ANA Holdings Inc

TSE:9202

Earnings Call Transcript 2019-Q3

[Shinya Katanozaka, executive]

Thank you for taking time out of your busy schedule to attend today's presentation of our financial results for the 9 months ended December 31, 2018, and the ANA Group Corporate Strategy. On January 3, a domestic flight was delayed in an alcohol-related incident involving an ANA Wings flight crew member. This follows the occurrence of a similar incident in October of last year, and I extend my sincerest apologies to the passengers and others who were involved.

We have proposed a number of specific measures, rolling them out one after another. In addition to adopting stricter testing systems and taking emergency measures related to alcohol use at crew lodgings, we are implementing an e-learning course for all ANA Group employees. We will deal with this issue as a united group, remaining firmly dedicated to safety first. Thank you for your understanding.

I will discuss the following 4 topics today: one, outline of our financial results for the 9 months ended December 31, 2018; two, our response to engine issues with the Boeing 787; three, capacity for fiscal 2019 and beyond; four, merger of our LCC business; I will also address five, our operations and equity alliance with Philippine Airlines; and six, aircraft orders announced as a timely disclosure today.

First, please turn to Page 4. I will start with a summary of our financial results for the 9 months ended December 31, 2018. Our mainstay Air Transportation business has steadily captured demand for passengers and cargo. Operating revenues increased 5.2% compared with the previous year to JPY 1,568.4 billion, marking 2 consecutive years of record-high results.

As a result of implementing investments in safety, quality, services and human resources according to plan, operating income amounted to JPY 156.6 billion. While this result was 5.6% lower year-on-year, it also marked another quarter of outperforming our original plan as we did in the second quarter. The graph on the right shows operating revenues and operating income by fiscal year for the past 5 years.

As of the end of the fiscal third quarter, we're advancing favorably toward achieving our fiscal-year plan. While we must keep an eye on the impact of U.S.-China trade friction and other factors during the fourth quarter, demand for passengers and cargo appear to be generally in line with plan so far.

Further, we expect declining crude oil price trends to provide positive benefits in terms of costs.

Please turn to Page 5. This slide provides an update of the ANA Group Corporate Strategy. First, let's look at our corporate strategy progress. The pillars of our strategy have not changed from our original plan. We see the fiscal 2020 expansion in slots at Haneda Airport as a tremendous business opportunity, and we intend to execute our plan according to the themes for each phase.

At the same time, recent macro environmental issues have caused concern over the global business situation. In terms of the business environment, demand for inbound travel to Japan continues to be firm.

However, Asian carriers and other overseas airlines are expanding capacity of their Japan routes, likely leading to increased competition in the future. Also, we must deal with an issue unique to the ANA Group, namely the engine trouble with Boeing 787s. Given these changes in our business environment, we plan to put the finishing touches on safety, quality and services heading toward fiscal 2020. Having perfected these areas, we will then generate growth moving forward.

Please turn to Page 6. This slide shows our initiatives related to safety, quality and services. In terms of safety, we are dealing with the Boeing 787 engine issues. We implemented planned flight cancellations in the 2018 summer schedule. However, we revised ASK for international routes in the 2018 winter schedule, minimizing the impact on operations. In fiscal 2019, we will give priority to operation stability.

We will limit usage of certain Boeing 787s, conducting upgrades as a permanent resolution. At the same time, we will improve conditions to avoid any obstructions to operations. By fiscal 2020, we will put all Boeing 787s into service, pursuing our growth strategy under perfected systems.

In terms of quality and services, we intend to improve basic quality. This fiscal year, we are making investments in customer convenience as defined in our plan. As one result of our efforts, ANA was recently named #1 among Asia-Pacific major airlines network category and #3 in the world January through December 2018 for on-time arrival performance on domestic and international routes by flight stats incorporated of the U.S.

We have also improved our scores on customer satisfaction surveys. We intend to take a major leap forward in quality to achieve our fiscal 2020 interim goals for punctuality and customer satisfaction, which includes stabilizing our aircraft operations.

Please turn to Page 7. This slide addresses our Air Transportation business capacity. First, let's take a look at the ANA strategy.

The International Passenger business will continue to be a group growth driver, driving revenues and profits. We intend to expand our business in the Tokyo Metropolitan area, leveraging Narita Airport in fiscal 2019 and Haneda Airport in fiscal 2020. Also, we will move forward with our Hawaii strategy by putting A380 aircraft into service. For fiscal 2019, capacity will grow 8% year-on-year, rising another 20-plus percent year-on-year in fiscal 2020.

Further, our fiscal 2020 ASK plan calls for growth of 1.35x compared with fiscal 2017.

The Domestic Passenger business remains our group's largest revenue platform. Here, we intend to utilize smaller aircraft in optimizing supply to demand, while at the same time strengthening products and services to improve profitability further. As you can see in the graph, capacity will remain mostly level through fiscal 2020.

