© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon. Welcome to the Cathay Pacific Airways Limited 2022 Q1 Analyst Webcast. Thank you for joining us. Before we begin, we'd like to go over the rundown for the webcast. We will begin with a presentation by Chief Financial Officer, Ms. Rebecca Sharpe, after which we will hold a Q&A session with our speakers. 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 webcast by the submission box in the bottom right of the window. We will then read these out during the Q&A session.
With that in mind, allow us to introduce our speakers. Chief Financial Officer, Ms. Rebecca Sharpe; Director, Customer Travel, Ms. Lavinia Lau. Now I'd like to invite Mr. Rebecca Sharpe to begin the presentation.
Thank you, and good afternoon or indeed good evening or good morning to everyone today, depending on where you are in the world watching this. I'd like to add my welcome to today's presentation and start off by saying that it's just over 3 months since our last briefing in early March. And I have to say, as we sit here today, we're starting to feel a little bit more bright. Over the course of today's presentation, hopefully, it will become apparent why I say this.
The agenda follows a similar format to previous briefings. Obviously, this is not a results briefing, so we won't be sharing any new financial figures, but we will cover our operating performance year-to-date, so that's the end of May, and we'll spend some time on outlook before opening up for questions. So this is the agenda slide that lays that out. And I'll move on to start with our responses to the COVID-19 challenges. So you've seen this slide before. We've been summarizing this over the past couple of years. Today, it's updated a little. We've removed the 2020 information and added the 5 months year-to-date to May.
And the key points I'd like to highlight today are starting on the right with the fleet. You can see that compared to almost a year ago in June 2020, we've got 20 aircraft, less aircraft parked. Now some of these have left the fleet. So for example, this year so far, we're down net 6. But on the other hand, some of this is because we've got more in operation. I'll cover liquidity and capacity in later slides. To touch here a little bit on operating costs, as you might imagine, given the continuing uncertainty, our prudent cost and cash management focus remains ongoing. You'll recall that we saw the benefit of this focus, coupled with strong cargo performance generating a profitable second half last year.
Turning to liquidity. This slide sets out our liquidity balance journey over the last 2 years. You can see the impact of the recapitalization in December 2020's numbers, and that increased slightly to the end of December 2021, following the issuance of the convertible bond and the straight bond in the first half of 2021. Of course, that was offset by cash burn during the course of the year. The liquidity position includes liquid funds and undrawn facilities. So you can see here on the slide that December 2021, the undrawn amount was HKD 11.1 billion. And this figure includes the HKD 7.8 billion SAR government bridge loan that we have extended to us.
Now we've not drawn down on this facility so far this year as we've not needed to use it. But it is very helpful in terms of enabling flexible management of our liquidity position for us to retain access to this facility. So we very much appreciated the Hong Kong SAR government's agreement to extend the facility in terms of the drawdown period for 12 months to June 2023 earlier this month.
You'll recall this loan has an 18-month repayment period. So this will take the facility period out to December 2024. Fuel costs and interest rates, of course, are very hot topics at the moment. So although I can't share any specific updated data until we publish the interim results, I thought for your easy reference, it may be helpful to include the fuel hedging position chart at 31st December again. I can also confirm that we do continue to follow our fuel hedging policy. This has a clear pricing matrix that governs the hedges we make based on the prevailing price and our forecast consumption, and we continue to execute in accordance with this.
So for example, you can see that at the end of last year, based on our forecast consumption, we expected that we would be 100% hedged in the first quarter of this year. In terms of interest rates, the chart shown here is from our published annual report. And the darker bars in the top half of the graph represent the fixed rate portion of our borrowings with a lighter portions of those bars representing floating rate. So you can see that we mitigate our exposure to fluctuation in interest rates through having a portion of our debt on fixed rates.
Turning to our operating performance for the first 5 months of 2022. Again, I've presented this slide on the last few briefings and included it here again for reference. So this is the chart that shows the passengers into Hong Kong International Airport and the darker green that you can see on the left and very faintly along the bottom line of the chart is Cathay's passengers with the lighter green being other airlines, passengers in Hong Kong or within Hong Kong.
