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Edited Transcript of 293.HK earnings conference call or presentation 7-Aug-19 10:59am GMT

Half Year 2019 Cathay Pacific Airways Ltd Earnings Presentation

Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Cathay Pacific Airways Ltd earnings conference call or presentation Wednesday, August 7, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kar Pui Loo

Cathay Pacific Airways Limited - Chief Customer & Commercial Officer and Executive Director

* Martin James Murray

Cathay Pacific Airways Limited - CFO & Executive Director

* Rupert Bruce Grantham Trower Hogg

Cathay Pacific Airways Limited - CEO & Executive Director

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Conference Call Participants

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* Ben Hartwright

Goldman Sachs Group Inc., Research Division - Executive Director

* Heidi Leung

Macquarie Research - Analyst

* Kam Wing Lee

Jefferies LLC, Research Division - Equity Analyst

* Parash Jain

HSBC, Research Division - Head of Transport Research, Asia-Pacific

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Presentation

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Rupert Bruce Grantham Trower Hogg, Cathay Pacific Airways Limited - CEO & Executive Director [1]

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Okay. Good afternoon, everybody. For those of you who don't know me, I'm Rupert Hogg, Chief Executive Officer of Cathay Pacific. We've got a deck in front of us. Martin, CFO, I'll let you take us through the slide, and then the 3 of us will answer questions. Thanks.

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Martin James Murray, Cathay Pacific Airways Limited - CFO & Executive Director [2]

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Good afternoon, everybody. It's a rather deep room. So hopefully, you can hear me if you can't see me at the back. At the last analyst briefing, we discussed some of the macroeconomic headwinds that we're currently facing in terms of the geopolitical and trade tensions, the weak cargo market, the impact that was having on -- also on our passenger yield and the strong U.S. dollar, et cetera. So we think we have produced some solid results with a group profit of $1.3 billion and also the airline after-tax profit of $615 million.

This slide just shows you that, that could trend, and these are just looking at the last 3 years of first half results and that trend we've had since the first half of '17 as we continue with our transformation program. So overall, the group attributable profit of $1.3 billion compares to a loss of $263 million same period last year. And as mentioned, at the airline profit, $615 million against a loss of $904 million. Profit from associates, which is the main Air China is up to $732 million compared to $641 million. But again, just to remind you, that we account for Air China 3 months in arrears, so that's the period up until the end of March.

Group revenue up 0.9% on ATK growth of 3.6%, ASK growth of 6.7%. On the passenger side, the impact is on yield. Passenger yield, down 0.9%. In terms of cargo, cargo capacity is up 1.1% in the main through passenger belly space. Cargo yield, again, impacted, down 2.6%. Cargo carried, down 5.7%. So cargo down across the board. And again, on the cost front, our underlying costs ex fuel is marginally down 0.9%.

Big picture, waterfall chart shows you the movement in the airlines profit before tax of a loss to the profit of $907 million. You see the big 2 green bars being the passenger and cargo revenue. That's driven by the passenger revenue, up 5.6% on the ASK growth of 6.7%. Cargo revenue was down 8.9% on its capacity growth of 1.1%. In terms of the other revenue there, marginally down. Cargo and cargo trucking is included in other revenue, which is obviously down with the weakness in the cargo market. Last year, you remember, we had a couple of aircraft that we had leased for the buoyant cargo market -- or more buoyant cargo market from Atlas. So we don't have those this year. So year-on-year, that's down. You'll see that coming through on the cost side. And also we have lower in-flight sales as we changed the supplier there. Net fuel costs was a big impact. Gross fuel down 4.5%, net fuel down 7.7%. We'll discuss the cost later in the presentation.

So as mentioned, passenger revenue, $37.5 billion, up 5.6%. ASK growth, 6.7%. That's a combination of the full impact of the 2018 new routes, new routes in 2019, increased frequencies and also the use of larger aircraft and the seat configuration. But yield is down 0.9%. That's intense pressure in both the premium and long-haul economy cabins, more transit passengers and some unfavorable FX impacts. So our revenue efficiency, down marginally at 1.1%.

This slide has become a regular slide, showing our new routes. So we're flying new routes to Seattle and Komatsu in 2019. And again, we highlight the green areas where our routes that are not served by another airline from Hong Kong.

Round the board here in terms of Europe, growth in Europe in terms of the ASK growth. We got the full year impact of Brussels and Dublin and increased frequencies to Madrid, Frankfurt and Paris. The increase in the U.S. with increased frequencies that we had the full year effect of from last year. And we've got robust growth from the Indian market here. In terms of yield, you'll see the impact in Southwest Pacific, North America and Europe in terms of both the premium traffic and the long-haul economy class.

