ANA Holdings Inc

TSE:9202

Earnings Call Transcript 2019-Q2

[Shinya Katanozaka, executive]

Thank you for participating in our meeting for the financial results for the 6 months ended September 30, 2018.

Before I begin, I want to take a moment to express our sincere condolences to the people of Western Japan, who suffered from heavy rains and typhoons that hit one after another and the people of Hokkaido, who are affected by an earthquake. Our group promotes the Take a trip to Hokkaido project, which supports reconstruction and recovery efforts in Hokkaido. We, as the ANA Group, are conducting united efforts to make contributions by promoting the use of Hokkaido airports and stimulation initiatives for the various regions of Hokkaido. I will discuss the following 4 topics today: one, overview of the fiscal year 2018 first half financial results; two, impact of flight cancellations in the Air Transportation business and second half business plan; three, enhancing basic quality; four, our initiatives for the second half of fiscal year 2018.

First, please turn to Page 4. I will start with a summary of the financial results for the first half of fiscal 2018. In the Air Transportation business, our success in capturing steady demand in international passengers and cargo businesses drove top line growth. Operating revenues increased by 5.4% from the previous year to JPY 1,038.0 billion, representing 2 consecutive years of record-high revenues.

Operating income was JPY 105.2 billion. Income decreased year-on-year by 8.6%, but earnings transitioned above our original plan. The graph on the right shows transitions in first half revenues and operating income for the past 5 years. As you can see, for the first time, we surpassed revenues of JPY 1 trillion. We also exceeded operating income of JPY 100 billion and an operating income margin above 10%. Compared to fiscal year 2014, when we started the expansion of the international business at Haneda Airport, revenues increased by 20%.

Please turn to Page 5. Next, I will explain our progress for the Air Transportation business during the first half of this fiscal year, the first year of our current midterm corporate strategy.

For the International Passenger business, advancing globalization among Japanese companies supported stable business demand. At the same time, inbound travelers with the high unit price also increased. Strong demand trends continued both in Japan and overseas as RPK increased by 6.8% year-on-year. Yield also increased by 4.9%, which exceeded plans.

For the Domestic Passenger business, the first half load factor increased by 1.7 points year-on-year. Although ASK decreased on the impact of factors such as typhoons and earthquakes, we benefited from the sales strategies such as promotional affairs. Second quarter unit prices increased year-on-year as overall the Domestic Passenger business recorded stable earnings as a revenue platform for the group.

For the International Cargo business, we implemented demand and supply optimization to promote freighter network optimization. By implementing fare raises based on destination-specific supply and demand balance, we succeeded in increasing the first half unit price by 21.1% year-on-year. In our LCC business, we advanced preparations for the merger of the 2 companies. Thus far, the 2 companies had 3 overlapped routes on their services. From this fiscal year, we have consolidated the Narita-Kansai route into Peach Aviation. At the same time, we developed LCC demand by effectively applying management resources to launch other new routes.

Next, please turn to Page 6. This graph shows transitions in load factor for routes launched since fiscal 2015. Performance for each route is plotted in intervals of 5 percentage points. As you can see, we have maintained a high load factor on most routes since the start of operations. The Phnom Penh routes is impacted by seasonality factors, such as the effect of the rainy season during the first half of the fiscal year, but load factor is steadily improving mainly on business demand.

The last few years have seen a trend where the launch of new route services results in increased demand for existing routes to nearby destinations. For example, since fiscal 2014, we launched the Munich, Düsseldorf and Brussels routes. Since then, demand has grown stronger, even for the mainstay Frankfurt route. This fiscal year, the first half load factor reached nearly 85% for all routes to European destinations.

Our analysis of this trend is that network expansion and strategic aircraft deployment have increased ANA Group competitiveness, which in turn is driving rapid demand stabilization on newly established routes.

Please turn to Page 7. Next, I will discuss the impact of planned flight cancellations and our second half business plans for the ANA brand.

First, I will explain the impact of planned flight cancellations. To prioritize safety while addressing the Boeing 787 engine issue, beginning in July it was necessary that we implement flight cancellations on certain routes.

On the other hand, for our winter flight schedule beginning from the end of October, we are avoiding flight cancellations by revising the business plan we drafted at the beginning of the year. We are scheduled to receive upgraded parts beginning in December and will implement permanent measures to resolve the technical issues we currently are facing.

The impact on ASK attributable to these flight cancellations is as shown at the bottom of this slide. As you can see, both Domestic Passenger and International Passenger business recorded first half ASK that was below plans. During the second half, we plan to maintain ASK on par with our original plan for domestic business.

For the International Passenger business, we will minimize the impact on revenues by suspending and/or decreasing some flights on a limited route, while also guiding passengers who have booked on those flights to other ANA flights. From there, we will implement additional revenue improvement measures to take advantage of favorable demand trends.

Please turn to Page 8. This slide explains our initiatives to enhance basic quality. Since fiscal 2017, the ANA Group has engaged in initiatives to solidify our management platform as preparation for our next growth stage. The first measure is "Stand firm on Safety." Safety is our promise to the public and is the foundation of our business. I order all group members to prioritize safety in everything we do.

