Cathay Pacific Airways Limited (293) Earnings Call Transcript

Good afternoon. Welcome to the Cathay Group's 2026 Interim Results Analyst Briefing. My name is Ivan Chan, General Manager of Corporate Affairs for Cathay. Whether you're attending in person or online, it's a pleasure to see you all, and thank you for joining us. Introducing our speakers for today, we have Chief Customer and Commercial Officer, Ms. Lavinia Lau; our Chief Financial Officer, Ms. Rebecca Sharpe. We'll begin with presentations by Lavinia and Rebecca, after which we'll open the floor for questions. In case you haven't scanned the QR code at the reception for an electronic copy of the presentation, the slides and the video recording of today's briefing will be available for download at our Investor Relations page of our website later today. So without further ado, may I invite Rebecca to start the presentation. Rebecca, please?

Thank you. Good afternoon, everyone. It's great to be here, and I'll add my welcome to all of you today. So let me move to the agenda. The plan for this afternoon is that I will speak for about 20 minutes or so, and I'm going to cover the results highlights and some of the business performance, more operational metrics. Then I'll pass to Lavinia, who will take us through some outlook and strategy. And then we'll, of course, open it up to questions for all of you. So let's dive into those exciting first half numbers. On this slide, we've got 6 of our key metrics. I will talk some of these in more detail as we go through the presentation. So maybe just to touch on the 3 of them here. Revenue in the first half was $68.1 billion, and that's a 20-plus percent increase from the first half last year. It is also the highest first half revenue on record, just an interesting fact. And as you see as we'll go through the presentation, you'll hear about the background as to what the drivers for that have been. The other one I was going to touch on here is our dividend. So we've announced the first interim dividend for 2026 in the amount of $0.26 per ordinary share. That's a 30% increase on the number that we paid last year. So first half '25 was a $0.20 first interim dividend. And then, of course, the strong results come through in our earnings per ordinary share at the bottom over 75% of an increase that you can see there. So the strong performance that you see in these numbers presented today, I think a testament to the resilience that as an organization, we've built into our operations over the last few years that's enabled us to weather a very challenging, particularly second quarter of this year. This slide, you've seen it before, is the summary of our profit numbers, but we're looking at it at different levels. So you can see there we start at the line that without any nonrecurring items and without any associates. So you can see that at the Cathay level with -- before all these sort of more one-off or other items, we've increased by about HKD 1 billion. And then you can see that we had nonrecurring items. You'll have read about that in the traffic report as well. I'm sure the major one in there was a $1.4 billion gain on deemed disposal when Air China did an A share issuance in June, and that diluted our shareholding from 15.09% down to 12.85%. And then we've also got the share of associates number in here. You can see we've seen an improvement in that number, too. That the biggest associates we have in that number are Air China and Air China Cargo. And just a reminder that we capture their results 3 months in arrears. So their numbers included in our first half are their Q4 number and their Q1 number. So they haven't got any real Middle East impact in those numbers just yet. We'll see their Q2 number in our second half figures. And then yes, at the bottom line, a profit for the first half at the consolidated level of $6.2 billion compared with the $3.7 billion that we made this time last year. So then this chart is looking to map last year's $3.7 billion to this year's $6.2 billion. And as you can see on the chart, there's quite a few large variances amongst this road map. So on the revenue side, $10.1 billion for the customer travel business, the premium travel business that's added to these numbers, a combination of capacity change and strong demand. The cargo business has contributed a $2.9 billion variance. But then, of course, you can see a couple of large red bars in terms of the cost side. You'll be not surprised to know that we've got a negative impact in our numbers of $8.6 billion on fuel costs. Some of that's capacity related, but of course, the biggest portion relates to the fuel price increase that we've seen. And then other operating costs, they've also increased. Again, some of that is capacity related, but some of it is cost increases. So suffice to say that's what takes us at a high level down to -- or up to rather our $6.2 billion profit for the first half of 2026. So if I dive into that fuel question because I know you're all going to ask me about fuel. So let's talk a little bit about