ANA Holdings Inc

TSE:9202

Earnings Call Transcript 2020-Q2

[Shinya Katanozaka, executive]

Thank you for taking time to attend today's presentation of our financial results for the 6 months ended September 30, 2019. On September 26, the efficient operating procedures at the Osaka, Itami Airport security check resulted in tremendous inconveniences and concerns among our customers and others who were involved. I want to extend my apologies for this situation. We're in the process of implementing detailed preventive measures, taking every means possible to ensure air travel security. The typhoon of several weeks past caused widespread damage throughout Eastern Japan. Our thoughts go out to those who were affected, and we extend our heartfelt players for a speedy recovery. Ground transportation facilities were suspended due to typhoon. The ANA Group also canceled numerous flights over the course of nearly 2 days, causing great inconvenience to many passengers. Once the typhoon passed, we began efforts to support recovery, including nonscheduled flights and wider-sized aircraft on routes to and from Toyama and Komatsu as well as continued donations toward recovery programs. I'll discuss the following 3 topics today: One, overview of financial results for the second quarter of fiscal 2019 and revisions to fiscal year earnings forecasts; two, strategies and progress of our business; three, preparations for fiscal 2020 and our approach to future business plans. First, please turn to Page 4. I'll start with a summary of financial results for the 6 months ended September 30, 2019. Our mainstay Air Transportation Business captured demand steadily during the period, mainly during the 10-day Golden Week holiday in Japan. The weakening business climate due to U.S.-China trade friction as well as the impact of Japan-Korea relations and demonstrations in Hong Kong were factors contributing to a decline in cargo demand. In addition, we saw sluggishness in certain segments of demand for business demand on international routes. Despite these headwinds, operating revenues rose 1.7% year-on-year to JPY 1,055.9 billion. We incurred expenses in advance for business growth for next fiscal year and beyond, which contributed to a 4.7% increase in operating expenses compared to the prior fiscal year, rising to JPY 977.1 billion. As a result, operating income amounted to JPY 78.8 billion, which was a 25% decrease year-on-year. Please turn to Page 5. Next, I'll address our fiscal 2019 earnings forecast. Due to the deteriorating external environment, cargo demand on international routes continue to be sluggish. In addition, recent demand in our International Passenger Business was weaker than the first quarter. Our LCC business is experiencing intensifying competition from other companies in the industry. We expect this trend will continue throughout the second half of the fiscal year. In the midst of this environment, we have reviewed our financial results for the second quarter and conducted a careful study of our outlook for second half operating revenues and expenses, deciding to make a downward revision in our forecast for the fiscal year. We now forecast operating revenue of JPY 2,090 billion, JPY 60 billion lower than our initial plan. We are presently considering a revision to our operating expense projection. However, we have reduced our forecast for operating income by JPY 25 billion compared to the initial plan of JPY 140 billion. Our updated forecast for ordinary income is JPY 137 billion, while our forecast for net income attributable to owners of the parent is now JPY 94 billion. We have left our forecast for dividends unchanged from our initial plan at JPY 75 per share. Please turn to Page 6. I will now discuss the strategic points and progress by business. In our International Passenger Business, we are preparing to expand capacity in the next fiscal year. Accordingly, we are making steady progress in all areas, including human resources hiring and training as well as receiving aircraft. As part of our expanding network in Narita Airport, we introduced service to and from Perth in September and began service to and from Chennai on October 27. We plan to start Narita-Vladivostok Service in March of next year. In our Domestic Passenger Business, we are taking advantage of the impact of our new fare structure, introduced last fiscal year to provide greater convenience through earlier advanced reservations, while achieving improved unit price at the same time. Moving forward, we plan to increase premium class seats on our wide-body aircraft, introduce new seats in regular class service and take other measures to improve the quality of our in-flight products to raise unit price and strengthen our revenue platform. In our International Cargo Business, we began operating a Narita-Shanghai route using wide-body freighters in July of this year. Today, we began using these aircraft in our Narita-Chicago route as part of our effort to offer new services, including transport of special items such as oversized cargo and hazardous materials. At the same time, we intend to improve profitability during the second half of the year, through even greater flexibility and capacity adjustments not already incorporated into our original plan. This may include reducing the number of flights or suspending some routes. Our LCC Business has completed the centralization of flight operations under Peach Aviation, beginning with this winter schedule. We have eliminated duplicate routes and integrated back-office departments to pursue synergies through the merger. Further, we intend to improve yield management as a way to resist the increasingly severe competition from overseas airlines. At the same time, we will restructure routes, including a response to lower demand on routes to and from Korea. Please turn to Page 7. Beginning at the end of May, we have introduced 2 Airbus A380 aircraft into service on our Honolulu route. At this point, I want to reiterate the ANA Hawaii Strategy we are pursuing currently. The first point I want to address is restructuring our business model based on overwhelming seating capacity. We are leveraging the characteristics of ultra-wide-body aircraft to introduce new products, including First Class and COUCHii seats. At the same time, we are introducing services truly worthy of a resort destination route. Further, we are providing more opportunities for customers to use mileage and expanding our lineup of travel products to capture a wider range of passengers. The second point is our contribution to the local Hawaiian economy. We intend to sponsor events with local entities, participate in environmental protection activities and contribute in other ways for the community of Hawaii. We will sponsor the ANA HONOLULU MUSIC WEEK, a new music festival held in cooperation with the state of Hawaii and Honolulu City. We intend to make this a traditional event every November as a new way to add to the charm and attraction of Hawaii. The graph on the right shows passenger numbers for the first half of the fiscal year. ASK and RPK both grew 1.3x compared to the prior fiscal year, off to a smooth start. In the past, we operated our Honolulu route mainly using midbody aircraft. The measures I discussed and the introduction of the Airbus A380 has resulted in steady growth in demand. As a result, load factor has remained above 90%, on par with past performance. As we progress in our Hawaii Strategy, we will expand our share of Japan-Hawaii passengers, which we intend to leverage into greater overall competitiveness for the ANA network. Please turn to Page 8. This slide describes our progress related to strategic topics heading into fiscal 2020. This fiscal year was a year in which we will complete the finishing touches on safety, quality and services. As for the Boeing 787 engine issues, we are making steady progress in installing the upgraded parts received. We intend to continue to procure parts from the engine manufacturer, as planned, having all aircraft ready for service by the end of this fiscal year. In connection with basic quality in ANA international routes, we are introducing aircraft with new products on the Haneda-London route. Our THE Suite First Class service offers a relaxing space worthy of a 5-star hotel. Our THE Room service in Business Class offers one of the largest private spaces and levels of comfort in the industry. Both services have enjoyed a strong positive response from our customers. By the end of this fiscal year, we plan to roll out these services on our New York and Frankfurt routes. In our ANA domestic services, we are introducing ANA FAST TRAVEL at Osaka, Itami; Okinawa, Naha; and other major domestic airports for simpler, easier, smoother passenger boarding. Meanwhile, to secure and train human resources, we are hiring more cabin attendants and airport ground staff. In terms of human resources training, we opened the ANA Group Training Center, ANA Blue Base. Using leading-edge training facilities, we are installing an organization-wide culture of safety, which is the foundation of our business. At the same time, we are fostering people who will take the lead in improving the ANA brand. Our steady progress in these initiatives will be a major bridge toward growth in the next fiscal year and beyond. Please turn to Page 9. Recently, the Ministry of Land, Infrastructure and Transport made an announcement regarding the expansion of international route slots at the Haneda Airport beginning with the summer 2020 schedule. The number of slot allocations to Japanese airlines and the breakdown of countries have been released officially. Of the total of 50 new slots, 25 of which have been allotted to Japanese airlines, ANA received 13.5. By country, 6 lots for the U.S.A., as well as other slots for Russia, Italy, Turkey, Scandinavia, which are not currently serviced by ANA, allowing us to expand our service to new destinations. We have sales offices in Russia and Italy, where we have maintained a sales presence for more than 20 years. We plan to leverage our experience developed through charters and code share flights with other companies as we prepare to open new routes. At present, we are researching policies to make the best use of the expanded slots. We will reflect demand forecasts by destination and the movements of other carriers into our future business plans. Please turn to Page 10. We are engaged in ESG management under the current ANA Group Corporate Strategy, which defines material issues across topics such as the environment, social and governance.

