Cathay Pacific Airways Limited (OTCPK:CPCAY) Q2 2022 Earnings Conference Call August 10, 2022 2:00 AM ET
Company Participants
Andy Wong – General Manager-Corporate Affairs
Rebecca Sharpe – Chief Financial Officer
Ronald Lam – Chief Customer and Commercial Officer
Conference Call Participants
Andrew Lee – Jefferies
Chen Li – Morgan Stanley
Operator
Good afternoon. Welcome to Cathay Pacific Airways Limited 2022 Interim Results Analyst Briefing. Thank you for joining us. Before we begin, allow me to introduce myself. My name is Andy Wong. I’m the General Manager, Corporate Affairs for Cathay Pacific. We’re delighted to be holding the analyst briefing in person once again. It is a pleasure to see you all here.
With that in mind, I would like to introduce our speakers; our Chief Financial Officer, Ms. Rebecca Sharpe; and Chief Customer and Commercial Officer, Mr. Ronald Lam, who will be joining us remotely today.
We’ll begin with the presentation by Ms. Sharpe, after which, we’ll open the floor to questions. Those of you attending in person would have been given a copy of the presentation slides at the reception. Those joining via webcast would have received a copy via e-mail.
So without further ado, allow me to invite Ms. Sharpe to begin the presentation. Thank you.
Rebecca Sharpe
Thank you. Thank you, Andy, and good afternoon, everyone. Or indeed, I think we have got some people online. So maybe it’s good morning or even good evening and welcome. I’d like to add my welcome. This is the first physical briefing I’ve got to do since becoming CFO 18 months ago. So it’s great to see you in person, much more sort of interactive as they were. Now I did say when we met virtually back in June at the last briefing, that things were starting to feel a little bit brighter. And I think this is still holding true today.
We welcome the Hong Kong SAR government’s announcement earlier this week regarding the adjustments to quarantine arrangements for the inbound arrivals entering into Hong Kong. These adjustments are definitely positive steps to help facilitate travel into Hong Kong for our passengers. And we are asking the government to urgently provide a clear road map to help show how the complete removal of restrictions for both crew and passengers can be removed as soon as it’s feasible, such that we can protect Hong Kong’s international aviation hub status going forward.
Sorry, I need to press the button harder than I thought. Okay. So today’s presentation will follow a similar structure to previous presentations and briefings. Firstly, a reminder of the ongoing responses to the very dynamic and uncertain times that we do actually continue to operate in. Secondly, financial and operating figures for our first half of 2022. And thirdly, some commentary on outlook. And then, of course, we’re happy to take questions.
And before I move on, you may wonder this picture that I’ve got on the slide, the nine people. These are nine amazing Cathay people, but just nine of the many, many thousands of amazing people that are working at Cathay these days. And I’m not sure whether any of you have seen the Cathy stories on social media. And I’m not sure whether they do actually play before we came in. But we’ve created some Cathy stories about the amazing things that our people have done in support of customers or in support of the operations through these very, very difficult times. So. I would encourage you, if you haven’t had a chance to look at any of these, please do take a look because it gives you a bit of a feel for some of the things that the great people in the Cathay team have been working on through the difficult times that we faced over the last 2.5 years.
So if I start at the beginning with some of the headline figures, for the first half of 2021 compared to the first half of – sorry, for 2022 compared to first half 2021. And I’ll begin with revenue. So revenue for our first half was HK$18.6 billion. This was a 17% increase on the same period in 2021. And you’ll see some analysis in later slides, but both passenger revenue and cargo revenue did increase compared to the first half of 2021. Our Group’s attributable loss at the bottom of this slide was HK$5 billion for the first half. Now that’s still a substantial loss, but it is improvement, nevertheless.
The third P&L-related item that we’ve included on this slide is in the middle there, the HK$2.5 billion loss we show and that represents Cathay Pacific plus the subsidiaries. So the improvement at that level in our sort of the constituents that make up our consolidated loss was greater, approximately 60% down on where we were a year ago in the first half. You’ll see the drivers again for these different elements as we go through the presentation.
On the right-hand side of the page, we’ve got the liquidity and gearing numbers. So this obviously continues to be a very key focus for us as an organization. We completed the end of June at a balance of HK$26.7 billion in terms of available liquidity, which was slightly lower than where we were at the end of December. If you remember, the December number was HK$30.3 billion. And at year ago, June was HK$32.8 billion, but it still remains at 26.7%, a healthy elevated number. And the gearing at June was 0.74, quite a step change from where we were at June last year, but relatively similar to where we were at December of 0.75.
