreight, were aggravated by several flight cancellations during the quarter, reducing overall cargo operations altogether. We carried 26 million kilos of cargo in the second quarter. That's 48% lower than 2019, while cargo yields, which averaged PHP 33 per kilo, remained 21% higher than 2019. With the stats mentioned, CEB generated PHP 22.7 billion in total revenues, now up 96% of pre-pandemic level. Passenger business generated 70% of total revenues or PHP 15.8 billion, 10% lower than 2019. This was followed by ancillary business, which generated close to PHP 6 billion, 34% higher than 2019. Cargo generated PHP 867 million, 38% lower than 2019. Let us look at our financial results now, starting with second quarter income statement. With revenues of PHP 22.7 billion, we generated EBITDA of PHP 5.46 billion and operating income of over PHP 2.5 billion. That's a reversal from last year's operating loss of over PHP 2.8 billion and about 50% of 2019 levels. Let's dive into some key operational expense drivers. Operating expenses for the quarter totaled PHP 20.2 billion, 20% year-on-year increase on the back of 22% more flights and 69% more ASK. Compared to 2019, however, total operating expenses were higher by 9%, despite 4% less flights and 3% less ASK. Notable expense increases were for the fuel, which comprised PHP 7.2 billion and approximately 56% of our total expenses. Fuels over the quarter averaged $91.7 a barrel, over [indiscernible] higher than 2019. Repairs and maintenance costs likewise increased to over PHP 3.4 billion. We now have a total of 80 aircraft in our fleet, an increase of 8 since 2019. Moreover, 46 of our aircraft are operating leases or called right-of-use assets compared to only 22 back in 2019. With right-of-use assets, future maintenance costs are provisioned as the assets are used. This is in contracts to owned assets on property and equipment, where heavy maintenance costs may be capitalized at time of repair and then depreciated thereafter. As such, our depreciation and amortization cost decreased despite the increase in our total fleet, partially offsetting increase in maintenance costs. Finally, the Philippine peso likewise depreciated since 2019 by about 7% to PHP 55.7 per U.S. dollar compared to PHP 52 back in 2019. Over 60% of our operating expenses are U.S. dollar based. With this, cost per ASK, excluding fuel, now stands at PHP 1.8, 26% lower year-on-year, but 13% above 2019. After interest, our core income before tax posted at PHP 1.64 billion. We had another PHP 1.2 billion arising from noncore gains. These are mainly mark-to-market gains from the convertible bond option and gain on sale and leaseback of 2 aircraft. Bottom line, we posted PHP 2.7 billion in net income, a reversal from last year's PHP 1.9 billion net loss and 29% lower than 2019. Moving on to our first half business highlights. We flew over 68,000 flights year-to-date, 5% lower than 2019. In terms of seats, that's 12.1 million, putting our capacity restoration versus pre-pandemic at 94%. ASK of 13.2 billion remain 9% below 2019 level, as we still have less regional flights. On cargo, we carried almost 56 million kilos, that's down 45% versus 2019, but offset by 28% higher yields. For the first half of 2023, CEB flew 10.3 million passengers, 8% below 2019 as our seat load factor averaged 84.8%. Average fare of PHP 2,934 is now just 1% lower than 2019. Ancillary yields, on the other hand, are higher than both last year and 2019 by over 30%. Summarizing now our first half financial performance. Year-to-date, revenues generated were PHP 43.6 billion, 3% lower than 2019 on the back of 8% less passengers. Operating expenses, on the other hand, totaled PHP 39.8 billion, 11% higher than 2019. Fuel, our biggest cost contributor amounted to over PHP 14 billion, up 13% versus 2019. Fuel prices averaged over $99 a barrel, 13% higher at $78 back in 2019. Excluding fuel, operating expenses totaled PHP 25.7 billion, 10% higher than 2019. As mentioned earlier, these were driven mainly by a bigger fleet, higher repairs and maintenance provisions and the weakening of the peso from about PHP 52 to the dollar in 2019 to about PHP 55 per dollar this 2023. With still 9% less ASK than 2019, cost per ASK, excluding fuel, averaged PHP 3, about 16% higher than 2019. And with that, we generated EBITDA of PHP 9.6 billion, operating income of PHP 3.8 billion and pretax core income of PHP 2.2 billion for first half, all a positive reversal from last year's heavy losses. With additional PHP 1.1 billion in noncore gains, CEB's net income for year-to-date first half posted PHP 3.7 billion, a swing from a net loss of PHP 9.5 billion last year, but just half of 2019's net income of PHP 7.5 billion. Now let's look at our balance sheet. We end first half 2023 with total assets of PHP 165 billion, 12% higher than end of 2022, mainly driven by 8 aircraft deliveries this first half. 73% of our total assets comprised of aircraft and aircraft-related assets, including predelivery payments. Our cash balance remained stable at PHP 22.5 billion. Total liabilities amounted to PHP 164.3 billion, PHP 114 billion of which are debt related. That includes PHP 101 billion in finance and lease liabilities and PHP 13.3 billion in convertible bonds payable. And finally, with sustained profitability, CEB registered positive equity of PHP 726 million. Current ratio remained steady at 0.7%, while net debt to EBITDA for the last 12 months averaged 7.2x. Now for our cash flows. After noncash adjustments, CEB generated PHP 12.1 billion in cash income. This was reduced by PHP 8.1 billion outflows for debt service, which includes principal and interest payments on our debt, and payments for our lease liabilities. We also had a net cash outflow of PHP 1.9 billion for working capital as inflows of PHP 3.5 billion from increase in bookings were offset by PHP 4.6 billion for settlement of payables, including PHP 4.7 billion for asset retirement obligations and heavy maintenance visits. With net cash inflow of PHP 686 million from the sale and leaseback of aircraft, we generated almost PHP 2.5 billion net cash inflow for our first 6 months, bringing total cash balance to PHP 22.5 billion. Before I turn you over to Xander for our commercial and operational update, allow me to give you some latest macroeconomic indicators. While jet fuel prices for July remained below second quarter of 2023, forward prices have recently climbed up, reaching the $100 per barrel mark on fourth quarter, as news of supply cuts have turned the market bullish on oil prices. Meanwhile, the peso is sustaining its strength and now at a 3-month low amidst hopes of a pause in Fed rate hikes and improvement in the Philippines trade data. On the other hand, interest rates continue to push higher as latest U.S. inflation print of 4.6% remained higher than the Fed's 2% target, reinforcing their argument for higher interest rates. With all that in mind, let me turn you over now to Xander for our commercial and operational update.