fuel. Of course, there are 3 key elements to fuel. We increased our consumption. Our capacity increased, as you'll see on some of the later slides. So of course, that drives an increase in cost. We have got a hedging gain in our first half of HKD 0.9 billion. But the biggest driver by far and away in our first half is the increase in the jet fuel price. You can see there overall for the first half, a 45% increase in our inter-plane cost. As usual, on the right-hand side of this chart, you can see our fuel hedging profile. And this is the position as at the 30th of June. So you can see that roughly, roughly for the next 12 months, we've got more just over 30% hedged. We hedge, as I talked last time, rent and our fuel hedging policy remains unchanged because that's another question I always get. It's not changed. So if I then look at operating costs at a company level, but ignoring the fuel, although fuel is on here, we're showing you the fuel number plus the other operating costs. And of course, they've gone up. Even the operating costs have gone up even if I take the fuel out, so that's the dark green bar at the bottom. And over to the right, whilst, of course, these increases are related to capacity increases, they're also related to some other factors. As you can see in our cost per ATK, that number has gone up as well. And this is -- there's probably 3 key elements to the increase in our cost per ATK. We've got the sort of uncontrollable costs, so things like overflying costs increasing or landing and parking costs increasing in different parts of the world. You've also got some timing differences in here. So for example, this year, in the first half, we've had more maintenance requirements being undertaken. So that has a slightly higher impact in our cost per ATK this year. And then we've got things where we've consciously spent more money. So investing for our customers. So our lounge we've opened the Wing, First this year. We've had the Beijing lounge open now for the sort of full first half open partway through last year. Those cost increases for running the lounges. And then also investing in our dining proposition. We're really looking to, of course, delight our customers. So there has been more investment in our dining proposition on board, and that drives a little bit into the cost per ATK. And then over and above that, of course, in the current economic environment, inflation is always there on different elements, different parts of our cost base. So I would be remiss to not mention there is an element of inflation here, too. Turning to financing charges. You can see the big story here is the dramatic reduction in what we spent financing our business in the first half of this year compared to the first half of last year. So the cost or the net charge to the P&L has gone down by 26%. And the key drivers of that are, we've got less debt. Our strong result last year, of course, puts money or enables us to repay some of our debt. We also benefited from the lower interest rates that we've seen since the first half of last year, although not sure where that will go this year. And the other element is having more cash around us enables us to put it on deposit and earn some interest there, which offsets the interest you pay. So a number of factors supporting that drop in interest charges for 2026 first half. Chart on the right is more for your reference. A number of people ask me about that. This is our split between fixed and floating rate borrowings. So I've said before, we generally like to try and aim to keep it around 50-50 and the balance at the end of June, not that different from the balance we had at the end of December. So while we're talking about financing numbers, let's look at cash. So similar to the waterfall or road map chart we had for our profit numbers. This chart maps our liquidity balance at the start of the year to the end of June. And you can see that it's not too different in absolute terms, $25 billion coming down to $23.6 billion at the end of June. And you can see the key drivers in there. The inflow we've seen from net operating activities, $13.7 billion, driven by the strong financial or profit number. That is a couple of billion higher than we saw in the first half of last year. I think that number was $11.2 billion. And then you can see what we've done with that money. So the financing, the ins and outs, we draw loans, we repay them. So you can see that kind of stuff on the right-hand side. Maybe the key ones to mention there are the dividend. So we paid the second interim dividend related to 2025 in the first half of this year. So that's the $3.9 billion number there. And then, of course, the Qatar share buyback. You may remember, I talked at the end when we did the annual results briefing about the reason we had the sort of higher or elevated liquidity at the end of December was so we could pay for the Qatar shares. That was a $7 billion outflow. So you can see in this first half map that coming out there, too. So at the end of June, we've got $23.6 billion in our