Now I’ve shown this slide many times. We were hoping we didn’t need to repeat it so many times but COVID has obviously gone on far longer than any of us expected. We have changed it a bit in that we’ve dropped the 2020 data on – off rather. But I hope this provides a sort of snapshot, that’s easy reference for you all in terms of some of the things we’ve been doing over the period.
The key point I’d like to highlight here is on the fleet. So on the right-hand side of this slide, at the end of June, we had 228 aircraft, of which 69 were parked either in Hong Kong or overseas. And you can see compared to where we were a year ago, that’s a reduction of 20 aircraft that were parked. Now half of these have returned to our fleet and half have either been lease returned or retired. But again, a sort of a positive step in the right direction.
In terms of capacity, operating cost and liquidity, we will cover those in the later slides, so I won’t dwell on them here. But the 1 thing I did want to call out under liquidity was around the operating cash. And that was in – towards the end of the first half of the year, we did become operating cash generative. So despite the very, very difficult start to the year where we were not operating cash generative, towards the end of the first half, we did become so. And that was based on the – you’ll recall that from the 1st of May, some of the restrictions were removed and the travel sentiment definitely picked up from that point.
So if I move on to the first half results in a little bit more detail. And this slide sets out the key elements of the consolidated attributable loss split by the half year period. Now we’ve also added a graph on the right-hand side, so for people who prefer diagrams rather than numbers, you can take your pick. And in the graph, again, we also show the split between the different key elements of our consolidated loss in terms of the airline, subsidiaries, associates. Of course, it is disappointing to see that we are still in a loss-making position, especially after the fact that the second half of 2021, we were profitable.
However, you can see from the graph in terms of comparison with the first half of 2020 and 2021, this is at an improving trajectory despite the impact of the capacity reductions in the first half of this year due to the tightening of the restrictions. This reflects our continued focus on revenue maximization and prudent cost and cash management, and of course, the continuing strong performance of the cargo business.
You can also see that improvement that I referred to earlier at the airline-only level. So the first line on this table is the Cathay Pacific loss before associates or subsidiaries. And you can see that big step change from the HK$5 billion that was the loss in the first half of 2021 and the HK$1.5 billion loss in the first half of this year. This slide is to put those figures in a bit of context over a longer period. So this depicts five years, including 2022 and shows, again, the analysis between the different elements of the airline, the subsidiaries and associates.
And you can see again, the improving trajectory as we go across these three-year periods. So another positive point to note for the first half of 2022 was that there were no impairment adjustments or one-off adjustments. For example, we’ve had restructuring in the past and other one-offs. And you’ll recall that in 2020, both halves and 2021, both halves, we had to make adjustments of this nature. And therefore, for the first half of 2022, this is definitely a positive step in the right direction that none were deemed necessary.
So this slide shows an analysis of the major changes between the HK$7.6 billion loss in the first half of 2021 to the HK$5 billion loss at the end of the second – the first half of 2022. And you can see the positive benefit in terms of variance that the one-offs created, i.e., to not having them in this first half. And you can also see here the improvement in the bottom line effectively of passenger and cargo revenue. So both of them increased. You’ll see a bit more detail later in the slides. But the passenger revenue increased more so. And we do need to bear in mind that passenger is operating at really, really low levels.
So whilst this is a big number in normal times, when you’re talking much, much bigger numbers of billions, HK$1.3 billion would be nothing, but it is a step change for us in terms of the revenue number for passenger. The other aspect that you can see in here is the negative for associates. So I touched on that they were a bigger proportion of the loss in the first half of 2022 than they were in the first half of 2021.
If I turn to the balance sheet in terms of liquidity. This slide sets out our adjusted net debt position over the past few years and the debt-to-equity ratio across the same period. And you can see that the net debt position has reduced over the first six months of this year. Looking at liquidity. This slide sets out our liquidity journey. Again, we’ve shown this before. Over the past two years, sort of from pre-COVID to bringing up to date, you see the impact, the cash inflow of the recapitalization in 2020. And the liquidity balance at 30th of June, as I said, was HK$26.7 billion, a little bit lower than where we were at the end of December. And this just as a reminder, includes both liquid funds and the undrawn facilities that we have committed to us.
And I know a number of you asked me about this, but that undrawn facilities does include the HK$7.8 billion bridge loan from the government. We’ve not drawn that facility this year, but it does provide us with flexibility and support in having it available to us. And so we were very grateful to the Hong Kong SAR government earlier this year when they agreed to extend that drawdown period for a further 12 months. So that takes the drawdown out to June 2023. And then you’ll recall, we have a repayment period of 18 months. So that then takes us through to December 2024 in terms of the facility as a whole.