Thank you, Trina, and good afternoon, everyone. It must be said that coming into 2023, Cebu Pacific was optimistic about its ability to fully restore services to its customers in support of our country's post-pandemic recovery. In January 2023, after finalizing the investments in new planes as well as operational upgrades, we embarked on a recovery program, starting with the arrival of our new Airbus NEOs. In fact, the first quarter showed a credible performance as on-time performance or OTP improved month-on-month. However, as early as March, we began to feel the industry challenges in its effects from April onwards. This is when the engine and supply chain issues in the global aviation industry have changed the dynamics altogether. Cebu Pacific has faced challenges arising from Pratt & Whitney engine issues, which power all Airbus A321 and A320neo aircraft. The Pratt & Whitney engines experienced premature removal from service, in each engine restoration requires 220 days instead of the industry norm of 90 days. This impacted the network, causing delays and unscheduled cancellations. Currently, there are 120 Pratt & Whitney-powered Airbus grounded globally. While CEB provision doubled the level of recommended spare engines as early as last year, we were advised last March 2023 that we would no longer receive the spare engine support that Pratt & Whitney had previously indicated. Apart from the Pratt & Whitney engine issues, we have also encountered delays from Airbus, our aircraft manufacturer. We recognize that global supply chain issues are further worsening the situation and causing additional delays in aircraft deliveries. As a result, we have experienced delays ranging from 2 to 5 months for scheduled deliveries in 2023. Finally, supply chain issues have become increasingly prominent, leading to extended recovery periods for Aircraft on Ground or AOG. AOG refers to aircraft that are grounded, requiring additional time for restoration. These aircraft must remain grounded until they are deemed airworthy and compliant with safety standards. All these impacts the number of aircraft available to fly on our planned network schedule for the rest of the year. Apart from these fleet-related matters, we have also entered the rainy season and have seen much higher occurrence of red lighting alerts raised almost daily. This requires the suspension of all flight and ground activities at the airport for passenger and ground personnel safety. In the second quarter, there were a total of 72 red lighting alerts raised, some lasting for more than 2 to 3 hours, causing consequential flight delays, possible cancellations and negatively affecting on-time performance. CEB also experienced several incidents, which have created additional long-term grounded aircraft. Examples of these include aircraft damage from runway debris or even damage from displaced ground equipment due to sudden and exceptionally strong winds, a tow bar puncturing the aircraft and bird strike incidents, which damage both engines and the main landing gear among others. These events were sudden and unprecedented, which made delivering the originally planned schedule more difficult and causing disruptions to our guests. Despite the challenges, we remain resilient, ensuring we effectively address these external issues while maintaining our promise of providing affordable, safe and reliable flights. With the difficulties our passengers have experienced due to cancellations and changes in flight schedules, we rolled out enhanced customer recovery options, more than what's included in the Air Passenger Bill of Rights. We have also formed additional customer support teams, both on ground and online, to better serve our passengers. Aside from strengthening our customer support, we implemented reductions to our flight schedules up to the end of September and are accounting for the long-term AOGs toward winter 2023 schedules. Since April, we reduced the network by 6% to 8%. And while the rationalization of flight schedules affected our planned network growth for the year, this still resulted in 2,200 weekly domestic flights, which is higher than pre-COVID levels. On the other hand, CEB's international weekly flights ended at 519 by the end of the second quarter and are still gaining traction going into the third and fourth quarter. Notwithstanding network adjustments, we still resumed domestic operations of Manila-Laoag, Iloilo to Puerto Princesa, Iloilo to Cagayan de Oro, coupled with the launch of several non-Manila flights. On the international front, we have also resumed Cebu to Tokyo and Cebu to Taipei, plus the launch of Clark flights. This reflects our commitment to enhancing operational efficiency, boosting inter-island connectivity with new routes launched and effectively managing resources while maintaining a trajectory of growth. Another solution that we have done to address these challenges is to increase the number of standby aircraft. Our standby aircraft count has risen from 3 to 4, with plans to further expand to 6 by the end of the year. These aircraft are readily available in case uncontrollable events arise on the day of flight. Moreover, we are securing additional leased aircraft to reinforce our operational flexibility. Looking ahead, we are closing the year with 78 aircraft after 17 deliveries and 15 exits. Our future direction remains aligned with our commitment to achieve an all neo fleet by 2028 with 43 deliveries and 33 exits. On the commercial front, we saw weaker loads in April and May versus pre-pandemic due to the grounding of some aircraft. However, for the second half of the year, we feel encouraged as we expect a more stable network with additional spare aircraft and higher travel demand, pushing forward bookings up. Historically, the third quarter is a seasonally lean quarter, but curves are currently showing higher demand, possibly due to a shift in the school calendar. Similarly, the fourth quarter demand outlook is looking strong with All Saints Day weekend and the Christmas peak. As we navigate the ever-evolving landscape of the aviation industry, your trust and confidence inspire us to overcome challenges and seize opportunities. We stand firm in our dedication to providing exceptional service and value for money travel experiences for our customers. I will now hand you over to Mike to present our sustainability initiatives and second quarter wins.