liquidity. So that is cash and it's also access to facilities. And of course, we've got upcoming about 2 weeks' time, our straight bond of USD 650 million that were due to repay. Remember, we took that out in first half of 2021 due to repay later this month. So we're having a little bit of elevated levels of liquidity at the end of June in preparation for being able to repay this straight bond. Qatar, I've mentioned that. We've included this slide. I won't be going through all this information. It's for your reference afterwards when you look back at this deck. The only thing that's different in this slide from the one I shared in March is the fact that we did a capital reduction in May. So that the Annual General Meeting, our shareholders approved that we could do a capital reduction to offset the $7 billion we paid for the Qatar shares. So it meant that we moved $7 billion out of our share capital number and into our distributable reserve. So if you're looking at the numbers, you can see the share capital number change and you wonder why. That's why, because we did a capital reduction to offset the buyback. And then, of course, we're very excited early this year to do our first Hong Kong dollar public bond, which I know I shouldn't necessarily say, but I think this was seen as a success, largest bond that's been done for a corporate. A lot of interest in this. We issued $2.88 billion in the end. And this was us preparing for the straight bond that I said we're repaying later this month, so putting some money aside to do that. So what does all this mean in terms of liquidity and gearing profile? You can see here our gearing has ticked up a little bit from the end of last year. So buying back the shares from Qatar has had an impact. But we're in a significantly lower gearing level than we were a year ago off the back of the strong results in 2025 and into 2026. So then in terms of -- if I just touch on -- and as I say, you're familiar now, but the slides we've got here, I won't touch on every one because I'm conscious we want to get to questions, but you can refer to them later. So maybe just some of the key stats for Cathay Pacific, our premium travel brand. And it's exciting for me to see green numbers across the board this time. And so you can see the revenue number up by 26.3% This, of course, is driven by a number of factors. So one of the things that I think is quite standout on this slide is the passengers we've carried. So the number of people who've flown on our planes in the first half has gone up by 17.5%. And that's a big driver for the revenue number going up. Of course, we have added capacity. So first half versus first half on the ASK basis, it's gone up by 11.8%. You may remember in March, we talked about estimating around a 10% increase year-on-year, and we're on track to do that for 2026. And of course, the passenger numbers come through in the load factor at 87.5%, which is high. And then we have seen an increase in yield, too, which is underpinning the revenue numbers. So then charts that you're all familiar with in terms of capacity load factor and yield, and we set these out half by half, so you can compare the 6-month period. I suppose there on the load factor one, you can see looking back at our records, the load factor we've seen in the first half of 2026 is the highest on record for a first half. And that is where all these passenger numbers have come from and the change in yield also here. But the sort of -- you may remember when I talked in March, the strong Q4 that we saw in terms of passenger demand has definitely carried on into the first half of this year, and that underpins the numbers that we're sharing with you today. If I then move on to touch cargo briefly. Similar slide and again, green across the board, which is very exciting to be standing here talking about. A similar story relatively, we've got the revenue going up by 23.9%. And that, again, is underpinned by some increase in capacity. So you may remember that a lot of our capacity comes from our passenger bellies. So as the capacity on the passenger side of the business has increased, it increases our cargo capacity, too. So that's coming through there. We've carried more cargo, 8.5% more cargo than we carried for the first half of last year. And then we've also seen an increase in our yield. Same charts on the 3 metrics, capacity, load factor and yield for cargo. Now some of you may say, well, why is your capacity so much less in the first half of this year than it was in the second half of last year. It's higher than the first half of last year, but it is down in the second half. And that's because typically in the cargo space, we have a peak in the second half. So maintenance needs to be scheduled or more maintenance needs to be scheduled in the first half, and that is the case for 2026. We have done more maintenance, which takes some of our freighters out of the fleet for a while. And also some of that maintenance has actually been more extended than we anticipated. So capacity on cargo has been a