As you can see in the bottom left, we declared our support of TCFD in March of this year, the first Japanese airline group to ever do so. Our efforts in ESG have been recognized by third parties. For example, on October 8, we were selected as a component member of the Dow Jones Sustainability World Index for the third consecutive year. In striving for social value and economic value through strong ESG management, we pursue sustainable growth, while at the same time, contributing to achievement of the SDGs established by the United Nations. Please turn to Page 11. Next, I'll address our future management plans. The Air Transportation Business is accelerating its growth strategy mainly in the ANA International Business as we take advantage of the business opportunity presented in slot expansions at Tokyo Metropolitan area airports. In our LCC Business, we are pursuing merger synergies to pursue greater capacity while preparing for entry into mid-range routes. We intend to optimize our business portfolio here, maximizing the management resources of both ANA and LCC brands. In our Non-Air Business, we intend to leverage our group customer platform to our business, such as Travel Services, to shift toward an online sales model. We're also focusing on new revenue-producing domains, including the social infrastructure domain, as represented by our AVATAR service. We plan to announce a rolling update to our corporate strategy in Q4, addressing the next 3 years through fiscal 2022. Our update will address the approach I described and incorporate an economic outlook beyond the Olympics. We remain committed to a basic policy of international business as strategic pillars driving group growth. We intend to engage in business reorganization as necessary to respond flexibly to changes in the environment. As we aim to accelerate the speed of management and achieve our group management vision, we will also develop capital and dividend policies further to meet the expectations of our investors. This concludes my presentation. Thank you for your attention.