Now the positive that I wanted to comment on today, albeit you can't see it in the main graph because the levels are just so low. But if you look closely at the inset graph, which maps the nearer-term position from January 2021, you can see that the first few months of 2022 have seen higher numbers of air passengers into Hong Kong as compared to last year. So if we look at these passenger numbers as they pertain to Cathay Pacific, we can see that whilst our capacity in the first 5 months of this year has reduced significantly compared to the same period in 2021 and that's reflected in the available seat kilometers, the RPK, the number of passengers carried per sector times the sector distance and the absolute number of passengers carried have both increased significantly. Significantly, of course, is all relative. This is nothing like pre-pandemic levels, but still a significant increase compared to the first 5 months of 2021. And of course, this is then indicated in the significant increase in our load factor.
This slide sets out the 6 monthly capacity and load factor data back to 2019, and we've added the 5-month figures to May this year as an additional bar. So not strictly comparable with the 6-month blocks. But as an indication, we've included them here. So again, you can see the much lower capacity that we were able to mount following the tightening of the crew quarantine requirements in late 2021 and the 9 country ban that was in place for the first quarter of this year. However, you can also see the step change in load factor up to an average of 51.9% for these first 5 months of the year, reflecting the increased passenger numbers and the limited capacity that we operate in.
Moving on to cargo. You can see a similar story in terms of capacity with a significant reduction in AFTK resulting from the tightening of crew quarantine requirements, albeit with the adjustment to the rules last month, capacity has progressively started to increase. However, despite the significant reduction that 38.9% reduction in capacity compared to the same period in 2021, you can see that our cargo carried in terms of tonnage was actually at quite a similar level to the same period last year.
You may then wonder why the revenue freight tonne kilometers are significantly lower for the same period when we compare to last year. And this is because, although we were not able to operate so much long-haul capacity, we were able to operate regional capacity. Now in addition to the capacity provided by our freighter fleet and the bellies of our much reduced passenger operation, we continue to create capacity through the use of passenger flights for cargo only, and we still have 6 preighters operating. So just to remind you when we refer to preighters, what we mean. These are the 777 aircraft that we took the economy seats out of in order that we can carry cargo in the main cabin in these times where we're not using them on the passenger routes.
Similar to the chart for the passenger operating data, this slide sets out the capacity and load factors in 6-month periods with the year-to-date May 22 figures added. You can see the significant capacity reduction reflected compared to all the 6-month periods over the past 3 years. In terms of load factor, albeit it's marginally lower this 5-month period compared to the first half of 2021, it remains very high compared to pre-COVID times.
The operational performance of our subsidiaries generally reflects the passenger or cargo story depending on which sector they are most closely aligned with. So Air Hong Kong, which is our all freighter cargo operator is benefiting from the continued strong cargo market performance, whereas HK Express and our airline service subsidiaries continue to be negatively affected by the low numbers of passengers flying.
We shared at the last briefing, our commitment to net 0 cargo emissions by 2050. The fact that our air operations account for the vast majority of our emissions and our 5-pillar strategy to decarbonize these. You may have seen the FT article yesterday actually commenting on this topic and how challenging it will be for the airlines. One of our 5 pillars is a sustainable aviation fuels. And you'll recall, in September last year, we announced our commitment to using SAF, sustainable aviation fuel, with 10% of our fuel consumption by 2030.
This is a very challenging target, particularly as supply is very limited in this part of the world, but we believe it is essential in our journey to net zero. In conjunction with this target, we launched Asia's first major Corporate Sustainable Aviation Fuels Programme in April of this year, where we worked with 8 corporates in terms of our customers to use SAF for the first time at Hong Kong International Airport. This program provided corporate customers the opportunity to reduce their carbon footprint for business travel or for air freight by contributing to the use of SAF uplifted from Hong Kong International Airport on Cathay Pacific flights.
The other item in this area that I wanted to draw your attention to was the release of our annual Sustainable Development report last month. This outlines our commitment and progress in the areas of environment, social and governance. The report is pretty comprehensive, and I know more and more of you are expressing an interest in our ESG activities, which is great. So please do, if you've not had a chance, please do go online and take a look at this report. Our highlights, and perhaps just to mention a couple, include our strong commitment to diversity, particularly including our pledge to increase female representation at senior positions in the group. And we also touched on the dedicated cargo vaccine solution that we developed to help us deliver the 165 million vaccine doses in the course of 2021.