Thank you, Xander. Good afternoon, everyone. Thank you for joining us today. The past few months for Cebu Pacific have been challenging, but I'm pleased to share that our company has demonstrated resilience and maintained a positive business performance for the second quarter of 2023. One of the key reasons behind our continued success is our commitment to build and leverage the broadest of domestic networks with our extensive international network to, from and within the Philippines. This strategic approach has allowed us to consistently provide safe, reliable and affordable flights for our passengers, along with supporting economic growth across the regions. However, our success is not solely measured by numbers and figures. Our growth has also been propelled by a positive impact on society and our commitment to support the environment. One of our significant initiatives is the usage of sustainable aviation fuel or SAF within our fleet. We take immense pride in being the only local airline in the Philippines to embrace that, and we're continuing to integrate it into our operations. We are equally dedicated to promoting eco-friendly practices on the ground. We have already transitioned our Juander Shuttle service to 100% electric, 0 emission minibuses, supporting our employees' commuting needs and extending our positive impact beyond the aviation industry. We are also proud of our diverse and inclusive organization. Last month, we celebrated Pride Month by having the first Pride flight in the Philippines. It was operated by allies and members of the LGBTQIA+ community. This highlights our unwavering commitment to diversity, inclusivity and equity. This aligns our operations with our environmental goals and social responsibilities. I am pleased to share that all of these efforts have not gone unnoticed. We have recently been recognized as the third strongest and one of the most valuable brands in the Philippines by a prestigious London-based research firm. This recognition is not only about the present, it speaks volumes about our long-term business performance and the enduring trust people have placed in us. None of this would have been possible without the unwavering support and confidence of our investors and stakeholders. I extend my heartfelt gratitude to each and every one of you for being an essential part of this journey with us. As we move forward, let us continue to focus on our mission of providing safe, reliable, affordable and sustainable flights for all of our passengers. Together, let's soar to greater heights and create lasting value for all. Let's fly everyone.