little bit down more because of maintenance. And you're doing that as an organization or any airline to ensure you've got your maximum capacity available for the peak in the second half of the year. Load factor, not a little bit higher, but not too different from our typical load factor in cargo. And again, this is -- just as a reminder, where we are is the largest air cargo hub in the world, we're very strong on the traveling west, the front haul, if you're in -- if you're a shipping analyst as well, the front haul, taking the cargo west. But cargo coming back this way, there's less of it. So typically, our planes are close to 100% full cargo on the way out, but they're far less cargo being carried on the way back. It has that balance has improved a little bit and that's what picks up the percentage there. So sort of regional cargo has been coming into Hong Kong. But yes, that's the reason why load factors for cargo are quite different from load factors for passenger business. Passengers want to go both ways. They generally want to come back again. The cargo doesn't. Yield, again, a strong demand story. So as I'm sure you'll have read about the cargo demand in support of the AI infrastructure boom is definitely very real. AI infrastructure, tech products are moving and driving a high demand, hence, supporting yields. Then if I just touch briefly on HK Express. HK Express, of course, is our low-cost carrier. And they've also got a happier story. I can't say green across the board just yet, but we're getting closer. So their loss at a loss before interest and tax level was HKD 73 million, significant improvement from where we were for the first half of last year when we lost around HKD 0.5 billion. And so they had I think I talked back in March, a strong start to this year, and that continued. But of course, the jet fuel prices have impacted them in the second quarter, which then has had an impact on their overall numbers for the first half, but a big step change towards their turnaround journey that they are on. And we see their fundamentals continuing to be strong. So things like the on-time performance, their focus on cost discipline, operating efficiency. These are all the things that are heading in the right direction in support of this substantial improvement on their path to a turnaround. And then sustainability, I won't dwell on this because I'm conscious I've got to pass on Lavinia. But again, a bit of information on some of the initiatives we're working on as a group. This remains a challenge for us as a business for all aviation. But yes, we're continuing to work on this. So I'll pass on to Lavinia. Before I do, I do just want to say thank you to all of you. Today is my last financial briefing before I retire next month. And I know all of your questions and your support that I've received and your interest in Cathay as a group has been fantastic over the last 5.5 years. So thank you very much.

Thank you, Rebecca. So after a pretty encouraging first half, I guess, naturally, you all want to know what we -- how we see the second half of this year. So allow me to provide some insights. Starting on the passenger side on the travel side. So while we are cautiously optimistic about the second half. So looking into our current bookings and summer, well, we are halfway through quarter 3 actually. So in terms of the summer bookings and actually, the strong travel demand actually extends throughout quarter 3. So I think we remain pretty robust about quarter 3. As to quarter 4, I think it really depends on the Middle East situation. We believe that the underlying demand is still strong. And of course, we need to watch out on whether there's any further developments in the Middle East and whether there are other macroeconomic factors at play. In terms of capacity, I think Rebecca has mentioned, I think overall, we are still looking at a growth of around 10% for the group for the whole year. I think that is very important. I think last year, we added a lot, especially during summertime on the long-haul routes, added a lot of capacity on the Americas and Europe and Australia. This year, we also do it in a more balanced manner. We added more regional growth. And that's very important because we are a network carrier. So as we continue to add more, more flights on each part of the route, it creates more connectivity via the Hong Kong hub, which will help us to build more loads and become more attractive to our customers. So in terms of jet fuel, we don't have a crystal ball. Again, that really depends on the Middle East situation. But I guess our best guess is jet fuel will stay at a pretty high level or at the current level, at least for unless there are any new developments in the Middle East. And for that, so in order to mitigate that incremental cost, we'll continue to leverage our 2 tools, both hedging and fuel surcharge to continue to offset some of those incremental cost increases. From a cargo perspective, yes, it's the same words that I'll use. We also remain cautiously optimistic about the second