So the first part of this presentation was more on the history, what's happened in the first 5 months of 2022. And now I'll move on to outlook looking forward. Now I know you'd all love me to be able to tell you exactly what will happen for the rest of the year and beyond. But I think we all know what we have collectively experienced on a global level during the last 3 years means that we still face high degrees of uncertainty. In addition to the COVID-19 situation that remains with us, we also now face high fuel costs, increasing interest rates, inflation concerns and talk of possible recession in different parts of the world.
So if I start with the first half of 2022 in terms of expectations. This slide sets out the 2021 first and second half figures of the HKD 7.6 billion loss in the first half and the turnaround to HKD 2 billion profit in the second half of last year. Unfortunately, but unsurprisingly, we expect to make a substantial consolidated loss in the first half of this year. Please bear in mind, the diagram on this slide is not representative of that loss. So you can't measure it and compare and decide what you think it is.
Of course, this is disappointing after a profitable second half of last year, but understandable following the tightening of travel restrictions and quarantine requirements as Hong Kong continued to fight against COVID-19. As I've described in the operating performance section, such measures have restricted our ability to operate beyond only a fraction of our passenger services and significantly reduced our cargo capacity. However, with the recent adjustment to the travel restrictions and crew quarantine requirements, we have been able to resume more flight capacity in the second quarter of this year.
Given a strong underlying cargo performance, coupled with our cost management measures implemented over the past couple of years, our consolidated loss for the first half of 2022, while substantial, is expected to be lower than the consolidated reported loss in the first half of 2021. Furthermore, it is worth noting that a lower loss in the first half of 2022 would also reflect the progressive improvement in the past couple of years in terms of the first half of 2020 with a HKD 9.8 billion loss, the first half of 2021 at 7.6% and a lower loss expected for the first half of this year.
Turning to operating cash. You may recall this slide from previous presentations, which sets out the declining trend in our operating cash burn that we have delivered over the past 2 years. To the point where in the second half of 2021, we were actually marginally cash generative at an operating cash level. Unfortunately, as I mentioned in the March briefing, with the impact on our capacity from February, we started burning cash at an operating level once again.
However, with the more recent adjustment to the travel restrictions and crew quarantine requirements and the resulting ability for us to mount additional capacity, this has had a positive impact on our business and therefore, cash flows. And we are seeing the operating cash burn reducing to below HKD 0.5 billion. Now I often get questions from you guys on capital expenditure. So perhaps just to touch on that here. The majority of our capital expenditure is on aircraft, and we typically take secured financing on those aircraft. In terms of deliveries this year, I think we've published in the annual account. But from memory, it's 11 this year and 12% next year and then some in the later years. But just to mention that while I'm here talking about cash flow.
Now you'll probably have seen some articles on this topic of recruitment in the media. Our CEO, Augustus Tang, has been talking to the media about this. So I wanted to summarize this here for your easy reference. As a group, we have begun to execute a recruitment plan to hire several thousand frontline employees by the end of 2023. This includes 4,000 specifically for Cathay Pacific, and we plan that this will happen progressively subject to the operating environment.
Given the lead time required for recruitment and training, we're continually reviewing the people requirements for our business in the 18- to 24-month period ahead and planning for the anticipated recovery in Hong Kong and global aviation across this period. We began welcoming back pilots last year and have already welcomed back some of our cadets this year. We look forward to being able to bring back cabin crew later this year as well. We're very pleased to be able to extend this welcome to many of our past Cathay Pacific colleagues who were impacted by the restructuring in 2020.
Of course, this recruitment is in support of our travel, passenger services going forward. So in terms of outlook on the passenger side of our business, it goes without saying that capacity remains constrained without -- due to the crew quarantine requirements currently in place. However, we do recognize that there is a significant amount of pent-up demand, and we have been and will continue to look for opportunities to add back passenger capacity and rebuild our hub and network.