Everyone, once again, thank you for joining us this afternoon. We will now begin our Q&A session. We will be joined by Mr. Mike Szucs, our Chief Executive Officer; Mr. Xander Lao, our President and Chief Commercial Officer; Mr. Mark Cezar, our Chief Finance Officer; Mr. Alex Reyes, Chief Strategy Officer; and Mr. Trina Asuncion, the Director of Investor Relations. [Operator Instructions]

We are now taking questions. Yes, we have Rachelleen Rodriguez.

I have 2 questions. First one, you mentioned that there still exist supply issues, but I noticed that I think you're quite ahead in terms of deliveries of new planes. So what's your view on that? That's the first one. And second one, what's your outlook -- overall outlook for how oil prices will be for this full year? And how are you hedging these exposures?

Well, I'll split that up. This is Mike. What I'll do is, Mark, do you want to just give an update on aircraft deliveries, maybe just in the general sense, and then I'll talk about some of the supply chain issues, and then we'll come back to you on fuel.

Sure. It is true that we are increasing aircraft deliveries for the balance of the year. But our ongoing issue has been for some time that we are -- most delays from 2 aircraft deliveries from aircraft has been delayed by [indiscernible]. And we have [indiscernible] that program [indiscernible] And also, we are covering more aircraft that are grounded. You would say that the net impact is that -- in terms of the fleet growth will not translate into capacity growth on a 1-to-1 basis. That's the reality.