In this slide, we’re mapping the liquidity balance at the end of last year through to the liquidity balance we’ve got at the end of June and showing the key flows in that time frame, key categories of flow. So I guess a couple to highlight here. You can see the strong cash inflow from operating activities in the first half. And a large proportion of that was actually generated towards the end of the first half. As the travel sentiment improved and the travel restrictions and adjustments came into were adjusted on the 1st of May.
In terms of financing, you will all be familiar with the volatility that we’ve seen in the markets over the past, well, from the end of last year and through into this year. But despite that, we did manage to raise over HK$4 billion in new financing during the first half of the year in support of our business. As I’ve talked on this before, sort of if we can raise financing at a reasonable cost, given the uncertainty of the environment that we’re still operating in, then we do continue to do that.
And a question that I’m also asked is around sort of our approach and whether that will continue. So liquidity at the moment is, we believe, at a healthy elevated level. I would normally have these kind of levels on a day-to-day basis. But the environment that we found ourselves in is very dynamic as we saw at the start of this year. And therefore, we are wanting to continue for the time being with elevated levels. So we will continue to talk and review different financing options such that if they are available at a reasonable cost, we’ll consider taking them onboard.
The final topic I just wanted to cover in this section was related to ESG. You’ll recall we started including some information about this in connection with our annual results briefing back in March. And two of our very ambitious goals in this area are our commitment to net-zero carbon emissions by 2050 and a slightly nearer-term goal, our ambition to use 10% sustainable aviation fuel in our – in terms of proportion of our fuel consumption by 2030.
So in conjunction with these targets, we launched Asia’s first major corporate sustainable aviation fuel program in April of this year. So this is where eight corporate customers have participated and we uploaded a small amount of sustainable aviation fuel for the first time at Hong Kong International Airport. This program has provided customers with the opportunity to reduce their carbon footprint, either if they’re a corporate customer or they’re carrying airfreight with us by contributing to the use of that sustainable aviation fuel on a Cathay flight at the Hong Kong International Airport.
The other thing I wanted to highlight here because I know quite a few of you ask questions on the ESG space. So I did want to remind everybody that we did publish our 2021 Sustainable Development Report back in May this year. And that’s got a lot of information on all that we’re doing in the areas of ESG. So if you’ve not had a chance to look at that, please do take a look and we can, of course, answer any questions at a point in time. And last but definitely not least, in June of this year, we secured the first sustainability-linked aircraft financing for one of our Airbus A321neo aircraft that were delivered. So that was a first for us, but a good step.
Now if I move on to talking in a little bit more detail about the operations. My first slide is not my favorite slide, but we, again, have shown this one before because I think it does sort of in one slide, if you like, capture the challenge that all of us have been facing here in Hong Kong. So just to remind people, the dark green and the lighter green that you can see to the left was back in 2019, and these are passenger numbers into Hong Kong airport. And the dark green being Cathay, lighter green being other airlines.
And then you can see the dramatic reduction in passenger numbers into Hong Kong from sort of February-March 2020. And that little sort of green line that you can kind of see along the bottom is the numbers that we’ve seen in 2021-2022. We’ve added an inset graph because we want to highlight sort of how that is changing. And the positive to note from this slide is particularly as you can see from the May-June period, the passenger numbers did tick up quite significantly, albeit they’re still a tiny, tiny fraction of what we used to see coming through Hong Kong.
So how is this related to Cathay specifically? You can see on this slide that the number of passengers we carried in the first half doubled – more than doubled compared to the first half last year. So that’s the fourth line down in terms of the 335,000 passengers. But again, I talk about it doubling that sounds great, and it is, but of course, it’s a fraction of normal times. And this, despite the fact that our capacity, because of the tightening restrictions in the early part of the half reduced by 26%.
So as you can see there, the load factor, of course, as a result, was much more – was much more significant than it has been in the first half of 2021. And also this delivered an improved revenue passenger kilometer number there, again, over 100% of an increase. But overall, all in the first half, just to sort of put it in context, as a percentage of the pre-pandemic capacity, we averaged 4%. Now that did increase in June, similar to those charts you saw for Hong Kong passengers, but the average for the half was 4%.
Here, we map those key metrics sort of across periods, so you can see a bit of a trend in these numbers. And you can see that reduced capacity that I mentioned. So in first half of 2022, the capacity was actually the lowest that it’s been over this time period. And however, you can see, as I also touched on the step change in the load factor, obviously, not back to the first half of 2020 levels yet. And you’ll remember the first half of 2020 was a little bit different in as much as January and into February, we were still carrying quite high numbers of passengers. So getting closer to those levels in the first half 2022. And yields remained at elevated levels in the first half being a little bit higher than they were in the second half of last year, but still at elevated levels given the much lower capacity that we’re operating with.