From June, we have been flying daily to and from London Heathrow. We're also resuming or increasing passenger flights for a number of our important markets, markets such as the U.S.A., Australia, India. And the Cathay Pacific group started this year operating flights to 30 destinations. We target to more than double this by the end of this year. As of this month, we're already halfway towards reaching this target at 45 destinations resumed. I know this is still some way off our pre-pandemic levels, but it is a considerable improvement to where we started 2022. We do remain fully committed to keeping Hong Kong safely connected to the world and to help retain its status as an international aviation hub.
If I move to cargo in terms of some outlook information on that part of our business. We anticipate the imbalance between supply and demand continuing, albeit the availability of passenger belly space is increasing as airlines globally start to mount more flights. With the recent adjustments in quarantine requirements for us here in Hong Kong, our freighter crews have been able to resume our full freighter schedule from this month, and this will be further supplemented by the increasing passenger flight frequencies and cargo-only passenger flights.
Overall, we remain confident for a solid traditional peak season later in the year. In terms of Cathay, our relatively new premium travel lifestyle brand, there have been a number of shopping, dining and credit card initiatives launch that you launched that you may have seen. Earlier this year, we launched a new wellness proposition, which consists of 2 components: a wellness journey, which is a new and innovative feature within the Cathay app. This allows members to link their health tracking devices and receive a health score and start accumulating miles while staying active with 6 daily wellness goals. The second component of this launch was a new strategic collaboration with Cigna Hong Kong. Members can purchase an exclusive insurance product, Cigna Cathay Premier Health Plan, through the Cathay website and be rewarded with miles. Additionally, members can use miles to pay for the Cigna insurance.
Additionally, next month, we are bringing together the best of Marcopolo Club and Asia Miles under a new single membership program. We wanted to make it easier for members to get the most out of Cathay and to bring everything they value about membership from benefits to rewards together in one place. With Cafe, it will be easier to earn miles and then to spend them on flights, experiences and products. And it will be just as simple to earn the status points that unlock even more membership benefits.
So to conclude, the impact of COVID-19 as the pandemic does continue to pose significant challenges for the Cathay Pacific Group. Encouragingly, though, as we start to be able to mount more capacity, this will have a positive impact on our business. The decisive steps taken during 2020 and 2021, whilst very difficult in some cases, have resulted as planned in our group becoming more focused, efficient and competitive. And this was seen in the progressive reduction in our operating cash burn over the past 2 years.
The achievement of a profitable second half in 2021 gives us significant confidence in what we can now deliver, whether it be through the maximization of revenue opportunities or the continued focus on effective cost and cash management. The continued hard work and commitment of all our people in support of these achievements, whether it be our air crew, handling the travel restrictions and quarantine requirements or employees on the ground, in their offices, their focus on delivering service excellence in these most challenging of times is unwavering and very, very much appreciated.
So the final slide of our presentation today summarizes our key metrics of attributable profit or attributable results, average monthly cash burn and liquidity balance over the past 2 years. We've also added a comment on outlook against each of those metrics. And you can note the progression or trend in each of them across the period depicted. As we start to get our teams ready to meet the demand for travel as borders reopen, and we begin to execute on the required comprehensive recruitment and rehiring plan for our frontline, the recovery definitely feels a bit closer than it did when we presented to you back in March.
We remain very confident in the future of our airline. We have a healthy liquidity balance. And our second half result last year demonstrated what our group can now deliver being a much more focused, efficient and competitive airline with our dual brand strategy in the premium brand airline of Cathay Pacific and a low-cost carrier in HK Express. Despite our short-term challenges, our confidence in the long-term future of both Cathay Pacific and the Hong Kong International Aviation Hub remains as steadfast as ever. And now we'll move on to questions. Thank you.
Thank you, Rebecca. We'll now begin the Q&A session. We've had a couple of questions on capacity and recovery. So Lavinia, maybe you'd like to take this first. How much is practical level of passenger and cargo capacity that you can operate with the current rules? Also in Slide 8, it appears that other airlines seem to have had a higher share of the recovery. Any thoughts there?