half. So Rebecca mentioned about the -- a lot of the cargo growth this year is really, again, there's very strong demand driven by this whole AI boom. So a lot of high-tech products traveling both within the region and also from Asia to U.S. I think we also -- I think we have to say that we are -- our strong network, both on the freighter side and on the passenger side did allow us to capture this AI boom quite effectively. Our teams have been talking to different customers in the past few weeks, I mean, trying to gauge their overall sentiment on the cargo peak season, which will start very soon. And again, I think overall, I'll turn that as cautiously optimistic. They do believe that the current AI boom will at least last until the end of this year. And again, to leverage that, we will be adding capacity, as you show during peak season, particularly on the Hong Kong route. So if Hong Kong to the Americas, we'll be adding capacity. And also within the region, again, because some of these AI boom involves a lot of traffic between Southeast Asia and Northeast Asia, between Chinese Mainland, Southeast Asia, et cetera. So to capture these flows as well, we'll also be leveraging our subsidiary, Air Hong Kong, use some of their capacity to help carry some of these traffic. So I think overall, on the cargo side, well, we are very committed. Actually, earlier this year, we have placed an additional orders for 2 more A350F freighters. And Air Hong Kong, they're also going to lease an additional A330 freighter to cover this peak season. So I think all in all, this demonstrates our confidence in the ongoing development of the Hong Kong cargo aviation hub. So I think this is a brief sort of like summary of how we are seeing the second half. So let me shift gears a bit, talk a little bit about longer term. So this year is our 80th anniversary, a very happy time and a very important milestone for us. So at this time, when we reflect on what our next 10 years will be, we think that we'll continue on this dual track, sustain and elevate. We had 3 very positive years in terms of profitability. So this year, first half looking good. Hopefully, we also see a good fourth year. It's very important that we continue to sustain our profitability. Obviously, we want to keep our shareholders happy. But also very importantly, we do need these profits so that we can continue to invest in our business and invest in the Hong Kong aviation hub. And this is what exactly we plan to do in the next 10 years. Some of you may remember that in the past couple of years, we always give 3 100 numbers to showcase our commitment to Hong Kong. But this year, I think, well, at our 80th anniversary milestone, we decided it's time for us to elevate our narrative to again demonstrate our commitment to our business and to the Hong Kong hub. So these are the 3 new 150 numbers that I want you to remember. So firstly, we have already committed around $150 billion investment already. This is committed. So for the next 10 years, obviously, we'll continue to add more investment. Our target in 10 years' time is to bring in a total of 150 new aircraft into the Cathay Group and also as a group, fly to 150 destinations. So just for sharing, currently, we fly to 103 destinations as a group. But in 10 years' time, we want to go 150. So this is our ambition. And in terms of our investment, when we think about the already committed $150 billion, where do most of this investment and also where will most of our future investment go into? Well they go into a few key areas. The first most obvious area is our fleet. So here, we have already committed 105 aircraft. These are new orders, which will be delivered in the next few years. I presume you should be quite familiar because we mentioned them almost every time in our briefings. But just to refresh your memory, so starting with the ones which will be delivered first. So the narrow-body A320, A321neo, actually, the first of this batch of orders will arrive later this month. And then going down chronologically, then next year, in the second half of next year, we will be expecting our first 777-9 aircraft that will be our new flagship fleet complete with first class and 3 other cabinets as well. Then going to that, the other side then from 2028, we'll start receiving our Airbus A350F freighters. And as I just mentioned now, including the 2 new orders that we made this year, we'll be expecting a total of 8 very efficient new generation cargo aircraft. And then last but not least, we have also placed orders for the CX regional wide-body fleet. So these 30 A330neos will also start coming into our fleet in 2028. So these are the existing 105 orders that we are expecting. But like I said, in 10 years' time, our expectation is that we'll bring in a total of 150 new aircraft. Apart from the airframe or the aircraft itself, we also made a lot of investment in the customer experience, both in the air and on the ground. Again, I think you should be quite familiar with some of these cabin programs because we have been mentioning