Now cargo performance. This part of our business continued to perform strongly. We saw a revenue increase of 9.3% compared to the first half of 2021. And this, again, was despite a reduction in capacity. So we had a 31% reduction in capacity, you can see there on the second line of this table. And that was – the reduction in capacity, of course, was due to the tightening of the requirements in the – I think it was a very late December in terms of the crew quarantine requirements. So the absolute amount of cargo we carried was not too dissimilar from the first half of last year. And that – but the revenue tonne kilometers did reduce and that’s because we were carrying more only regional flights as we manage the capacity that we had through the first half.
And in addition to the capacity we operate, as I’ve touched on, I think, before, the capacity we operate on the freighters and the bellies of our passenger planes, obviously, that was restricted with the capacity reductions, but we do still continue to operate cargo-only passenger flights as a way of increasing capacity. And the six Preighters that we have that we still are operating. You’ll recall, we refer to a Preighter, which is a passenger plane where we’ve taken out some of the economy seats so you can carry cargo in the cabin. So we are still using those as a way to boost our capacity.
Again, similar to the charts for passenger data. This slide sets out the capacity load factor and yield for cargo. So again, you can see the trends. And it’s a somewhat similar story to the passenger part of the business. You can see the capacity reduction to even lower levels similar, the lowest across the whole period. And again, in terms of load factor, a slightly different story to the passenger story in that, that reduced a little bit. It was affected by some of the supply chain issues that we’ve seen in the first half of the year. And finally, yield in the same way as capacity was the lowest in this particular half, yield has been the highest in the past 3.5 years. And that’s reflecting that supply-demand imbalance that we see driving in sort of basic economies of supply and demand driving the yield higher.
If I then turn to operating costs. So cost management, our effective cost and cash management still remains a very, very key focus as is for any business at any time, but particularly so for us. You can see that the costs in total in absolute terms, excluding fuel, the fuel is on a separate page, have come down. Now part of the driver for that, of course, is capacity reductions. And the other aspect of that as well is you can see the impairment and restructuring one-offs that we had in the numbers last year that this year, we haven’t got. So I’ll cover these in a little bit more detail on the following slides.
If I start with fuel, this, of course, is our highest operating or largest operating cost as a business. And as we all know, fuel prices are very high at the moment and have been for some time. And we can see this in the increase in our gross fuel cost. So you remember the capacity is reduced but the gross fuel cost has gone up, and that’s reflecting the historical prices of jet fuel.
You can see in the chart on the top left that the price from December 2021 up to June 2022, that increasing jet fuel price. And the chart on the top right, you often ask me about this in terms of our fuel hedging profile looking forward from 30th of June. And you can see the bars reflect the hedge cover that we’ve got in place and the line reflecting the strike price that we’ve got that cover in place at, set out on a quarterly basis. Overall, our fuel costs increased and that is despite the reduction in capacity and despite the relatively significant fuel hedging gain that we achieved.
Now another question in connection with fuel hedging that I’m often asked is about our fuel hedging policy. So we do have a fuel hedging policy that we continue to follow. There’s no change to this. I can confirm that we have it in place and we follow it. It’s very prudent. It sets out the clear pricing metrics that we follow, dependent on the price of the fuel, the consumption we forecast. And based on that, we then execute accordingly. So yes, just to confirm, we are still operating our fuel hedging policy.
Interest. We’ve added a bit more detail here because, obviously, in the current environment with the interest rates going up quite dramatically, I wanted to share a bit more information on our position with respect to this. So the chart on the right just sets out the net financing charges that we’ve incurred over the past few years set by half. And so you can see that for the first half of 2022, the net financing charge is very similar to the cost of the second half of 2021. And then the chart on the right is one that I shared a similar one at the June briefing in terms of the fixed and floating rate as we have on our borrowings.
So the bar, the lighter color at the top is the fixed rate proportion and the darker bar at the bottom being the floating rate. And we do, on an ongoing basis, try and keep a proportion of our borrowings on – with fixed rates in order to mitigate that risk of – or exposure to the fluctuating interest rates. So just to share sort of that is obviously information in our interim report as well, but we’ve added that here because I know, again, it’s a hot topic at the moment.
So this chart I think is the final chart on operating costs, just maps those total operating costs from the first half of last year to the first half of this year. You can see that net fuel cost increase there, not too significant. Staff costs and some of the other costs are driven by changes in capacity, but also there were less in terms of total head count in the first half of this year versus first half of last year. Aircraft maintenance tends to be a bit cyclical. So some of that will be a little bit lumpy as it comes through the P&L, but also affected by capacity because some of the things, if you think about line maintenance driven by the number of flights you’re operating. And the other items, the negative there is an exchange loss on our U.S. dollar borrowings. So suffice to say, overall, in terms of our operating costs, they did come down compared to the first half of 2021.
