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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon, ladies and gentlemen. Welcome to the Cathay Pacific 2020 Pre-close Analyst webcast. Thank you for joining us.
[Operator Instructions]. 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 the copy of the presentation, kindly contact ir@cathaypacific.com. [Operator Instructions]. With that in mind, allow me to introduce our speakers: Martin Murray, Chief Financial Officer; and Ronald Lam, Chief Customer and Commercial Officer. I would now like to invite our Chief Financial Officer, Martin Murray, to begin the presentation.
Thank you. Good afternoon, everybody. What I thought we'd do for the third analyst presentation is to talk a little bit about the 2020 performance, and obviously, the impact of COVID-19 on the airline, the recent restructure and then give some thoughts on the outlook both for this year, for next year and beyond. So this is the slide we showed the last time. This is how we are internally communicating the impact of COVID. Starting off with the impact of it at the start of the year, cost containment and cash preservation, the recapitalization, halfway through the year and the recent restructuring before we move on to reviving the industry. So in 2020, just a recap of the difficulty that this part of the world has faced. The first decline started at the second half of 2019. And from August, we had the impact of the social unrest, where inbound traffic was 40% down. So we knew there was a difficult period at the end. Thankfully, we built up our liquidity towards the end of 2019, which put us in quite good state for when COVID hit in February 2020. And you can see from this slide, the devastating impact it's had in the past year business since March 2020. So it's worth reminding us that in terms of looking at the 2020 performance, where we were at the interim stage. So the interim year-end this rating, we made a $9.9 billion attributable loss. What I've done there is I've taken out the impact of the impairments and the government grants, there's about $1 billion of government grant in that figure and $2.5 billion of impairment. So the underlying operating performance is about $8.5 billion. And the reason why I've set that is because that includes, obviously, the first 6 months of the year. And I remind you that January and a little of February were actually strong months. And also to remind that we do account for Air China 3 months in that year. So that only -- that period of losses only accounted for 2 months of COVID on the impact of our associates. So the period for the full year would -- will include March to September for Air China. So I say that because we can certainly give guidance towards the second half, given our plan -- our passenger plans throughout the end of this year. The second half will be more difficult than the first half, even though these numbers were our worse losses for an interim report. On the passenger side, there, you just see the RPK collapse, capacity remains -- will remain under 10% throughout the whole of 2020. Load factors around 25% and revenues down about 96% currently. On the cargo side. The cargo side has been -- obviously has been strong yields utilization, offset by lower capacity because more than 50% of our cargo is currently flowing on the passenger bellies. And so again, some cargo numbers there. Capacity down 35%, but overall, revenue up 14%, efficiency up 75% on the cargo business. So it's all really about the passenger side and the huge impact, the devastating impact on COVID on the business. An initial slide, you've seen this slide before. So of course, we immediately cut passenger flight capacity, were down, cut 94% reduction in total capacity. We've had 2 rounds of voluntary unpaid leave. We've cut executive pay, the operating costs. We've looked at all discretionary spend, we've gone through that, and we've highlighted at the interim stage the cost-saving measures we've introduced. And on the CapEx side, we've been speaking to Boeing and Airbus and making deferrals as we reported at the interim stage to our CapEx. We have had government support prior to the recapitalization. So there, you'll see we've received approximately $2.4 billion in government grants globally. Mostly $1.4 billion in relation to income grants and $1 billion in relation to cost reductions and support from the airport authority at the airport. And so the key focus has been liquidity. And throughout the year, we've looked at -- at the start of the year, we had a public bond, some private placement, et cetera. But obviously, the big thing was the recapitalization in August. Again, we reported this at the interim stage. So $27.3 billion investment from the government. And similarly, right this year, about $10 billion from our stakeholders, which was oversubscribed by 137%. So that was a recapitalization, and that boosted our balance sheet, increased our equity by $31 billion, reduced our net debt by $31 billion and reduce our gearing, where we sit today. So this is where we