The second measure is, "Improve quality and services." As we prepared to head into a new growth stage, we will aim to improve customer convenience while offering superior quality.

The third measure is, "Secure and develop human resources." In addition to securing human resources to support future growth, through effective education we will foster the development of future group leaders. We will increase productivity by enhancing motivation for each employee.

The bottom graph shows the status of investments and expenses related to these initiatives. We implemented nearly 40% of annual planned investments during the first half and will also continue as planned during the second half.

Please turn to Page 9. Next, I will introduce some of our initiatives related to enhancing basic quality. To address safety, we are conducting detailed maintenance work based on ANA internal standards, which require a shorter cycle of engine inspection compared to the manufacturer recommended standards. We are enhancing safety initiatives, including using mobile terminals to share flight and maintenance information in real time. We are addressing quality and services by completing the installation of in-flight Wi-Fi Internet services on nearly 80% of applicable aircraft.

On the domestic business, we are improving customer convenience by offering free Wi-Fi service, expanding in-flight entertainment and installing seat monitors. We are enhancing universal services by renovating airport counters and boarding gates to provide a more pleasant boarding experience for customers, including wheelchair passengers. We will continue to enhance employee training as we aim to provide the world's best universal services.

We are proactively engaged in hiring personnel for future growth. We conduct personnel development for ANA pilots based on long-term 10-year personnel plans. For the LCC business, Peach Aviation will also begin its internal pilot development program. We are also in the process of constructing an ANA Group Training Center, which will bring together training for all sorts of occupations, including pilots, flight attendants, mechanics and airport ground staff in a single location. In addition to centralizing the multiple training facilities located around Haneda Airport, we will adopt advanced technologies and equipment like VR and AR to improve the quality of our training. This will enable us to simultaneously pursue human resource development and safety improvements. Furthermore, we will utilize AI and IoT, such as introducing automated baggage check-in systems at domestic airports to improve productivity.

Please turn to Page 10. Next, I will explain our initiatives for the second half of this fiscal year. First, I will discuss our business strategy. ANA will appropriately address the Boeing 787 engine issue and establish a production structure for the next fiscal year and beyond. Beginning in mid-February of next year, we will utilize late night slots at Haneda Airport to start new services to Vienna. We will steadily expand our network in accordance with our midterm corporate strategy.

For the LCC business, the merger between Peach Aviation and Vanilla Air is proceeding according to plan. As previously announced, the Peach Aviation CEO will also take a leadership role at Vanilla Air. We will gradually consolidate management resources into Peach Aviation in order to improve management efficiency. We will continue to implement planned initiatives to solidify our management platform. At the same time, we will control unit costs to improve our cost competitiveness.

As part of our financial strategy, we issued green bonds in October. In gaining market support for our group's policy on environmental initiatives, we were able to draw the interest of a broad range of investors and issue bonds to a well-balanced share of investors. Lastly, as you can see in the bottom half of this slide, we forecast that this trend of revenue growth will continue during the second half. While continuing to carefully watch crude oil markets and negotiations with engine manufacturers regarding compensation, we will focus on solidifying our business platform in preparation for our next growth stage.

This concludes my presentation. Thank you for your attention.

I will provide a detailed explanation of our financial results for the 6 months ended September 30, 2018.

Please turn to Page 15. This slide shows an overview of our consolidated income statements. Operating revenues increased by JPY 53.0 billion, up 5% year-on-year to JPY 1,038.0 billion. On the other hand, operating expenses increased by JPY 62.8 billion, up 7% year-on-year to JPY 932.8 billion. As a result, operating income decreased JPY 9.8 billion year-on-year to JPY 105.2 billion. Ordinary income decreased JPY 9.8 billion to JPY 102.9 billion. And net income attributable to owners of the parent decreased JPY 44.6 billion to JPY 73.7 billion.

The year-on-year difference in net income is due to normalizing after having recorded a total of approximately JPY 44 billion during the first half of the previous fiscal year as a special gain on the revaluation of stock resulting from the consolidation of Peach Aviation. Please see Page 16. This page shows our consolidated financial position. Total assets increased by JPY 64.2 billion to JPY 2,626.6 billion compared to the end of the previous fiscal year. Shareholders' equity increased by JPY 87.5 billion to JPY 1,076.2 billion. The shareholders' equity ratio was 41.0%, a 2.4 point increase from the end of the previous fiscal year.

Interest-bearing debt decreased by JPY 4.8 billion, to JPY 793.5 billion, resulting in a debt-equity ratio of 0.7x, an improvement over the end of the previous fiscal year.

Please turn to Page 17. This slide shows cash flow. Cash flow from operating activities resulted in income of JPY 159.7 billion. Cash flow from investing activities resulted in expenditures of JPY 122.8 billion due to capital expenditures, mainly for aircraft. Cash flow from financing activities resulted in expenditures of JPY 40.8 billion due to loan repayments, bond redemption and dividends payout. Substantial free cash flow, which is based on excluding capital transfers for time and negotiable deposits of more than 3 months from investing activities, resulted in revenues of JPY 24.5 billion. Please see Page 18. These are our results by segment. Operating revenues increased for Air Transportation, Airline Related, and Trade and Retail businesses. Operating revenues for various group business increased with the expansion of International business. Operating revenues decreased for Travel Services due to the impact of declining sales for Domestic Leisure Package Travel.