So having talked through the Cathay Pacific airline figures, the next couple of slides just give some very, very brief commentary on our subsidiaries and associates. Starting with our low-cost carrier, HK Express, which did make a significant loss in the first half of HK$0.8 billion, albeit this is again an improvement on where we were a year ago. They’re currently operating to six destinations. Of course, that’s also a fraction of what they would normally be operating. And they to continue with the cost preservation and cash optimization initiatives in order to manage until we can start the recovery in earnest.
As has been the case throughout the whole pandemic, the operations of the other major subsidiaries typically follow the passenger or the cargo story. So Air Hong Kong being our fully or 100% freighter operation, it’s all cargo focused. They do reasonably well during these times that are more challenging for the passenger side of the business. So the other parts of the – in terms of subsidiaries, sorry, the service, airline service subsidiaries we tend to refer them to, they’re driven by passenger. So with lower passenger numbers coming through the operations, their numbers have not been so good.
Finally, in this section of the agenda or major associates. So a reminder that Air China and Air China Cargo are our two major associates. We have other smaller ones, but these are the 2 significant ones. And for both of them, we capture their results three months in arrears. So the numbers included in our first half 2022 figures are their numbers from the 1st of October 2021 through to the 31st of March 2022. And as I noted at the start of this presentation, approximately half of our loss or consolidated loss for the first half of this year was the results from associates.
Moving on to the final section before opening up for questions with some commentary on outlook. Now I know you’d all love me to be able to tell you exactly what will happen for the rest of this year and beyond. But I think we all know, particularly having experienced and lived this past 2.5 years through COVID times, the uncertainty and dynamism of the world that’s going on around us is, yes, too hard to predict. And in addition to the COVID situation, we now have high fuel prices, increasing interest rates, potential talk of recession in different parts of the world and inflation, of course, being reported. So it’s an interesting time that continues here we say, and my crystal ball is not working very well, but we are preparing for recovery. Now there are many different aspects, of course, to preparing for recovery as an airline. But the key elements are people and planes.
So we’re gradually starting to bring the aircraft that we’ve had parked overseas back. They need to go through maintenance checks, but we have a plan to progressively bring them back over time, subject to the direction of the capacity projections. And in terms of people, given the lead time that is needed to recruit and retrain people, we have to plan for this in advance. So we are starting to execute a recruitment plan. You’ve probably seen some of the commentary on that in the media includes several thousand frontline employees and for Cathay Pacific specifically, about 4,000 and this will all happen progressively. It’s not sort of happening tomorrow. But subject to the operating environment, we have sort of started to execute this plan and we’ll build up accordingly. And that’s all needed, of course, to support the travel and cargo outlook.
So in terms of outlook on the passenger side of the business, our capacity remains constrained and this is because of the COVID-related operating constraints. So these constraints have placed an enormous burden on our pilots and cabin crew and their families and restrict our ability to mount additional capacity despite growing demand. We are seeing positive signs in terms of the sentiment for travel. We’ve got a significant backlog of retraining that needs to happen for our crew.
Many of them haven’t flown for over a year and this backlog cannot be adequately addressed until the constraints around how we fly can be removed. So this, combined with other operational complexities means our capacity can only be gradually improved or increased over a period of several months once these constraints have been removed. So it will take time for us to build that capacity back. And this is why we very much welcome the announcement, as I mentioned by the government earlier this week that the quarantine rules are being altered.
So moving down to less time for passengers in hotels. But we would like to see a clear road map, which sets out the complete removal of all these COVID restrictions for our aircrew and for the passengers, such that we can get back to normality as soon as it’s feasible. So based on the current operating constraints, the numbers we’re talking about in terms of capacity are 25% on the passenger side of our business by the end of this year if things continue as they currently are in terms of the operating constraints.
In terms of our cargo outlook, we do anticipate this imbalance we’ve seen between supply and demand is continuing, albeit the amount of passenger belly space is starting to increase as other airlines globally are mounting more passenger flights. And that will start to put some pressure on yield and load factors as we move forward. We did resume our full freighter capacity back in June. And that will be further supplemented as we increase the passenger capacity, obviously, that brings more belly space, so that will support cargo and the increasing flight frequencies that, that capacity will bring.
So it supports the cargo part of the business as well. And we’ll continue to operate the cargo-only passenger flights as a way of maximizing our capacity. So overall, in terms of cargo performance in the second half, we are expecting – projecting a solid peak performance. You’ll recall that the second half of the year is typically the stronger half for cargo performance.