Thanks for the question. Our ability to operate is very much -- how much capacity we can operate -- it's highly dependent on the true productivity that we have, which, on one hand, is also highly dependent on the crew quarantine requirements in place. So we will continue to adjust our capacity according to these changes and adapt to these changes and we'll progressively add more capacity, both passenger and cargo down the road.
Another one on capacity looking forward, what is our plan for resuming flight capacity in the second half of 2022? Do we have any target?
Well, that is a very dynamic number. I think we are continuing to work hard on it. Like I mentioned, we need to continue to adapt to these changing crew quarantine requirements, and we already have a plan, like Rebecca has just mentioned, in terms of network, we target for [ Cathay purposely ] to actually double our destinations by the end of this year. So I think that tells something about where we want to end up with our capacity. But again, we will progressively add more capacity down the road as we adapt to these new crew quarantine requirements.
The next question is on hiring from Prudence Asset Management. How many pilots in cabin crew have been retained in percentage terms versus pre-COVID? And how is the hiring of pilot's been?
I don't know that in terms of specific percentages. We have obviously retained a large proportion of our pilots. And over -- as I mentioned in the presentation, over the past year, actually starting last year, we started to recruit back some of the pilots that previously worked for us, and we're continuing to do that. Our cadets that had been trained prepandemic, have now come back onboard, completing their training, and we're in the process of recruiting even more pilots into the future as we work through our plan for the next 18 to 24 months in terms of what we're going to need in terms of capacity.
And a follow-up question from Prudence Asset Management. What is the latest liquidity numbers?
I -- we haven't published the latest liquidity number. So I can't give you a specific number. What I can do is talk about the fact that you know what the number was from the end of December 2021. And you also have an awareness of the operating cash burn numbers that we've quoted in terms of what we've been targeting through the course of this year thus far. So if you do the maths based on that, you probably won't be too far on.
Next question from Jefferies on cargo and also on hiring. First question on cargo, the cargo yields. How does the year-to-date yields compared with the second half?
I'm not sure I'm 100% clear on the question. In terms of our expectation of yield in the second half of this year versus first half of this year, I assume. I'll let Lavinia supplement, but we don't quote yields at this stage, as I think, as I'm guessing this as Andrew knows. But in terms of typically based on the understanding of the market, typically yields would be stronger in the second half, the peak period of cargo is in the second half. And therefore, though it's been a little bit different at times because of the mix over the past couple of years of what we can operate and what we can't, typically the second half is a stronger period for cargo. I don't know if there's anything you wanted to add, Lavinia?
Yes. I just want to -- maybe it is the question about comparing the first half of this year versus last year? Or it is the question about, okay? So first half of this year, I think the use still remain pretty strong. Obviously, there has been some disruption in some of the [ mainline ] reduction and all that. But as far as we see, I think the yield still remain pretty strong in the year so far.
A follow-up question on hiring, maybe one for Rebecca. The extra 4,000 staff is roughly 20% of the existing staff numbers. How much will staff costs increase?
I don't have a specific percentage that I can give you. You can make some estimates from the numbers. Of course, some of the 4,000 will be replacing people that have resigned potentially. So the best suggestion I can have for you is to, yes, use it as a rough approximation looking at the headcount numbers in our statutory reports at the end of the different years in terms of how it would impact. Of course, the significant changes to the costs and the contracts of our people at the end of 2020 has made a big impact on the cost of our crew.
Great, Rebecca. One final question, it's on cargo. What gives you the confidence of a strong peak season in your cargo. May be Lavinia want to take the question?
I think the cargo market has still been pretty strong this year. I think going forward, what we can expect and what we are seeing, of course, is a lot of carriers are putting in more passenger flights so that will increase the value capacity. So we do expect that supply overall will increase this year compared with the last. The market at this point remains solid, like Rebecca has just mentioned, the supply will be increasing. So that's why balancing the 2 together, we expect that it will still be a solid peak for this year.
Thank you, video. And thank you both of speakers for answering the questions, and thank you for your questions. Kindly note that the slides from today's presentation will be available to download on our Investor Relations website later. If you have any further questions, please write to us at ir@cathaypacific.com, and we will endeavor to respond to them as soon as possible. This concludes the Cathay Pacific Airways Limited 2022 Q1 Analyst Webcast. Thank you for joining us.