[Ichiro Fukuzawa, executive]

My portion of today's presentation will be a detailed discussion of our financial results through the second quarter of fiscal 2019 and our forecasts for the fiscal year. Please turn to Page 14. These are the highlights of our financial results. Operating income for the first half decreased by JPY 26.3 billion year-on-year to JPY 78.8 billion. Net income attributable to owners of the parent for the first half amounted to JPY 56.7 billion, and EBITDA was JPY 164.7 billion. Please turn to Page 15. This slide shows an overview of our consolidated income statements. Operating revenues rose JPY 17.9 billion year-on-year or 1.7%, reaching JPY 1,055.9 billion. This was a record high result for any first half. We have engaged steadily in capturing passenger demand, mainly in our domestic routes. Operating expenses increased by JPY 44.2 billion, 4.7% up to JPY 977.1 billion. In line with our fiscal year plan, we are incurring expenses in safety, quality and services as well as for human resources and our fleet. Increased maintenance-related costs were another factor in the first half results. As a result, operating income was JPY 78.8 billion, ordinary income was JPY 81.5 billion and net income attributable to owners of the parent was JPY 56.7 billion, a decrease of 23% year-on-year. Please turn to Page 16. This next slide shows our financial position. Total assets of September 30, 2019, amounted to JPY 2,718.0 billion, an increase of JPY 30.9 billion compared to March 31, 2019. Shareholders' equity increased by JPY 19.8 billion to JPY 1,119.2 billion, and shareholders' equity ratio was 41.2%. Interest-bearing debt amounted to JPY 818.7 billion, while our debt/equity ratio came in at 0.7x. Please turn to Page 17. These are our cash flows. Cash flow from operating activities resulted in an inflow of JPY 140.3 billion. Cash flow from investment activities resulted in an outflow of JPY 112.5 billion, mainly associated with capital expenditures for aircraft. Cash flow from financing activities resulted in an inflow of JPY 0.3 billion. This result was mainly due to an increase in cash through straight bonds and our issuance of social bonds, offset in part by dividend payments. Substantial free cash flow resulted in an inflow of JPY 19.6 billion. Please turn to Page 18. This slide covers our results by segment. Operating revenues increased year-on-year for all segments. Our Airline Related Business experienced a small decline in operating income, mainly due to the active hiring of airport ground staff and other upfront costs incurred for upcoming business expansion. Travel Services recorded higher profits, having been successful in capturing leisure travel demand during Golden Week holidays and summer peak season, both in Japan and overseas. Next, I'll discuss the details of the Air Transportation Business. Please turn to Page 20. This table shows a year-on-year comparison of operating income in our Air Transportation Business. Operating revenues increased JPY 14.2 billion year-on-year. As you can see, the ANA International Passenger Business recorded an increase of JPY 7.4 billion in revenues, while the Domestic Passenger Business recorded an increase of JPY 16.3 billion. On the other hand, Cargo and Mail recorded a JPY 14.8 billion decrease. Operating expenses increased JPY 41.8 billion. We are incurring costs in advance for human resources and our fleet looking ahead to future business expansion. We are also on schedule with our plans to put the finishing touches on safety, quality and services. Maintenance expenses increased as a result of increased frequencies for engine maintenance, including contracting services outside the ANA Group. As a result, operating income in our Air Transportation Business decreased by JPY 27.5 billion year-on-year to JPY 73.5 billion. Unit costs are as shown at the bottom of this slide. Please turn to Page 22. This slide provides data for our International Passenger operations. This chart shows JPY 7.4 billion in change factors that led to higher revenues in the first half. Under passenger factors, we made efforts to capture Japanese leisure travel demand and trilateral demand by expanding ASK through the introduction of the Airbus A380 and stimulating more demand through promotional fares. Meanwhile, demand for business travel from Japan showed weakness among a part of industries. At the same time, increased capacity among overseas airlines, led to sluggish inbound tourist performance. Unit price factors contributed JPY 7.5 billion to revenue growth. This result was a combination of careful yield management for high demand flights as well as a higher ratio of passengers on medium- and long-range routes, including flights to and from Europe, the U.S. and Hawaii. Next, please see Page 23. This line shows supply and demand by destination, reflecting strong demand in North America for flights originating overseas, we secured RPK in excess of ASK. Despite intensified competition with overseas airlines, we captured leisure travel demand for flights from Japan to Europe through the use of promotional fares. We began controlling supply for flights to and from China beginning in the second half of the prior fiscal year, while preferentially capturing high-unit-price demand from Japan. At the same time, Chinese carriers have expanded their Japan route services, which led to lower year-on-year performance for inbound tourists. In Asia/Oceania routes, we saw lower demand for Korean and Hong Kong routes. However, we leveraged the strength of our existing network to actively capture demand for connecting flights with North American routes.