are at the 31st of October. So we've got $33 billion of liquidity currently, and our gearing is 0.73. So again, a strong balance sheet of which to observe, watch and look at the outlook. In terms of the restructure, we -- the restructuring can be sort of put into 3 buckets: the sensation of the Cathay Dragon brand; then there was the restructuring on the redundancies; and the transition to the new condition of service, which we'll continue in the next 2 slides. I do want to also highlight, we started the fees, looking at the underlying report of $8.5 billion in terms of the operating results. We do have $2.5 billion of impairment in the first half. On top of that, we have announced the $2.2 billion of redundancy costs in the restructuring. And then we've also got $1.3 billion impairment of deferred tax assets there, too. So we've had about $6 billion of impairment so far, and we will reassess -- we'll have to reassess the carrying value in March of some of our aircraft. In terms of the brand, our goal of the restructure was to achieve a business that was well focused, more efficient and more competitive. There wasn't enough meaningful differential between Cathay and Cathay Dragon. But more importantly, it doesn't mean that we are giving up the entire network, yet we will be applying to the authorities for a significant number between Cathay and Hong Kong Express on that piece. In terms of the staff rationalization, 8,500 positions were made redundant, which is 24% of the establishment. Because of headcount freeze ended up being 17% of existing staff, 600 at the outports, as I mentioned, the total cost of that redundancy was $2.2 billion. In terms of right-costing, the new conditions of service have been offered to the Hong Kong-based Cathay Pacific crew. Terms are competitive, there've benchmarks and fair, 90% -- over 90% of staff accepted them. However, we did have to terminate 600, who did not accept the new conditions of service. And this week, we've offered a new conditions of service for Hong Kong Express. In terms of fleet, we have been working with Boeing and Airbus, as I said, to defer some of the deliveries, so we have 6 deliveries in 2020, 7 deliveries in 2021. 45% of our passenger fleet is currently parked in outside locations offshore. You see there that in terms of retirement, we have 29 aircraft retiring in 2020. As mentioned, the -- we did impair in the interim 16 of those aircraft, but we will have to review the others at the year-end. What does that mean? The restructuring has helped our cash burn, as I said, we're -- the focus is on liquidity. We start -- we are in a position of balance sheet strength at the moment, healthy liquidity and healthy gearing, but we are still burning cash at the rate of approximately just over $1 billion -- between $1 billion and $1.5 billion. So the restructure saves us about $500 million a month. So the outlook for 2020. 2020 is going to be exceptionally poor year as I said. The first January started strongly, February was okay and then from March onwards, we've been flying at less than 10% capacity. So overall, in the year, it'll be 20%, but the second half will be worse than the first half at the operating level. And as mentioned, we will have to -- we've had $6 billion of impairment to date to net that off with the government grants, but then we will be looking at further impairment of aircraft as of March. And so in terms of looking beyond that in 2021. This is obviously the 2020 picture, the top piece, the top half -- the red boxes, look at the challenges we've faced throughout the year. So back in 25th of March, the boarder closed to non-Hong Kong residents and then new regulations introduced in July, imposing restrictions for travelers arriving from high-risk countries. The U.K. was added to the list of high-risk countries at the October 1. And then it went to 15 countries and now all arriving passengers, except those from the Chinese mainland undergo 14 days quarantine in a hotel. The bottom half looks at the small things that have happened. So at the 1st of June, transit reopened, except for those from the Chinese mainland. August 15, transit reopened for travelers from ex-Chinese Mainland. October 28, Sea-To-Air ferry Transit reopened. And then obviously, at November 22, we welcome the start of travel bubbles and particularly the one that's just being announced between Hong Kong and Singapore. We have announced our base assumptions for the restructure, we do expect a continued, very difficult first half of 2021. Capacity at less than 25%, load factor is low, slowly picking up with the -- hopefully, assumes a vaccine comes into effect. In the second half of '21, slowly building up to have ASKs above 50% for the second half, but overall, for the year, our capacity will still remain well below 50%. There is some good news and the sense we welcome the travel bubble between Hong Kong and Singapore, which was launched in the 22nd of November. It's a start, and it's something that we welcome and hope can -- we can roll out throughout the region. And then obviously, we also are encouraged by progress that's recently been announced in terms of vaccine resets and -- which gives us hope on the assumptions that we've made in terms of an effective vaccine by the second half of 2021. Cargo remains strong, capacity still seriously constrained given the impact on the passenger fleet. However, demand remains very strong. Demand in the U.S.