Cargo is down across the board. So cargo revenue at $10.3 billion, down 8.9%. Load factor is down 4.9%. Cargo carried, down 5.7%. Gross cargo yield, down 2.6%. So a weak overall market sentiment across the whole cargo market, and the cargo revenue per AFTK down nearly double-digit at 9.8%. So cargo volumes significantly down from the same period last year.

In terms of our operating cost per ATK, we do get the benefit of the economies of scale from the introduction of the larger aircraft and the change in economy class seat configuration. We have significant reduction in our net fuel cost of 7.7%, as mentioned. Our underlying unit costs ex fuel are down 0.9%, which we'll go through in more detail in a second.

Fuel remains our biggest cost, at 28%, then staff costs, aircraft depreciation -- landing and parking, aircraft depreciation, aircraft maintenance being the big ones. So fuel remains our biggest cost. And then, of course, the challenge of the transformation is, we're very much a fixed cost business as we go through our initiatives.

Gross fuel, as mentioned, down 4.5%. That's 6.5% decrease in fuel price, 2% increase in consumption. And net fuel down 7.7%. The crack spread has widened a little bit over recent months. In terms of our hedging book, we are 33% hedged in 2019. U.S. dollar Brent price of $62, marginally above where we are today. In 2020, 30% hedged at $65. In 2021, 8% hedged at $62.

Overall cost per ATK down 2.6%. Underlying costs, down 0.9%. That's after adjusting for FX movement, the introduction of the new accounting standard on leases, which is IFRS 16, and our exceptionals, which are outlined at the bottom of that slide.

Big impact is the strengthening U.S. dollar. U.S. dollars, as we've mentioned in many of these briefings in the past, has a sort of 3 significant impacts to us: one is the translation of our foreign revenues into Hong Kong dollar, which obviously is impacted by a stronger U.S. dollar. The second is more harder, which is the overall sentiment of travel when the U.S. dollar Hong Kong just becomes a more expensive place to travel to. And the third is the revaluation of balance sheet items at that balance sheet date. And the big 2 currencies that we look at is the Hong Kong dollar, U.S. dollar and obviously the impact on renminbi, both for us and our associate Air China.

Taking that out, we've adjusted the cost base there, as I mentioned, to look at our underlying costs. So we've adjusted it for the currency, IFRS 16 and the exceptionals. I would say the impact on currency doesn't look too significant. You can see the impact of the revenue of $650 million. In others there, of the $309 million benefit on the cost front, a lot of that was the Hong Kong dollar going to the stronger rate of paying for 7.85 and moving stenciling down at the end of June. Since then, it's come back to the 7.85 range. So again, that will reverse in the second half should it stay like that through to the end of December.

The overall cost per unit side there. Again, these are sort of the graph, it looks a big step change, but we're only going from 229 to 227. But again, the trend is in the right direction. So on the staff costs, we've seen productivity improvement, and we've started the airport reorganization on that side. On the landing and parking, we're seeing the benefit of the bigger fleet. Owning the assets, again, we mentioned that in terms of the Atlas aircraft, we saw that reduction in the other revenue. We also see the benefit of it coming to our cost there.

Some of our cost per ATK, as we mentioned in the past, we continue to -- since we started the transformation and saying we're trying to keep our cost per ATK down, we did see that we rethought about that in 2017 in terms of investing in the customer and brand and also obviously investing in new aircraft. We're very proud of our fleet and of our investment in in-flight entertainment. And on that new fleet, you get that benefit in the fuel side. So our fuel unit costs are down per unit, 1.5%. So 2% increase in consumption on an ATK growth of 3.6%. So we're seeing that benefit coming through that metric.

In terms of our subsidiaries, the cargo terminal and everything else, again, it doesn't have a massive impact across the board. Our subsidiaries here Air Hong Kong, we own 100% of now. In terms of Air China, the big thing to, as I pointed out, the Air China, we report results 3 months in arrears. So the impact of the strengthening U.S. dollar in May will come through in August, as we previously mentioned. So the May impacts on their results will come through in our August results.

In terms of balance sheet. Our balance sheet, we got shareholders' funds of $65 billion. In terms of cash flow, we've got 9 aircraft coming in 2019, 5 already delivered, we'll talk about that in later slides. That cash outflow includes the $2.25 billion that we've moved into escrow for the acquisition of Hong Kong Express. These results, you'll see the net debt equity ratio there of 0.94. That's the -- prior to the introduction of IFRS 16, which is the lease accounting, which we introduced from the start of this year, the impact of that is to put operating leases onto your balance sheet. So profit -- property, plant and equipment increases by $17.4 billion. Your lease liability goes up $18.6 billion. Your impact is mainly through your reserves, $2.3 billion, but your impact on your gearing goes from 0.92 to 1.25. Banks still remain -- looking at the calculation on the previous assumption of how we calculate it. Still very healthy in terms of our financial covenants.