Yes. So let me -- because I'm sure the question will come up in another format. Let me just give you an update on where we are in terms of capacity. So probably the single biggest supply chain issue that we faced, and there is a multitude, means all MROs and airlines are facing. The big single one that we are facing is due to the Pratt & Whitney related engine issues. And as Mark said, one of the reasons that we've been bringing in additional aircraft is to provide us capacity to cover 4 aircraft that are essentially going to be on the ground. So we are now planning, based on the forecast that we're getting from Pratt & Whitney, that we will have X number of aircraft on the ground at any one time. So for example, as of today, we have all long-term AOGs that are Pratt & Whitney, and that number will fluctuate during the next 18 months. It will get -- at times, it will get slightly larger than that and at times, it will be slightly smaller than that. And that's something that we have to forecast for. We have been bringing in additional aircraft to cover for that and also to provide for us additional growth. And of course, one of the other reasons we bring in aircraft is that Airbus themselves on the new aircraft that we're receiving, they're running late, too. Now on previous call, we gave last quarter, we gave an indication of the additional aircraft that were coming in. We anticipated that we'd be -- we maybe have as a run rate by the end of the year, in December 2023, that our December 2023 seat capacity would be maybe about 12% up on where it was versus 2019. Given all of the issues with Pratt & Whitney and given the outlook, whilst the Pratt & Whitney issues seem to be more severe, we have brought in additional aircraft. But we now pay our seat capacity in -- at the end of the year to be in the high single-digit area, mid- to high single-digit area. So about half or slightly above the half of the 12% that we were indicating before in terms of our overall capacity that we'll have in the market at the end of this year versus where we were in December 2019. Now in terms of the supply chain issues, let me talk specifically about the biggest one, which is the Pratt & Whitney engine issue. First of all, there is no issue with regard to safety. All of the actions and all the recommendations that are coming from Pratt & Whitney, and they're working with all of the airlines that are flying around on the GTF platform, it's all done out of an abundance of safety. Now the first issues that we've been dealing with, and these were the ones that came and hit, as a Xander talked about earlier, these are the ones that came up on us very quickly in March because we've been given every indication that there was a supply of spare engines to cover for us. The unscheduled engine removal started to increase, not just for us, but for everyone in Pratt & Whitney all of a sudden found themselves short of any engines whatsoever. Hence, we now have all engines on the ground. These issues are primarily related to -- nothing to do with the Geared Turbofan itself, not the gearboxes, nor indeed the life-limited parts, which have been escalated. These are things around the combustion chamber and the nozzle guide vanes that aren't quite making it to the LLP limits. So engines are coming off wing slightly in anticipation of where Pratt & Whitney has been indicated. So that's caught the industry short. That's the issue that we've been dealing with as of now and why we've been bringing in additional aircraft. There is a new issue now with Pratt & Whitney, and this is the one that they announced or RTX or Raytheon announced about 3 or 4 weeks ago on their earnings call. And this relates -- again, it's about an abundance of caution and safety that they're doing this. And it's something that is an extremely remote possibility of failure. And if in failure, there's an extremely remote possibility could be a problem. Now this is related to a quality issue on the powdered metal, which they used to create things like the disks in the high-pressure turbine. And so they have announced that there are a batch of about 200 aircraft that they'll be looking to recall -- I'm sorry, 200 engines, I should say, look to recall in mid-September this year. We've been advised that we don't have any engines in that batch of 200. So it doesn't affect our immediate outlook. However, there is the possibility, or we have been told that there is a second batch of engines that is also under review. And that is something that we will find out more about in the next month or 2 and we will then have to react accordingly. We don't think it will impact us at all for this year, but it could impact us next year. But we're building up contingency for that in terms of bringing in additional aircraft, which is one of our fundamental strategies this year. Extra aircraft, just to summarize, the 3 things. One was we fundamentally, we wanted to grow. And at the end of this year, we will be bigger than we were in 2019, not as much as we hoped because of the AOG aircraft. But we wanted to grow. Number two, Airbus are late with their deliveries. And number three, we do have aircraft on the ground due to Pratt & Whitney issues. So that's where we're at. I don't know, Mark, if you want to talk about -- I think there was a separate question about fuel prices.

Fuel prices, obviously, quite a bit of volatility in the market out there and given us like [indiscernible] I'll be talking about [indiscernible] on top of the [indiscernible] We are hedged for 15% for the next 3 months at significantly lower prices than market. But I think this essentially will be over in the 9 months. We are going to be taking on for the more opportunistic stance on this [indiscernible]. And also, you are seeing that in demand, which allows us to pass on fuel prices hitting [indiscernible] fuel surcharges and also seeing that our competitors are in the different market are not [indiscernible]. That's how we see it.

Thank you very much. We will now have Klein.