-China trade lane is back to pre-COVID levels. And so an air travel is the preferred mode of transport at the moment to get things to destinations as quickly as possible. IATA has announced that they don't believe we'll get back to 2019 levels until 2024. So our plans are consistent with that approach. However, as we announced at the interim stage, as we announced for the recapitalization, we are encouraged by the level of support and the bullish outlook that remains from our stakeholders and government. As to Hong Kong and the Greater Bay Area as part of an international hub and a global financial center. This slide we've used at previous analyst briefings. So in summary, the 2020 full year results will be extremely poor. And the outlook does remain uncertain. The recapitalization has strengthened the balance sheet, improved our gearing and given us significant liquidity. The restructure enables the group to remain focused, efficient and competitive. Liquidity and minimizing the cash burn remains our short-term focus. And whilst it's very early, discussions of vaccines and trouble bubbles do provide some optimism. The cargo business remains strong. And whilst the recovery will be prolonged, all our shareholders remain very bullish on the long-term prospects of Hong Kong and GBA and a strong aviation HUB. And with that, we'll open the floor.
Thank you, Martin. We'll now begin the Q&A session. First question from Shawn Ng from JPMorgan, in fact, 3 questions. I'll take each one in turn. The first one, what is driving the lower capacity deployment in the fourth quarter versus the first 9 months of 2020?
Well, the first 3 quarters of this year includes a few months in first quarter where the disruption was less. In particular, Jan was a pretty much normal month. And Feb, we had Chinese New Year. Half of the month was affected by the beginning of COVID-19. And then March was further affected. But it's only since April, the -- our capacity on the passenger side has been shrunk to a single-digit percentage versus the normal capacity. So if you count first quarter to the third quarter, the capacity is the average of the 3 quarters. But quarter 4 is more like quarter 2 and quarter 3, where we have only single digit of normal capacity. So I think that's the reason why.
Second question, is it fair to say the majority of the rightsizing has been concluded and no further impairment losses expected?
Well, as I said, you can make your own assumptions on the forecast we've given. So we've given you the basis on where we've made a base case assumption both in terms of capacity for 2021. And we have indicated in terms of impairment that we have additional aircraft, particularly aircraft currently. So in March, we have to look at our plans there, what the outlook looks like there. And aircraft that are unlikely or will not return to flying will need to be impaired. So there will be some additional aircraft impairment at the year-end, for sure.
And the third question, can you quantify the amount of committed lines that Cathay has at the moment? And how much of this is currently drawn?
We've given our liquidity position of EUR 33 billion. We haven't drawn on the government Tranche C in terms of the recapitalization on that but that's included in the EUR 33 billion liquidity balance that we have currently. But our gearing remains low. And so when there is a pickup in sentiment, then we're in a healthy position to get additional liquidity.
The next question is from Ian Wong at UBS, in fact, 2 questions. Do we expect further capital raising transactions similar to SIA in the near future? And the second question is how many months of capital buffer does Cathay have relative to its current cash burn rate?
Well, again, there are 2 parts to that. We've given you the cash burn rate that we have and we've given you where our current liquidity company sits so that you can do the calculation on that piece. In terms of raising additional funds, I mean one of the things that we have been fortunate with in terms of the support that we've received from both stakeholders and what we did at the year-end last year is we've got sufficient buffer to plan and to watch. So there's all -- there are obviously different types of capital raising that other airlines are doing at the moment. We're watching those with interest. But at the moment, we're in a healthy position to do that, watch and learn and obviously have the outlook.
The next question is from Andrew Lee at Jefferies. There's 3 parts. I'll select from these. The first one is cargo. Is it possible to provide some guidance on its profitability? Or what percentage of the group expenses is related to cargo? That's the first part.