In terms of the impact of IFRS on our P&L account, it has a very negative impact. So impact is a loss of $23 million. And in terms of cash flow, there's no cash flow, but there's a reallocation between your net cash inflow from operating activities and your net cash inflow -- outflow from financing activities. And that just shows you the trend before and after the introduction of IFRS and the impact on the gearing.

In terms of fleet, as mentioned, we have 9 aircraft coming in 2019: 4 A350-1000s, 2 A350-900s and 3 used aircraft, 777-300s. Five of those aircraft have already arrived. You can see that in the A350-1000s there, up 4 there, and 1 777-300. 777-200s left the fleet, and you'll see we've got 69 aircraft, 2 of them used aircraft, coming over the next 5 years, mainly in the form of the A321neos and 777-9X.

Going to our transformation. As we mentioned before, we launched in the second quarter our service brand Move Beyond, very proud of that. We always said that the transformation, that it's more than just getting back to financial health. We have to be brand-led and customer-focused and we're -- the reaction so far -- I mean obviously, it's a service brand, so it takes a long time to invest in that and rally behind it. But the feedback from both staff and customers have been very positive today, and we rally it behind words like thoughtful, progressive and can-do spirit, which goes behind the themes of what we're trying to achieve.

In terms of our transformation program, we've talked at length over the last few years of this. We've now got over 1,000 initiatives in our tool that we call WAVE that tracks those. We're operating them under the 4 pillars, as we said: through customer operations, productivity and value management and high-performance and on the customer side with our award-winning lounge proposition, with a new lounge in Shanghai. Put an awful lot of effort into digital and disruption management on that side.

On the air, we've gone to in-flight connectivity. We're rolling out a new business class proposition in terms of dining-on-demand. We're looking at all sorts of new fare preparation using cargo -- using digital in our cargo business to improve time to market and space utilization.

On the operational side, again, under that pillar, we're looking at -- we're working with our suppliers, big one being the example of HAECO on lean initiatives with them, looking at things like fuel consumption on the high-performance part. And again across, we're looking at the revamped service delivery training program for our front-end staff. And in the back office in terms of the productivity and value management, we've gone to guided buying, Ariba Guided Buying, we're rolling out that. GBS, which is like the end-to-end process review. We've moved the whole of accounts payable and accounts payable across the airports into GBS, and we're trying -- getting the benefits now of automation and robotics.

Outlook, very fluid. As you can imagine, the geopolitical and trade tensions have escalated, and they will be expected to continue to impact our business negatively in the second half. Protests in Hong Kong have reduced our inbound passenger traffic in July and are adversely impacting forward bookings going forward. Our passenger business continues to be affected by that intense competition. The U.S. dollar, as expected, in these times has strengthened, which is negative to our side. And whilst we're seeing the benefit of lower fuel costs, we do expect that to be volatile. So the short-term difficulties and challenges are there. But in the meantime, we remain very confident in Hong Kong's position as the largest aviation hub in Asia, its connectivity to the Greater Bay Area, and we're very focused on our transformation program still, which we do believe -- we said that our initial objective to beat ROCE by the end of this year. It will be extended and beyond. But we do believe we're on track to achieve an objective of sustainable long-term financial performance.

In July -- 19 of July, we did complete on the acquisition of Hong Kong Express. I mentioned the fact that we had to move money before that into, escrow, $2.25 billion. Total consideration, $4.93 billion. And again, we think, overall, this is a great investment, both for ourselves, Hong Kong Express, traveling public and the Hong Kong hub.

With that, we'll open the floor to your Q&A. Somebody got a microphone there?

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Questions and Answers

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Unidentified Analyst, [1]

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(inaudible) I've got 4 questions. The first one, it's (inaudible) advance technology, and you gave us your positive view second half, what might (inaudible) away from last remaining (inaudible) is that still the (inaudible) that in relation to that, how important it is that it stays second half (inaudible) first half. That's my question.

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Rupert Bruce Grantham Trower Hogg, Cathay Pacific Airways Limited - CEO & Executive Director [2]

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Second question?

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Unidentified Analyst, [3]

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Second question, Hong Kong Express, appreciate the short-term focus and view that (inaudible) medium term or longer term, what's your vision for the LCC and how is it going to help the growth, especially for a shareholder of the group?