I have a few. The first question is, I guess, the competitive dynamics. Can you talk more about this? Have -- your experienced in the second quarter for both domestic and international markets? And how is this -- how are dynamics evolving so far in third quarter? And I guess if you can provide your outlook for the rest of the year? Are you already, I guess, seeing pricing power -- so which routes? That's the first question. The second question is on your nonfuel cost per ASK. It dropped sharply in the second quarter versus the first quarter. I'm wondering if this is a sustainable level. And how quickly can you bring it down further to, I guess, the 2019 level [indiscernible] to PHP 20.6? So that's the second question. And the third question is, is Pratt & -- are you going to get compensation from Pratt & Whitney? And if so, can you share how much, I guess, the compensation will be? And if anything, will it come in this year or next year? That's all for me.

This is Xander. Let me try to answer the first question regarding in terms of the competitive landscape. I think we ended the first half, domestic market share 54%. So we continue to lead in the domestic market. We did see, I think, overall, the supply chain issues that Mike alluded to, not just impacted Cebu Pacific, but other airlines that we compete to. So we did see our capacity, I guess, crunch in the second quarter, so to speak. So domestically, we continue to lead. We are seeing better, I guess, booking and yield activity for the third quarter so far in domestic. International hasn't come back strictly, mainly because while China has clearly opened up, we won't see a lot of demand for China just yet. And that's actually -- we can see that in some of the capacity data out of China. So domestic capacity out of China is over 100% already compared to pre-COVID levels. I think international region effects in and out of China is a little over 50%. Also, you can see certainly in China as we come back. The other -- I guess the other thing on international is we have less 330 capacity in the first half of 2023 compared to that of 2019. Clearly, as we bring back our 330s next year, we'll be able to bring it up a little bit capacity on the international segment. I think maybe with the exception of China, we do see some strength from other regional -- international regional expect. Japan continues to be quite strong for us. Hong Kong registered a pretty good comeback in the second quarter, and we see this continuing into the third quarter.

All right. Let me -- I think, Klein, you're asking about outlook for rest of the year. I think rest of the year, we see -- I mean I'll talk about it in just the EBIT margin sense. I think we're looking at EBIT margin levels consistent with what we saw in the second half of the year in 2019. And so that would be high single digits. I'll range at high single digit to low double-digit EBIT margins for the second half of the year. That's where we would guide for our profitability on the second half. Trina, do you want to give an update on CASK ex fuel and where you see that?

Sure, Mike. On CASK ex fuel, last guidance, I think we were looking at -- maybe we can describe it because of the difference in FX. FX has changed quite significantly since 2019. But if we remove the FX effect, we are looking at CASK ex fuel to continue the range maybe in the mid to high single digits, higher than 2019. You won't meet the 2019 number, yes, that's what...

No, by year-end, I mean by year-end, we had anticipated. I mean if you'd ask at the beginning of this year, we were planning to get down towards -- very much towards the same CASK ex fuel numbers as we had in 2019. That was a clear objective of this. Unfortunately, we are carrying costs in relation to the fleet that are substantially different to our outlook. That is due to number of aircraft that are essentially part due to being AOG. And of course, because of the uncertainty we have, there is an element of uncertainty in the Pratt & Whitney situation and general supply chain as well. We are increasing our standby level. So we're effectively doubling our standby level of the fleet from roughly 3 to about 6 aircraft. So this additional fleet cost is a headwind to us. But as Trina says, even with those headwinds, if we strip out the FX delta between this year and 2019, we're into that sort of mid- to high-single-digit increase on CASK ex fuel. What we are clearly targeting to do, I mean, it's part of our DNA and our mantra is to keep focused on that. We are going to have some structural elements that will come in favor as we go forward into 2024. Every time we get a 321neo or every time we get a 330neo, that level of up-gauging is a structural reduction in our CASK ex fuel. So that's a real benefit to us. And of course, as we can start to unwind some of the issues that we're having on engines and just supply chain, which is causing us to have grounded aircraft and additional standbys, that's something that will also feed through. So we see that we're not quite going to get there this year, but we'll still keep focused on it for the years beyond. If -- I think your final question was about Pratt & Whitney compensation. I'm afraid that's not something that we can talk about.