In terms of Cathay, so this is our relatively new premium travel lifestyle brand. There has been a number of shopping, dining, credit card initiatives launch that you may have seen. A couple to perhaps just bring out or highlight is we launched a new wellness proposition earlier this year. And so this has got two key elements; a wellness journey, which is a new and interactive feature on the Cathay lifestyle app. So you can now link your health tracking device and receive a health score and earn miles at the same time. So I hope you’re all doing that.
And we’ve also got a collaboration with Cigna Hong Kong, where we offer an exclusive insurance product through the Cathay website, again, that you can earn miles through doing. And the second one I wanted to highlight here is the customer relationship program that we’re hoping to launch later this month. So this is where we’re going to bring the best of Marco Polo Club together with Asia Miles and create one sort of simpler platform to make – easier for people to earn their miles, burn their miles in one place. So we look forward to seeing that later.
My final slide in this outlook section is on cash. I think this is also a top question for all of you. So this sets out – we showed this before, the declining trend, so sort of stepping down through the halves over the past 2.5 years to the point where in the second half of 2021, we were cash generative marginally, just slightly. But as you can see, the next bar for the first half 2022 gone back the wrong way slightly because the impact of the restrictions we saw in the first half of this year did mean that our operating cash in the early part of the half was obviously cash burn. But as I said earlier, in the – as a result of the travel restrictions or adjustments changing and the improving travel sentiment, we did see cash becoming more positive such that we were cash generative towards the end of the half. And we are targeting to be cash generative going forward.
So my final slide before we open to questions, summarizes the key metrics here, sort of try to give you in one page our key metrics with a bit of a trend or history. So attributable profits or losses, our average monthly cash flow across this period and our liquidity balance. And we note to the bottom of each of those boxes for your easy reference, the sort of key point about our outlook expectation against each of those metrics. So I guess the key highlights for this first half will probably be reduced losses. So the losses have reduced compared to where we were a year ago.
Another positive, I think, isn’t the fact that we didn’t need to make any impairment charges, no one-off adjustments have been put into these numbers. And the fact that we became cash generative again towards the end of the first half, again, another positive. And liquidity, whilst a little bit lower than where we were at the end of December is still at a very healthy level for our business.
And none of this, of course, could be achieved without the support and continuing support of our customers, which I hope all of you are, so thank you. Our shareholders, of course, their support a Hong Kong SAR government. And of course, our people. None of this will be possible without them. Their determination and resilience in keeping the airline flying and doing quite able things is definitely something that we’re sincerely grateful for. So an opportunity to say thank you to them. I won’t ask you to clap.
And as we get our teams ready to meet the demand for travel, as we are starting to see these green shoots and we begin to execute on bringing the planes back the recruitment, retraining, getting people current again. The recovery definitely feels like it’s a little bit closer. But we are still hampered by the restrictions that are in place at the moment. So the capacity won’t, as I say, be able to change much more than the 25% and we won’t be able to, 25% is what we can achieve on the passenger side of the business and 65% on the cargo side of the business by the end of the year, operating under the current environment.
So we do remain very, very confident in the future of our airline. We’re obviously, yes, still facing short-term challenges. And we do welcome a road map from the government to help us see clearly sort of a pathway to removal of the quarantine restrictions for our air crew and for passengers as soon as it’s feasible. But saying that in terms of the longer term, our confidence in the longer term remains the future of Cathay Pacific, Hong Kong as an international aviation hub, definitely, for sure. We’re extremely confident and we remain as steadfast about that confidence as we ever have been.
And at that point, I’ll stop and open up for questions.
Question-and-Answer Session
A – Andy Wong
So thank you, Rebecca. And also thank you, Ronald, for joining us online. So now let’s open the floor for questions. Can you raise your hand and I’ll call on you and our colleagues will give you a mic. Please state your name and organization before asking the questions. So any questions? Gentleman on the left. Thank you.
Andrew Lee
Hi. Thank you. Good to see you face to face, again. Andrew Lee from Jefferies. Three questions. Passenger yields in the first half was very high and you’re going to bring back more capacity, right? So a 25% target by year-end. Would that lead to some pressure on passenger yields into the second half? That’s my first question. Second question is on bringing back the parked planes. Could you give us a little bit of guidance in terms of how your costs and which costs would increase as you bring back more planes? So I assume it’s like more maintenance costs. Third question I have is on the deferred dividend on the preference shares, under what scenario would you need to basically start paying this dividend back? Is it based on profitability? Just a little bit of guidance, please? Thank you.
Rebecca Sharpe
Okay. Thank you, Andrew for your questions. I’ll ask Ronald to do the passenger yields, but I can perhaps start in reverse order, maybe with the deferred dividend. So yes, we have announced that we will be deferring the dividend that is due this month for the preference shares. The reason for doing that is as part of our prudent cash management. So the understanding or the agreement is that sort of we are managing our cash position. And whilst, yes, this is something I perhaps want to sort of share.