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Martin James Murray, Cathay Pacific Airways Limited - CFO & Executive Director [4]

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All right. I'll deal with the yield questions. Actually, I'll do with the revenue question one to signal our view. First of all, when we talk about second half is burdened, first half, we're referring to the bottom line. So cost is a major component of it as well in addition to top line. And going back to revenue, when we described the short-term challenge, it's quite clear that there are a lot of headwind. On the cargo side, I will talk about the cargo side first. We have seen the drop in volume year-to-date. We have shown that in the first half results, down by 5.6% in terms of volume, as well as yield was also in a negative decline.

What we have seen is the gap is stabilizing compared with same time last year. But that is all, up to 2 days ago, before the next round of tariff was announced. So to be honest, we haven't been able to comprehend and reforecast if that is really going ahead from September 1, what will be the exact impact. But I think in general, that cargo will continue to be pretty tough. Volume will have negative growth from last year. Yield will also be under a lot of pressure. The key question is, will there be a peak? If there is a peak, how long will it be? And I think if there will be a peak, it won't be very long. And also, at the same time, you won't be able to see the same type of rate that we have seen last year. So that's the general view on cargo.

On the passenger side, it's a lot more than just what's going on in Hong Kong because we are looking at a basket of issues. Global economy sentiment has not been great, and many corporates cut their travel budget. A strong U.S. dollar is not good for us. So quite a lot of weakness in the first half already. But we managed to grow our revenue by 5 -- 5% and 6% on top of capacity growth of 6.7%. You see a lot of excessive capacity out there in the market, many of the airlines are offering very cheap deals. So we got to stay competitive. And the yield decline is no longer just at the back of the cabin. Front end has also very strong competition as well. Coupled with what's going on in Hong Kong, you can imagine that there is a lot of impact on inbound booking. And with the stock market going down, sentiment in Hong Kong, you can foresee that in the coming near future, outbound from Hong Kong will also be weak. What we have seen so far is we managed to be able to find replacement traffic with sixth freedom passengers, but that is at a much lower yield than [current form]. So if you see that we managed to be able to maintain a load factor for the rest of this year, that will be at the expense of yield.

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Rupert Bruce Grantham Trower Hogg, Cathay Pacific Airways Limited - CEO & Executive Director [5]

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Yes. Look, Hong Kong Express, so we talk about early days, it's obviously early days, completion on 19th of July. I mean the first order of business for us is to stabilize, understand what we've got, make sure that it runs smoothly and efficiently. There are some things that we would like to improve, aircraft utilization being one. We're also looking at how the group can help it. We've said very clearly that we want this airline to remain a low-cost carrier, and that enables it to offer low competitive fares and stimulate demand and serve a segment that's not unique, but it certainly is a stimulatory type of model. So I think probably, in terms of growth, yes, we would like to grow thereafter. But probably, when we meet again at the final analyst briefing, we'll have more information on what that might look like.

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Kar Pui Loo, Cathay Pacific Airways Limited - Chief Customer & Commercial Officer and Executive Director [6]

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If I can just address your question about second half, first half. We said at the analyst briefing the last time, prior year we've been saying we're on track for a transformation. We said in a very difficult industry there are headwinds and tailwinds. And then when the headwinds are ahead of you and they're all lined up against you, it becomes tough to do that. And so whilst we are focused on the things we can control, and we think we've got that fantastic strategy, the big headwinds are the 3 big ugly sisters, so to speak, in terms of the oil price, FX and the political situation that we find ourselves in. I would say on the FX, it's working against us. We know we've got the impact of -- the strength of the U.S. dollar will impact us in terms of Air China in August. We know what's happened, and you can all see what's happened, in July in terms of the strengthening U.S. dollar and the impact on that. And counter to that, the fuel price is now down below $60. So that counters to an extent the FX situation there. And so therefore, you're looking at the political situation, which is very early days in that sense. And so where you all sit, just look at Bloomberg, the $3.3 billion to $5 billion range, so everyone in this room currently has thought that we're doing a better second half than the first. So it's a true statement and sort of where we sit today.

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Rupert Bruce Grantham Trower Hogg, Cathay Pacific Airways Limited - CEO & Executive Director [7]

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I think the only other thing I would add to that on this second half versus first half, of course, if you look at the cycle of this industry over a year, I mean it's just a fact that there are more peaks where -- both for cargo and passengers, than there are in the first half. And that's traditionally why it's always been stronger. And as Paul says there lies growth and, with that, comes economy of scale and things like that. But all the factors mentioned can impact that.