Yes, we have questions in the Q&A chat box. We have Ren Roque. As regards to the heightened customer care and other operational adjustments made to address the challenges in 2Q, what is the company's outlook and the impact in margins? Can you share the estimated contribution of this, the operational expenses for full year 2023?

I think we've kind of answered the margin question in the manner that in terms of outlook. I think we've given an outlook in terms of the EBIT margins going forward into the second half.

We also have questions on cargo. Is this going to be better in the second half? And are we looking at these figures at the normalized level post pandemic?

I think cargo is really being driven by a couple of things. One is the, as I mentioned earlier, the number of retaining capacity. So in 2019, we have A330s will be flying international, which is first of our cargo revenue. So that's the A330 [indiscernible] Secondly, given the return of international capacity, there's a lot more cargo belly space available flying the routes. And obviously, the freight yields have also come down substantially compared to that of last year. So we do think the cargo will continue to experience some weakness in the second half of the year.

[Operator Instructions] Okay, Klein?

So just a follow-up question on the topic of pricing power. I'm just wondering, why in the second quarter, your fares fell quarter-on-quarter both on a fare per kilometer basis and, yes, the overall fares. Can you just give some color on that? And how is that, I guess, evolving so far in 3Q?

Stand by Klein.

Current quarter, it has dipped, but very, very slightly, actually, average fares. But maybe the proper answer to that there would be even at a higher seat load factor, we did have -- we didn't have that much pricing power in second quarter, particularly with the flight consolidations that have happened, driven by the cancellations. In those kinds of situations, we have very limited excess seats available as we have to consolidate previously priced and rebooked passengers into the remaining seats.

I think, Trina, there is that and then there's also the shift during the school holiday calendar. So we are actually seeing, I guess, better foreign revenues for the third quarter in terms of overall pricing. There's a combination of 2 things. One is because of all the fleet-related disruptions and fleet-related issues, which is a lot more difficult for us to revenue manage upward. And then clearly, it's because we also think -- we also see a shift in the school holiday calendar. There's people traveling in May, for example, this year compared to that of previous years in terms of our [indiscernible]

Yes, that answers the question, Klein?

Yes.

Yes, we have another question from Renier. Are the Senate hearing a thing of the past now?

Let me take that. Obviously, we continue to cooperate with our regulators that are legislators, and we have to keep them -- we have kept them appraised of the customer quality improvements we've had as well as the operation improvement [indiscernible] And I think, we take a look at all of the events that has happened, as Mike referred to earlier, which is the Pratt & Whitney related [indiscernible] on the freight AUG incidents. The level of disruption that Cebu experienced in the second quarter was quite unprecedented and something that we continue to address. Now obviously, we will continue to be open to discussions with our regulators and legislators on any further improvements, but we have both improvements in our own customer policies as well as the communications that we've done. And we continue to keep our government partners appraised of our own development.

And I think underpinning all of this is the level of resilience that we're now building in, which as I've talked about, which is we're now projecting a level of AOGs based on regular interaction with Pratt & Whitney, along with we're carrying considerably more spare than we would previously have done. So this is to give us a level of resilience and, therefore, confidence in terms of the schedule that we're planning to offer.

We have another question from Brandon.

My first question is about international. It looks like you still won't be back at full international capacity at the end of this year. Is that right? Do you have any like update on when you might restore international fully? And what the international domestic breakdown would be for December when you were saying overall capacity is going to be up like 7%, 8% or something?

And you got a follow-up question, Brand there as well. Brandon?

Yes. My second question is about Caticlan. I mean, I'll give you both -- do you want both questions now or answer the first question...

No, give the Caticlan, yes.