them in the past couple of years. So starting with our long-haul fleet, Boeing 777-300ER. I hope some of you might have the chance to try out Aria Suite already. Well, it has been very welcomed by our passengers. So glad to say that we are now halfway through the program. We are going to retrofit a total of 35 of our 777-300ER with this new product and also new premium economy. Currently, we have just passed the 18 mark. So we now have 18 of them flying the skies, and we expect to complete the whole program within 2027. Next up, well, the hero or star product of this year, well, sort of like the sister or sibling of the Aria Suite, Aria Studio, this will be the new business cabin or business class product that we will be installing on our Airbus 330 regional aircraft. So this will be coming end of this year. So what we are expecting is that in the business class, there will also be a lie-flat bed and there will be direct aisle access and also a brand-new economy cabin. So this is something which is really something to look for -- look forward to towards the end of this year. 777-9, I've mentioned, second half of next year, new first class, we are all very excited about it. And of course, apart from new first class, it will be a brand-new aircraft, so complete with new cabins in the other 3 cabins as well, new products. And last but not least, the narrow-body A321neo, as I mentioned, the first new one will be coming within this month, but we are also retrofitting the first 16 aircraft. For some of you who have been traveled -- who have traveled on that aircraft, you might find that, well, the economy class cabin may be a little bit less spacious than you want. We hurt you. So what we are doing, what we are going to do is to remove one whole row of economy seats so that to create more leg room, more space for our economy class passengers. So all of these are a very important part of our $150 billion investment committed already. And cabin improvements will also continue to be our focus. Why? Because Cathay Pacific is a premium carrier. We will need to charge really premium pricing in order to -- I mean, justify our investments. But we -- in order to -- how can we charge premium pricing is really to provide value to our customers. And all these investments will help to increase our customers' willingness to pay. As I mentioned, the investment is not just in the air, but on the ground as well. Earlier this year, we have already reopened the brand new The Wing, First at HKIA. So these are the upcoming launches, in new launches in the pipeline. New York JFK we have mentioned before, we are still looking forward to have it within this year. And then next year, then -- well, for those who are familiar with HKIA again, so after The Wing, First, we are now -- we have already closed down the wing business for renovation. And also in Tokyo Narita, that launch is also closed currently because we are going to expect a brand-new launch in the first half of next year. So again, all these ground and new products are there so that we can delight our customers more so as to increase their willingness to pay on us. Apart from all these hardware cabin ground products, which will all help us to generate bigger customer satisfaction and hopefully, more revenue. Of course, we'll continue to build or to continue to invest in making our business more effective, more efficient, more resilient. So these are our areas of excellence. I just want to particularly call out digital. Well, this is an area which we really are putting our bets on. We invest over $3 billion in IT every year. And quite a lot of them will be -- quite a lot of that budget will be going into AI-related, agentic AI, et cetera, because all these we think will not only elevate the customer experience, but also help us in the back in increasing our effectiveness and productivity. So these are all areas that we will focus on. At the end of the day, our vision is very clear. We want to be the best in all the 3 -- all the 4 lines of business that we are part of. And we believe that -- well, I think Ronald went -- in the March briefing, he has talked about this formula. We firmly believe that once we have happy team internally, happy teammates, we will have happy customers. And happy customers will generate happy shareholders because it will mean a more profitable business. So this is what we firmly believe in and which we will continue to work towards. And of course, the other thing is that we also believe that, well, as the home carrier of Hong Kong, we are there to grow with the Hong Kong Aviation Hub. The 3 runway system is a golden opportunity for us. So we will continue to invest like what I mentioned, because at the end, we think that what is good for Cathay will be good for Hong Kong and vice versa. So I guess that's what I want to talk about. So this just final slide summarizes what Rebecca has mentioned about the financials and what I briefly talked about, about our long-term strategy and investment. So I'll stop here, and let's start the Q&A session.