Definitely, we’re seeing positive shoots. But things are still uncertain. The capacity levels that we’re operating at the moment are pretty low compared to parts of – other airlines in parts of the world. So under that sort of premise, we’re looking at the cash flows and determining that it’s not the right time for us to start paying. We do have some flexibility with when we do that. And it is tied to effectively the cash flow projections that we would have as to what – that would be that would determine when we believe it’s affordable for us to start repaying them.
In terms of your parked plane question, yes, you know the answer. There will be impact on maintenance costs. So depending on how long the planes have been parked, what stage they are at in their life. So whether they’re due one of their major checks or minor checks. But yes, there will be some impact on maintenance costs as we start to bring them back. So depending on – I mean, it varies plane to plane depending on what it requires. But yes, that will have an impact of some – to some extent, not huge. But yes, there is an impact on aircraft maintenance. But I’ll let Ronald answer the passenger yield question.
Ronald Lam
Thank you, Rebecca. On the passenger yield side, in the first half of the year, we are under very special demand and supply situation. So I wouldn’t read too much on the yield trend being the long-term yield trends. So we expect to get back to a more normal level as we recover more. It’s pretty hard to predict the yield for the second half because it really depends on a number of factors, including ticket prices, but more importantly, what kind of routes do we resume because yield is a function of the mix of different long haul and short haul routes together. But I wouldn’t expect the yield situation in the first half, which was very exceptional to continue for the long run. Thank you.
Andy Wong
Rebecca and Ronald, thank you. Next question.
Rebecca Sharpe
No questions? Does that mean I talk too much.
Andy Wong
Very, very comprehensive presentation you had.
Rebecca Sharpe
Okay.
Andy Wong
Okay. All right.
Rebecca Sharpe
Andrew, can have another one.
Andrew Lee
Andrew Lee, Jefferies. You mentioned before on the cargo side that you see that there could be a little bit of pressure on cargo yields. Do you mean that second half could disappoint in terms of the peak season? Or do you mean more the longer term where as capacity comes in. So what I’m trying to ask is, is this into next year, you’re talking about the pressure on cargo yields? Are you talking about into the second half, which is now the peak season?
Rebecca Sharpe
So my comment was more general in terms of sort of an overall as more capacity comes back, then there will be pressure. But maybe Ronald might want to elaborate a bit more on the cargo part of the business.
Ronald Lam
Okay. Sure. Well, as we all know, the second half of the cargo market usually is stronger than the first half. And we still do expect to see the same this year. And – but I think a number of economic indicators like PMI start to show softening compared to what we’ve seen in the past 18 months, I would say. So we expect the peak will still be strong and will still be stronger than normal year. But compared to second half of last year, we don’t expect a strong peak this second half of last year. So it’s all relative because last year second half was exceptional. And we expect to still have a strong peak, but not as exceptional as the second half of last year, given the economic indicators worldwide. And the reason behind probably is due to high fuel prices and high inflation and consumer confidence that is affecting the air cargo demand worldwide.
Andy Wong
Okay.
Unidentified Analyst
Hi, Rebecca, this is Caroline from HSBC. I have a question about the cost structure. How do you think and how sustainable is your current cost structure, especially as you start to ramp up the capacity and also recruit more staff for the airline? Then how would that impact the overall cost structure in the future? Thank you.
Rebecca Sharpe
Thank you. That’s quite a big question. So I guess one of the things we’ve got to bear in mind is the cost structure as we sit today is sort of relatively fixed. So logically, as things start to ramp up, yes, you’ll be adding people, but you will also be adding more capacity. So in a sort of very theoretical overview, I would say, sort of I’m not expecting it to sort of double as we double or anything like that.
I’m expecting it to be a sort of curve, if you like, in terms of the cost we need to add in because you’ve got the fixed base that we’re paying already will not be as steep, if you like, in terms of adding the – or the ability to add that more capacity, some of it will be much more variable as we move forward. Obviously, fuel is our biggest cost. So really depends what happens with the fuel price. But yes, the sort of more on the head count, the people cost side of things. As we ramp up, it will be not because we’ve got sort of a base cost, if you like, as we add much more and more capacity that will sort of add incremental cost, if that makes sense.
Chen Li
Hi, Rebecca. This is Chen Li from Morgan Stanley. So I have several questions. The first question is about the capacity plan maybe for next year. So is there any color that you can share to which extent you’re going to resume your capacity on both passenger and cargo front for next year? This is the first question. And the second question is considering there are still some capacity remain parked, will you continue to return your operating leased capacity into next year?