The whole question is this, I mean, I just noticed that capacity is way up to Caticlan. Just generally, the airport is at the moment, like over 50% over -- compared to this time or last -- in 2019, your flights from Caticlan to Manila have doubled almost, I think, or doubled from 816. I'm just wondering, what's the situation there in terms of the cap on visitors? Is there no cap? Is there -- and what do you think -- do you think this is sustainable going forward? I mean everybody talks about sustainability these days. Can this number of flights actually be maintained in a sustainable way in terms of what the island can take you think? Or are you -- is there a concern that at some point, you'll have to reduce Caticlan again?

Brandon, let me take that. We do have a peak period from 16 times a day, we really calibrate some of the capacity going to Caticlan. We have, I think, made reduction around 8 -- or down to 8 from 10 flights previously in low periods of the year. Having said that, if you take a look at both the domestic and international capacity flying into Boracay both from Caticlan Airport and Kalibo Airport, we've not seen massive return of international capacity just to yet into Kalibo. But I think in terms of the overall capacity, that relation exists. But having said that, the overall capacity going to Caticlan, I think, is probably similar to that of previous years if we combine domestic and international. We haven't seen the Chinese -- we haven't seen a lot of Chinese players there, [indiscernible] for example, flying back into Kalibo. Or if they are, it's not at the same levels as it was in [indiscernible]

Brandon, on to your question, by the end of the year, we should be at about 100% international capacity on a seat basis. Obviously, we'll be more of that on a domestic basis, we will be in excess of 100%, in fact, we already are. And that will then give you the mix of the number that I said earlier in terms of overall seat capacity growth on our run rate in December. So yes, by end of the year, we should be at 100% on international seat capacity restoration, slightly different market mix because China won't be a net the same extent that we once had it.

Yes. I thought it would still be down because there's this 560 figure for fourth quarter number of departures, which is still like 10% down from 2019, but maybe its seats are different or by December, you had a lot in October, November to get back up by December. Do you plan to add a lot?

Look, what I'm looking at now is showing that we will be on a seat basis will be an international basis will be around about 100% by year-end.

[indiscernible] international here, more 321s.

Yes, because I'll come back for that year, yes. Okay.

Well, 321s and 330neos as well, whilst we've been short on 330neos when they do come in, they each got quite a few seats on them.

Thank you. [Operator Instructions] If there are no more questions, we will now end the call. Once again, thank you for -- oh, there's another question. There's another question, sorry, from Paulo Garcia. After the set of cancellations, delays from unforeseen fleet aircraft problems seen in the past, was there any significant negative effects on forward bookings or increase in customer canceling flights?

No, I don't think we've seen that. I don't think we've seen a long-term impact there. We do measure our customer Net Promoter Score. It's part of our business. And that's certainly that dropped during the period. It's now recovering. But bookings have remained -- forward bookings have remained healthy. But certainly, clearly, we -- there was some dissatisfaction amongst our customers, and that was reflected in the NPS and the CSAT scores that we measure. But long-term, and as we're seeing the bookings are coming in as we would have normally expected.

Thank you. We will have one last question from Adrian. I see on the fleet side, you are up to 91 by end of 2024, but back down to 88 by 2028. Does that indicate extra aircraft being brought in, in 2024 due to delays?

That's part of it. We are adding aircraft on short leases [indiscernible]. But the other factor to that is we fundamentally know we have under order [indiscernible] capacity. We will -- we anticipate topping up with more aircraft, whether it's in the leasing or direct order.

And it will probably be a combination. I mean I think we do, from '27 onwards, we are -- I mean it's not -- the economy in the Philippines is growing strongly. The fundamentals of the Philippine market, which is our core market, is -- remains extremely strong. And so plenty of opportunities for growth. So the fact that it's dropping there is really a factor that -- the factors that Mark said, we do need to top up fleet from '27 onwards, and that's something that we will be working on in the months and year ahead.

Once again, everyone, we will now end the investor call. Thank you for joining us today, and you may now disconnect. Thank you, everyone.

Thank you.

Thank you.