We will accelerate profitability improvements in our international cargo operations by restructuring our network. In fiscal 2019, we plan to introduce wide-body freighters and use alliances with other freighter companies to bolster hub functions in the Tokyo Metropolitan area. We are looking to optimize the scale of our Okinawa hub network, balancing supply and demand. We expect these measures to grow our international cargo operations capacity in step with our International Passenger business.

Please turn to Page 8. Next, I will discuss the ANA network strategy. As announced previously, we will introduce a route between Haneda and Vienna on February 17. Vienna is a gateway to Central and Eastern Europe. By launching a service to the airport base of our joint venture partner, Austrian Airlines, we will expand our network throughout Europe.

On January 23, we announced our fiscal 2019 business plan. This plan calls for launching a Narita-Perth service in September as well as a Narita-Chennai service in the winter schedule. We will enjoy a first-mover advantage in developing new demand.

Further, our Narita-Singapore and Narita-Bangkok routes will be serviced by the 787-10, a state-of-the-art wide-body aircraft. In this way, we can expend supply while maintaining comfort not only for flights to and from Japan but also for the major routes from Asia, which feature strong demand for connections to North America.

At the same time, we also intend to capture demand for higher unit priced services. ANA Holdings will invest USD 95 million in Philippine Airlines, a code share and mileage partner with ANA. This is another step forward in expanding our strategic alliances. As with Vietnam Airlines, with whom we concluded an operating and equity partnership in 2016, we're creating stronger win-win relationships with major airlines in Asia.

These new routes, state-of-the-art aircraft and strategic alliances will expand ANA's coverage throughout Asia/Oceania, raising our competitive advantage.

Please turn to Page 9. This next slide addresses ANA aircraft. First, we plan to put our first airbus A380 into service on the Narita-Honolulu route in May. In July, we will introduce a second A380 to the route, operating a total of 10 flights per week. We've been using Boeing 767 and 787 mid-body aircraft for the Honolulu route. However, the fiscal 2017 load factor was in excess of 90%. This is just one indicator of continuing strong demand for this route.

In the future, we intend to introduce an ultra-wide body aircraft as a game changer in advancing our Hawaii strategy to capture wider-demand segments.

The graph on the upper right shows our Japan-Hawaii seat share results. By the time we have 3 aircraft in operation in fiscal 2020, we expect ANA's share to reach somewhere around 25%.

Next, we plan to introduce the Boeing 777 freighter to our Shanghai route in July and our Chicago route at the end of October. We will leverage our existing cargo network to link China, Asia and North America, capturing greater demand for trilateral cargo.

Further, we intend to actively pursue a variety of products, including oversize cargo, hazardous materials, special items and other items. The ring graph on the lower right provides a breakdown of AT ratio by destination for our International Cargo business. Traditionally, the ratio of cargo to North America has been relatively small, acting as a bottleneck. We plan to introduce wide-body freighters and strengthen our alliances with other companies to raise the ratio of cargo headed to North America to between 25% and 30% by fiscal 2020.

Please turn to Page 10. Next I will discuss our LCC strategy. We plan to complete the merger of Vanilla Air and Peach Aviation by the end of October this year. In fiscal 2019, total capacity for the 2 airlines will rise marginally year-on-year. However, we expect fiscal 2020 ASK to be about 1.3x higher than fiscal 2017.

In March, Vanilla Air employees will begin transferring to Peach. Further, we will convert aircraft while transferring flight operations for Vanilla routes gradually to Peach.

Once the merger is complete, we plan to expand our routes based in Kansai and Narita Airports, entering the mid-range international routes to/from China and Asia in fiscal 2020. The graph on the lower right shows the forecast for ASK per aircraft in our LCC business.

By integrating the resources of each airline to generate efficient aircraft operations, we expect to see fiscal 2020 plan figures at more than 1.2x compared with fiscal 2018. While peach has established a unique marketing presence in the Kansai and neighboring Asian service areas, Vanilla Air has gained recognition steadily in the Tokyo Metropolitan area.

In the future, we will be able to capture demand across a wider range of prices, expanding routes under an integrated brand.

Our aim is to generate greater efficiencies while becoming the leading LCC in Asia.

Please turn to Page 11. Now allow me to address the 2 important resources of aircraft and pilots. First, I will discuss our fleet plan. By the end of fiscal 2020, we forecast a total of around 320 aircraft. We intend to follow our plan in securing the aircraft necessary for executing our future strategy.

Next, I will discuss our pilot resources. The 3 ANA brand airlines are currently developing pilots based on long-term staffing plans looking ahead 10 years. Our policy is to secure and develop a stable base of personnel. Our LCC business has a pressing need for pilots. Here, we've implemented captain-promotion training for first officers. And we will begin in-house development in fiscal 2019.