We don't publish the profitability on the cargo side independently because our cargo business is closely linked to our passenger business. And during normal time, our capacity on the cargo side, half of it is from the passenger flight valley. And during this time, because of the major shrinkage of the normal passenger schedule, the cargo capacity has been affected. And also, we're running a lot of cargo-only passenger flights, i.e., deploying passenger aircraft just to carry cargo. And we don't separate the P&L. And therefore, we don't publish the number in terms of cargo profitability.
The second part of the question is for KA routes. Does CX need to apply for all KA routes? Or have some already been transferred?
Okay. Take that question as well. Yes, it is our intention for Cathay Pacific and HK Express to continue to operate most of the Cathay Dragon routes but this is subject to regulatory approval. And since the announcement of the restructuring, we have already launched applications with different authorities worldwide in Hong Kong and overseas to make sure that we secure the necessary approval to continue to operate some of the Cathay Dragon routes. In fact, some of the previous Cathay Dragon destination have already been resumed by Cathay Pacific, either providing passenger services and in some cases, providing cargo-only services. For example, we have recently resumed points to Kuala Lumpur, Fukuoka, Kaohsiung, Hanoi, et cetera, which were run by Cathay Dragon previously.
The third part to that question is the EUR 3.5 billion restructuring cost, will this be booked in the 2020 second half results?
Yes.
The next question comes from Ben Hartwright at Goldman Sachs. Again, there are 3 parts to this one -- sorry, 2 parts of this one I'll pick up. Can you give us any more color on the negotiations with Boeing for what deferrals you're hoping for?
Well, as we mentioned before, that's in relation to the 9x, which we plan to push out as far as possible.
And the second part to that is can you quantify the potential opportunity for cargo from vaccine distribution in terms of revenue or volume impact? Might this be meaningful?
Well, on the vaccine's benefit impact to our cargo business, it's too early to tell but we are watching very, very closely. And in fact, internally, we have set up a task force to work with different stakeholders like the airport authority to make sure Cathay Pacific and Hong Kong are ready to facilitate the transportation of vaccines into Hong Kong and via Hong Kong to different parts of the world. At the moment, it's very difficult to quantify the benefit to our cargo business. But we believe there will be a positive impact, either directly through vaccine transportation or the surge in overall cargo demand because there's more need to transport vaccines across the whole world within a short time. At the moment, we don't have a number in terms of quantifying the benefit.
The next question just come from [ UOB ]. How many passenger aircraft have you converted to carry cargo by removing passenger seats? Would you plan to raise your cargo capacity by converting more passenger aircraft?
Okay. Currently, we have converted 4 777-300ER aircraft by removing seat in the economy class and premium economy class cabin to facilitate carriage of cargo in the cabin itself. At the moment, we don't have further plan to convert more aircraft because we are also using normal passenger aircraft without seats being removed to carry cargo. Also, we are using our subsidiary Air Hong Kong to run extra charters to increase our cargo capacity. We believe these measures are optimal at the moment. And therefore, we are not looking at further converting our 777-300ER aircraft by removing the seat at the moment.
And the second part of the question is does CX have the required cold chain capacity to carry vaccines?
We believe so. Actually, Cathay Pacific is one of the leading carriers in carrying pharmaceutical products. And we are one of the few carriers that are certified by IATA on a CEIV standard for pharmaceuticals. And Hong Kong as a hub is also well suited to carry cold chain protective solution for vaccine. And as I mentioned before, we have an internal task force working with different stakeholders to make sure that we all gear up for the carriage of vaccines.
The next question is from Lok Kan Chan from Crédit Suisse. Which markets do you expect will see a better recovery into 2021?
Well, it's hard to say right now which specific market but we believe that the Asian regions will recover fast before the long-haul regions for us. And also, we believe the leisure segment will recover faster than the business segment -- business travel segment when the recovery comes.
From Karen Li at JPM, how much of the current capacity has been stored in the desert in a more optimistic scenario if the vaccine can become more readily available in 2021? The aircraft that's a part of the desert, can they be brought back easily? If not, what would be the cost or bottleneck?