Now I will go over the details of our Air Transportation business. Please turn to Page 20. This is a year-on-year comparison of changes in operating income for our Air Transportation business. Operating revenues increased by JPY 50.4 billion. Operating revenues for the Domestic Passenger business decreased year-on-year due to the unprecedented impact of typhoons and earthquakes as well as flight cancellations attributable to the Boeing 787 engine issues.

International Passenger and Cargo and Mail businesses contributed significantly to top line growth. Operating expenses increased by JPY 58.5 billion. The expansion of the business scope resulted in increased operation-linked expenses. Plus, although we are adding a fuel surcharge to fares in the International business, this was not enough to cover fuel expenses, which increased ahead of fuel surcharges due to continuous crude oil price raise during the first half of the fiscal year. As a result of the above, operating income decreased by JPY 8.1 billion year-on-year to JPY 101.0 billion.

As shown in the table at the bottom, we were able to control unit cost in line with our plan. Please turn to Page 22. This shows the status of our Domestic Passenger operations. Please see the figures on the left, which show an analysis of the factors for the JPY 2.8 billion decrease in first half revenues. Passenger factors resulted in decreased revenues of JPY 3.0 billion, mainly due to the impact of typhoons and earthquakes. With load factor increasing during the peak demand season, for unit price factors, we implemented fare strategies to capture high unit price demand. As shown on Page 21, second quarter ASK decreased by 5.2% year-on-year. By enhancing sales strategies to address such conditions, we increased second quarter load factor to 73.2% and improved unit price by 1.4% year-on-year. Please turn to Page 24. This is the status of our International Passenger operations. Please see the figures on the left, which show an analysis of the factors for the JPY 35.5 billion increase in first half revenues. Passenger factors resulted in increased revenues of JPY 25.5 billion due to capturing a broad range of the demand along with ASK expansion. Unit price factors resulted in increased revenues of JPY 10.0 billion due to fuel surcharge increases and the benefits of a focused effort to enhance yield management.

Next, please see Page 25. This shows ASK and RPK trends by destination. RPK during the second quarter increased year-on-year for all destinations. For China routes, shown in the bottom left, total supply volume, including other airlines for routes between Japan and China was largely unchanged year-on-year. However, we saw the continued trend of increasing demand, particularly among inbound travelers from China. There was also a notable increase in yield for China routes. Other destinations also captured strong demand along with increased ASK.

Please see Page 26. This slide shows an analysis of demand by point of departure and seat class. Each graph shows fiscal 2018 first half passenger numbers compared to the previous fiscal year. The light blue indicates passenger numbers of Haneda departures and the dark blue indicates Narita departures with 100 representing the total number of departures from both airports during the first half of the previous fiscal year. As you can see, we recorded growth for each category.

Please see the figure on the left. Passengers departing from Japan increased year-on-year due to capturing firm business and leisure demand. Passengers departing from overseas significantly outpaced those from Japan, recording a 12% growth rate year-on-year.

During the 4-year period between fiscal 2014 and fiscal 2017, we have expanded ASK on ANA's International Business by 60% and increased the number of overseas destinations serviced from 32 to 42 cities. Our network expansion has established a solid position in overseas markets. The graph on the right shows results by seat class. We recorded a high rate of growth for passenger numbers for Haneda and Narita combined, with business class and economy class growing 10% and 8% year-on-year, respectively.

Next, please see Page 30. This is the status of our International Cargo operations. Please see the figures on the left, which show an analysis of the factors for the JPY 9.3 billion increase in first half revenues. Weight factors resulted in decreased revenues of JPY 2.0 billion due to the implementation of sales strategies focused on unit price, such as prioritizing capturing import and export cargo to/from Japan. Unit price factors resulted in increased revenues of JPY 11.5 billion. Due to firm demand trends, we focused on increasing the share of import and export cargo, which has a relatively higher unit price, and we implemented price raise.

The graph on the right shows transitions in total demand for import/export cargo and our group results. The light blue plotted line shows year-on-year comparisons in unit price. Since the first quarter of fiscal 2017, unit price has increased by approximately 20% for 6 consecutive quarters. During the first half of this fiscal year, unit price grew by 21.1% year-on-year.

Please see Page 31. Next, regarding our LCC business. The figures on this slide represent combined figures for Peach Aviation and Vanilla Air. Operating revenues increased by just under 10% year-on-year to JPY 48.3 billion. Load factor for the 2 companies combined was 87.1%, the high level following the first quarter. As the companies proceed with preparations for their merger, Vanilla Air started a new Narita-Ishigaki route and Peach Aviation also started a Kansai-Kushiro route during the second quarter. Load factors were above 85% for both routes, representing a solid start.

Page 32 shows traffic results for each LCC company. This concludes my presentation. Thank you for your attention.