Our merger in this business will deliver results that include improved labor utilization and more efficient training. Further, looking beyond the scope of our current strategy. We decided to place 2 aircraft orders today to ensure we have sufficient planes to support future growth.

The first is the Boeing 737 MAX 8. This aircraft will be the successor to the Boeing 737-700 and -800 now in operations under the ANA brand. The second aircraft is the Airbus A320neo. We will use this to replace narrow-body aircraft used in our operations, including our LCC business.

These orders will not have a significant impact on cash flow, as we already incorporated them in our initial corporate strategy.

Please turn to Page 12. Next, I will address cost management. The graph at the top left shows ASK and group employee numbers, excluding LCC operations. Compared to the fiscal 2017 results, our plan for fiscal 2020 calls for a 19% increase in ASK for the combined ANA domestic and international routes.

At the same time, we must secure enough pilots and cabin attendants to match ASK. We expect to increase personnel as a whole by approximately 10%.

Over the past several years, we've been hiring personnel ahead of plan. However, fiscal 2020 will be a stage of productivity improvement in response to significant growth in the scope of our business.

As shown below, our unit cost in this context should begin decreasing in fiscal 2020. In the future, we will use AI and IoT for automation and detailed cost management.

Last, please turn to Page 13. Here I want to review our value-creation targets, leading to fiscal 2020. The results of our strategies to date has steadily increased profit levels over the past several years. Having expanded our international network, our operating income has averaged more than JPY 150 billion, and net income has averaged more than JPY 100 billion between fiscal 2016 and fiscal 2018. Meanwhile, we will use fiscal 2019 as a period to complete the finishing touches prior to fiscal 2020. For fiscal 2020, we will leverage increased slots at Metro Tokyo airports into greater revenues. Our goals for fiscal 2020 are operating income of more than JPY 200 billion and net income of more than JPY 120 billion.

We plan to introduce a rolling update to the ANA Group corporate strategy through the second half of fiscal 2019, assuming the allocation of slots at Haneda Airport will be clarified by then.

The ANA Group is creating value toward becoming the world's leading airline group, steadily increasing profitability as we respond flexibly to any change in our environment. This concludes my portion of today's presentation. Thank you for your attention.

[Ichiro Fukuzawa, executive]

My portion of today's presentation will be a detailed discussion of our financial results for the 9 months ended December 31, 2018.

Please turn to Page 19. First, let's look at our financial highlights. Operating revenues increased JPY 77.5 billion year-on-year or 5.2%, reaching JPY 1,568.4 billion. Meanwhile, operating expenses amounted to JPY 1,411.8 billion, an increase of JPY 86.9 billion or 6.6%. We posted operating income of JPY 156.6 billion, which was a JPY 9.3 billion decrease, year-on-year. On a noncumulative basis for the third quarter, we recorded revenue and profit growth, representing historical highs for both operating revenues and operating income.

Ordinary income amounted to JPY 154.1 billion, JPY 9.7 billion lower compared to the same period in the prior fiscal year.

We reached a settlement with the plaintiffs in the Class Action Civil Litigation in the United States, recording approximately JPY 6.5 billion in special losses. As a result, net income attributable to owners of the parents amounted to JPY 106.8 billion, JPY 46.1 billion lower year-on-year.

The difference in net income here was mainly due to a gain on valuation of stocks associated with the consolidation of Peach Aviation during the first half of the prior fiscal year, which totaled approximately JPY 44.0 billion in special gains.

Please turn to Page 20. This next slide shows our financial position. Total assets as of December 31, 2018, amounted to JPY 2,588.6 billion, an increase of JPY 26.1 billion compared to March 31, 2018.

Shareholders' equity was JPY 1,066.6 billion, up JPY 77.9 billion. Our shareholders' equity ratio rose 2.6 points compared with the end of the prior fiscal year, coming in at 41.2%. Although, we are still in fiscal 2018, this was a record high for the ANA Group. Interest-bearing debt amounted to JPY 781.0 billion, JPY 17.3 billion lower compared with March 31, 2018. Our debt equity ratio was 0.7x, an improvement over the end of the prior fiscal year.

Please turn to Page 21. These are our cash flows. Cash flow from operating activities resulted in an inflow of JPY 206.5 billion. Cash flow from investing activities resulted in an outflow of JPY 207.7 billion, mainly associated with capital expenditures for aircraft. Cash flow from financing activities resulted in an outflow of JPY 53.5 billion, mainly due to the repayment of loans, redemptions of bonds and payments of dividends. Substantial free cash flow calculated by subtracting time and negotiable deposits of more than 3 months from cash flows from investing activities, resulted in an inflow of JPY 26.9 billion.