As mentioned by Martin's slide, we currently have 83 aircraft, half outside of Hong Kong. And some of them are on a long-term parking basis so it will take a longer time to retrieve them. But others are on a short-term parking basis, meaning that we can retrieve them with [ weather ] to be a shorter lead time. So with that combination, we believe we have the flexibility to retrieve our aircraft as the recovery comes in an agile way.
Next question is from Nathan Gee at Bank of America. How much of corporate travel may never return? And can profit margins return to the pre-COVID levels if some premium traffic is permanently lost?
Well, again, it's very hard to tell right now. I mean it's anyone's guess. But we believe it's going to take time to recover -- for all traffic to recover normal level. At the moment, our projection follows and agrees with what IATA has mentioned, i.e., overall international passenger demand won't return to 2019 level until 2024. So in the coming few years, we believe the business travel would not return fully. But we still believe that in the long run, the business will be back to normal on both the business travel side as well as the leisure travel side.
Next question, another one from Lok Kan Chan at Crédit Suisse. With the Singapore travel bubble beginning in 2 days, how are you seeing the demand so far?
The demand on our Singapore travel bubble flight is overwhelming. In the next few weeks, our flights are pretty much full because there's also a quota of 200 passengers per flight. Due to the limited capacity and high demand, our flights are pretty much sold out in the next few weeks.
And there's a second part to that question. By any chance, is CX reviewing their existing routes and plans to trim the less profitable ones?
Yes. We've been reviewing our network. At the moment, we are only flying less than 10% of our normal network. And the future is highly uncertain so we are taking a very agile approach to plan our network. And as presented by Martin, overall, next year, we believe that we will only be able to operate well below 50% of our total capacity on average, with better performance hopefully in the second half.
But in terms of the actual points to fly, we would see the market recovery situation and respond to the market in an agile way. So it's too early to say which network -- which points we'll resume fast and which one we'll resume later.
A question from [ Xiaofeng ]. What are your expectations on passenger yield performance in 2021?
At the moment, actually, if you just look at our passenger yield performance, it's performing higher than normal. But that's purely a function of a small base and different mix in demand. It's very hard to tell for 2021 because it really depends on the route mix. There's a difference between long-haul and short-haul new performance. There's a huge difference between just point to point for freedom yield versus sixth freedom yield. So yield is as much affected by the mix of traffic and the actual ticket price. So it really depends on the recovery pace and the network structure and traffic structure for 2021. So it's very, very hard to predict at this moment.
Next question is from Kelvin Lau at Daiwa Capital. What would be the magnitude of the voluntary special lease scheme next year? Similar to previous schemes?
Yes. Actually, internally, to date, we've just announced our third round of special lease scheme, which is similar to the scale and duration of the second round.
And the last question we have is Kelvin Lau again at Daiwa Capital. Would there be any limitation on cold storage on the cargo belly hold for carrying vaccine, including the temperature control?
Well, it depends on the nature of the vaccines. And there are different types of vaccines being researched out there and some requires very, very low temperature, up to minus 80 degrees. Some requires minus 20% and some requires 2% to 8%. It really depends on different manufacturers. So we would look at those demand carefully and do our best to facilitate whatever type of vaccine shipment coming up.
We have one more question coming from Andrew Lee at Jefferies. How are current cargo yields compared with the first half of 2020?
Well, the cargo yield has been strong because currently, there's an imbalance in the market with reduced supply of the carriers worldwide. And therefore, the yield is high than normal. At the moment, our yield is trending higher than first half because second half, we have a peak season from October to December. So usually, just like normal year, we enjoy a higher yield in the second half than first half.
That is all the questions we've received so far. If there are any further questions, if you could submit them quickly now. I think that is all the questions we've got. So thank you very much for your questions. Kindly note that the slides from today's presentation will also be made 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'll endeavor to respond to them as soon as possible. This concludes the Cathay Pacific 2020 Pre-close Analyst Webcast. Thank you very much for joining us.
Thank you.
Thank you.