And also I have a question on the fuel hedging. So I mean, if you look at historical results on fuel hedging, sometimes they’re making profit for you, sometimes they make a loss. And considering a majority of your competitors, they do not do fuel hedging. So is there any like discussion or probability that you may change your few hedging policies? Thank you.
Rebecca Sharpe
Thank you for your question. I’ll start backwards if I may. And Ronald can perhaps add a bit of color on capacity when we get to there. In terms of fuel hedging, I would say it’s not correct to say that our competitors don’t fuel hedge. So when we do peer analysis, there’s a mix you’ve got some airlines that do and some airlines that don’t. And in terms of sort of our competitors, we compete with over 100 different airlines on the different routes that we fly.
So when we’ve done analysis, we are not an outlier. So it’s a mix of airlines that do and airlines that don’t. And we’ve got no plans to change our current policy. We’re trying to mitigate the sort of short-term volatility because obviously, ticket prices don’t change straightaway. So we believe it’s a prudent policy to adopt and there’s no plan to change that.
In terms of capacity and aircraft part, yes, I mean the plan is to bring them back as the sort of projections around operational requirements determine. Typically, sort of we need to plan these things a few months ahead in order to get them maintained appropriately. So in terms of saying whether we definitely will or definitely won’t return something or not, I can’t say at this juncture. It will really depend on the operational environment at the time and we make the decision much nearer the time. And maybe on capacity, we haven’t given any indication for capacity for next year. Again, it will come down to the operating constraints that we’ve got here. I don’t know whether Ronald there was anything you wanted to add on capacity for 2023.
Ronald Lam
Sure. As Rebecca mentioned, we haven’t made any projections publicly about the capacity for next year. And the reason is because there’s so much uncertainty facing us still, both on the demand side, how the demand will change and how the traveler’s restriction will change in the coming months will be a key factor. But more importantly, for us is also the supply side. How would the crew restrictions that are constraining us will change in the coming months, if not next year, I think, will be a key driver for how much capacity we will be able to mount on both the passenger and cargo side. But we have every decided whenever possible, whenever supply and demand allows, we will maximize our capacity resumption back to the pandemic – pre-pandemic level.
Chen Li
Thank you.
Andy Wong
Any more questions? Okay.
Andrew Lee
Okay. Final question for me. Can you give me a little bit of guidance about the forward bookings and how strong are they just in the near term on the passenger side?
Rebecca Sharpe
Okay. That’s definitely a question for Ronald.
Ronald Lam
Sure, sure. Well, we’ve been seeing very large minute bookings throughout the pandemic. People are not planning that far ahead throughout pandemic. So the booking has been last minute. But all I could say is that since the Monday announcement by the Hong Kong government, we are seeing some booking that are well advanced say, into the Christmas holidays, New Year holidays, which is pretty encouraging. So it’s probably early indicator that people are gaining back some more confidence about their holiday bookings ahead of time, given the good positive announcement by the Hong Kong government recently.
Unidentified Analyst
Also one question on the load factors you disclosed on different regions. So I notice that for some of the region, the load factors – passenger load factors in the first half has been lower compared with some other regions such as the U.S. and Europe. So just wondering the reason behind that. Is it because of the supply and demand difference or just because of the disruptions of the travel restrictions? And how is the load factors trend after May, maybe in the past two months?
Rebecca Sharpe
That’s a Ronald question.
Ronald Lam
Well, through this year, since earlier this year, I think we are seeing a positive trend on the load factor. As you can see, our overall factor for the first half of this year is much higher compared to first half of last year. That is partly a function of lower supply in the first half of this year compared to last year. But also I think, a positive trend on the demand we’re seeing on many of the routes. In general, we’re seeing demand, I think people’s willingness to travel has increased and not just in and out Hong Kong. But for us, we also carry quite a lot of traffic via Hong Kong using Hong Kong as a transit hub.
So as the rest of the world opens up, the transit via Hong Kong demand certainly has seen a surge based on the little capacity we run, we are seeing more demand for people who are transiting via Hong Kong getting to different places of the world. So I think that played a role in boosting up the load factor. And we expect, hopefully, that the same trend will continue in the coming months. We will see better load factors.
Andy Wong
Okay. With that, so thank you for all your questions, and thank you, Rebecca, and thank you to Ronald. This concludes our briefing today. So a copy of the presentation slides has been sent to all the invited attendees by e-mail and will also be available for download on the Investor Relations page on our website later. If you have further questions, please email them to ir@cathaypacific.com. Thank you very much for joining us. Good-bye.
Ronald Lam
Thank you.
Rebecca Sharpe
Thank you.
Be the first to comment