Please see Page 22. This slide covers our results by segment. In our Air Transportation business, ANA passenger business drove rising group revenues and profits for the stand-alone third quarter. The Airline Related and Trade and Retail segments recorded higher operating revenues, mainly due to expanded ground-handling contracts from overseas airlines and stronger airport duty-free sales, targeting inbound travelers.

The travel services segment recorded lower-operating revenues, suffering the negative impact of typhoons and earthquakes on domestic travel sales.

Next, I will discuss our Air Transportation business. Please turn to Page 24. This table shows a year-on-year comparison of operating income in our Air Transportation business. Operating revenues increased JPY 75.3 billion, year-on-year. As you can see all ANA and LCC businesses recorded operating revenue growth. Our International Passenger business experienced significant revenue growth. While our Domestic Passenger business recorded a year-on-year decrease in the second quarter due to planned flight cancellations, natural disasters and other factors, this business delivered revenue growth for the third quarter.

Operating expenses increased JPY 81.4 billion. We've made steady progress in the categories included in our initial plan, including staff hiring, training and measures to improve quality at airports to support future growth.

As a result, we posted an operating income of JPY 149.2 billion, down JPY 6.1 billion compared with the prior year.

In November of last year, the crude oil market experienced a decline in prices. Since a time lag exists before actual market prices reflect purchased fuel prices, we expect to see the benefit on fuel costs beginning in the fourth quarter.

Unit costs are in line with plan, as can be seen on the chart at the bottom of this slide. Please turn to Page 26.

This slide provides data for our domestic passenger operations. The chart on the left shows a net JPY 2.0 billion in change factors that resulted in cumulative revenue growth through the third quarter. The impact of natural disasters, planned flight cancellations and other events taking place, mainly in the second quarter had a negative impact of JPY 1.0 billion on revenues. At the same time, unit price factors, including capturing demand for products with higher unit prices, resulted in a positive impact of JPY 3.0 billion.

More recently, we have experienced solid business travel demand, while seeing a recovery in demand for Hokkaido-bound flights, which was a concern in the wake of the Hokkaido earthquake.

In October of last year, we adopted a new fare system, allowing us to improve yield management to levels greater than in the past.

Noncumulative third quarter passengers and unit prices show improvement compared with the previous year.

This shows the effects of implementing flexible fares in response to reservation trends.

Please turn to Page 28. This slide provides data for our International Passenger operations. The chart on the left shows JPY 49.0 billion in change factors, leading to higher revenues. While a reduction in flights between Narita and Los Angeles, caused by Boeing 787 engine troubles, had a negative impact on passenger factors, business travel on flights to and from Japan and our capture of demand among a wider category of passengers, resulted in revenue growth of JPY 25.0 billion.

Our improved yield management and fuel surcharge revenue increase contributed to revenue growth of JPY 24.0 billion in unit price factors even as we limited capacity to prior-year levels beginning at the end of October.

Please turn to Page 29. This slide shows supply and demand by destination. Third quarter RPK outperformed the prior year in every destination with the exception of North America, where we reduced the number of flights to/from Los Angeles.

We successfully captured demand in Europe, both for flights originating in Japan and those originating overseas. Third quarter load factor for the 6 European routes was strong, averaging more than 85%. Our Haneda-Vienna route, which will launch on February 17, is off to a strong start with an average reservation rate of around 70% through the end of March.

We are transitioning to narrow-body aircraft for certain flights to China.

However, solid demand resulted in a significant improvement in third quarter yield compared to the previous year, continuing a pattern established in the second quarter.

Please turn to Page 34. This slide provides data for our international cargo operations. We recorded JPY 10.5 billion in change factors leading to higher revenues. Under weight factors, we continue to engage in unit price focused marketing measures implemented during the second quarter.

Meanwhile, unavoidable cargo load limitations on certain European routes, caused by engine troubles with the Boeing 787, resulted in a negative JPY 7.0 billion impact on revenues. Although, we did not see much impact from U.S.-China trade friction as of the end of the fiscal third quarter, we will be keeping a close eye on future developments.

Unit price factors had a JPY 17.5 billion positive impact on revenues. These factors included higher prices on routes to/from Europe and the U.S. as well as our capturing more demand for the relatively higher-unit priced export/import cargo.

The graph on the right shows overall demand for export/import cargo and ANA Group performance. The light blue line indicates changes in unit prices year-on-year. Continuing from the first half of the fiscal year, we enjoyed growth of around 20%.

Please turn to Page 35. This slide provides data about our LCC operations. The data here is a combined total for Peach Aviation and Vanilla Air. Operating revenues amounted to JPY 69.2 billion, up 7.5%. Load factor for the combined airlines remained high at 86.0%.

On Page 36, you can see the performance for each airline individually. This concludes my presentation thank you for your attention.