Please turn to Page 24. I'll discuss our yield performance using this slide. In fiscal 2014, we began to expand the ANA international network, mainly through Tokyo Metropolitan area airports. Over the past 5.5 years, ASK rose 1.7x while RPK grew 1.8x. We have captured demand as we have expanded our capacity. As we show in this graph, excluding the impact of fuel surcharges and foreign exchange, substantial yield has continued to grow over the medium term despite changes in the business environment, which have included economic shifts and competition against other carriers. We plan to expand our international network from Haneda Airport further in fiscal 2020 and beyond. Our policy will be to continue to capture high unit price demand as we improve our products and services. We'll pursue business growth while improving yield levels over the medium term. Please turn to Page 26. This slide provides data for our Domestic Passenger operations. This chart shows JPY 16.3 billion in change factors that led to higher revenues in the first half. Passenger factors generated a positive JPY 12.0 billion in operating revenues. We captured Golden Week travel and other demand during the first quarter of the fiscal year. During the second quarter, we captured steady demand for business travel and inbound travel, focusing on detailed promotions by route and by flight.

Unit price factors were impacted positively by the new fare structure we introduced in the second half of the previous fiscal year. This, as well as our promotion of earlier reservations and stronger yield management, resulted in JPY 4.5 billion of revenue growth. The chart on the right shows our results by quarter. Based on strong demand on domestic routes, we pursued both improving unit prices and optimized supply to demand. This resulted in a 73.6% load factor for the second quarter alone. This was another record high for quarterly performance after reaching a new high in the first quarter. Please turn to Page 29. This slide provides data for our International Cargo operations. This chart shows JPY 13.0 billion in change factors that led to lower revenues in the first half. With respect to weight factors, ATK optimization on certain routes, including our Okinawa Hub Network as well as the impact of U.S.-China trade friction on cargo demand for routes to and from China, resulting in a negative JPY 5.5 billion impact on revenues. Unit price factors accounted for a JPY 7.5 billion decrease as sales rates slowed due to supply-demand gaps and foreign exchange was affected by the impact of the strong yen. The graph on the right shows overall demand for export/import cargo and ANA Group performance. Overall export/import volume from and to Japan has been decreasing since the second half of the prior fiscal year. While ANA Group results also underperformed the prior fiscal year, our efforts to capture trilateral cargo allowed us to control the negative impact on revenues. We will continue to keep a cautious eye on demand trends, implementing adjustments flexibly in response to supply and demand. Please turn to Page 33. This slide provides data about our LCC operations. The data here is the combined total for Peach Aviation and Vanilla Air. We are making progress in aircraft conversions and crew training to centralize operations under Peach. To this end, we have temporarily reduced our running ratio of resources to operations resulting in first half ASK lower than the same period in the prior fiscal year. At the same time, demand on Korea and Hong Kong routes has decreased, while competition for Taiwan routes has intensified. As a result, we recorded a JPY 2.0 billion decrease year-on-year to JPY 46.1 billion. However, yield management under a flexible pricing approach allowed us to maintain a high 86.9% load factor for the 2 companies combined. Moving forward, we intend to restructure our routes while still maximizing the benefits of the centralization of operations. Please turn to Page 38. Next, I'll discuss the details of our financial results forecast for the fiscal year. Our recent forecast provisions are as you can see on this slide. Please turn to Page 39. This slide shows our results forecast by segment. Now I'll address the details of our upcoming revisions, which are mainly in connection with the Air Transportation Business. Please turn to Page 40. Here is our revised earnings plan for the Air Transportation Business. As concerns rise about the slowing of the global economy, our International Passenger Business has seen weaker business demand recently. Our International Cargo Business has seen the impact of U.S.-China trade friction resulting in sluggish demand. At the same time, our LCC Business results are experiencing the impact of the demonstrations in Hong Kong and Japan-Korean relations. We have revised our operating revenue plans in response to these environmental factors, considering the possibility that they will continue for the time being. Meanwhile, we have revised operating expenses in relation to sales-linked expenses, as well as in relation to additional reductions in costs beyond our current second half plan based on first half performance. As a result, we now plan for JPY 136 billion in operating income for our Air Transportation Business. Turning to Page 41. We have provided a single chart to summarize the differences in revised Air Transportation Business operating income compared to our original plan. Pages 43 through 45 show our assumptions related to main indicators in the ANA Passenger, Cargo and LCC Businesses based on revised operating revenues for each. This concludes my presentation. Thank you for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]