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Parash Jain, HSBC, Research Division - Head of Transport Research, Asia-Pacific [8]

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I'm Parash Jain from HSBC. I have 2 questions, one on passenger, one on cargo. Maybe quickly first on the cargo, I mean I understand that with the new aircraft coming, there's nothing much we can do in terms of managing value capacity. But with pretty much certainty that cargo trend is softening, how much lever do we have to adjust the cargo capacity, both as an industry and perhaps more importantly at the disposal? And with respect to passenger, I mean to your comment that you mentioned about -- I didn't get your point about replacement traffic. Which replacement traffic are you referring to at a lower yield? And second, with pretty much Boeing 737 MAX not returning to the market for much of 2019 and perhaps for early 2020, are we not seeing some tightness, especially in certain route where your competitors used to have a lot of 737 MAX maybe, in that case, could be Indonesia or any other market? How should we read about there's a lot of capacity despite usual tightness because of the MAX issue?

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Kar Pui Loo, Cathay Pacific Airways Limited - Chief Customer & Commercial Officer and Executive Director [9]

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Okay. Cargo capacity. It's true to us and also to most of the airlines as well. Nowadays, the growth in cargo capacity is mainly coming from passenger aircraft belly space. And people are still buying freighters but in a very small scale. And there are more airlines actually opting out from the freighter business. We are still one of the biggest freighter operator in the world. We are constantly on the top 3. And you're right that when the market is not strong, how to manage capacity is important. And as a result of that, we have already decided to early retire one of our oldest converted 747-400 freighters. They're meant to be flying for another 1.5, 2 years, but we are going to retire it this year. So that's one thing that we can do. And also in the short run, when we deploy our freighters, there are short-term readjustment we can do to change the routing and redeploy to places that there are still growth in cargo volume. So that's on cargo capacity. On the question of MAX, actually, if you go back to the time when MAX stopped to fly, there are very few operators flying MAX to Hong Kong. And in fact, among all the routes that we compete, very few operators is flying the MAX. And as we understand, many of the MAX operators, they have been extending their lease or delaying retirement of the 737-800s. So there are still capacity out there.

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Kam Wing Lee, Jefferies LLC, Research Division - Equity Analyst [10]

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Andrew Lee, Jefferies. First question I have is on the cost side. First half costs were lower 0.9%. Looking at the second half, for second half to be -- have better earnings than first half, I assume there to be more cost savings. First question I have is where would that cost savings come from? And then for next year, do you think that cost saving will continue?

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Martin James Murray, Cathay Pacific Airways Limited - CFO & Executive Director [11]

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The answer to both of your questions is yes. Again, currently, in terms of your overall cost, the biggest one that's changed is your fuel costs, and it has come down since -- in terms of our underlying costs, you've got 2 factors there, you have the second half in terms of if it is a stronger second half, you get better unit cost per ATK on that front. So you get those efficiencies. A lot of the transformation initiatives you can take, as we've talked about in the past, you can make a quick impact in 2017 by short-term things that are nonsustainable, stopping the bonuses and other things in terms of short-term measures. But if you want to transform the business, it becomes many -- much more medium-term pieces and looking at end-to-end process reviews. And as I said, a lot of that -- those changes just take multiple months, beyond a year. And so I do genuinely believe that our underlying unit costs will continue to fall, our controllable costs will continue to fall as the airline grows.

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Rupert Bruce Grantham Trower Hogg, Cathay Pacific Airways Limited - CEO & Executive Director [12]

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Just to add to that, Andrew. I mean, obviously, we've set ourselves up to bring about effective change in the business, and fundamental change and increased productivity. And one of the goals of keeping our unit cost without fuel flat is, at the same time, to be able to invest in the customer experience. So maximize our chances of quality revenue. That infrastructure that we set up in terms of how we redesigned the business, we will consolidate and keep going as is our business improvement department, as a true train beyond the end of this year. So the infrastructure that we've set up to affect change will remain.

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Ben Hartwright, Goldman Sachs Group Inc., Research Division - Executive Director [13]

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This is Ben Hartwright from Goldman. Just a question on the passenger side and performance by region. I noticed, as you mentioned, the long-haul yield is down in Europe, Southwest Pacific and the U.S. Just wondering what's driving that, particularly around the competitive pressures. Which areas or which particular players are driving that competition? And secondly, just on the yield side, just wondering if you could give us a sense of the trajectory in Q1 versus Q2? And then a little bit -- as I was saying, what -- how are we looking now in terms of the passenger yield year-on-year into Q3?

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Kar Pui Loo, Cathay Pacific Airways Limited - Chief Customer & Commercial Officer and Executive Director [14]

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Competition is actually very keen almost across the board. But if you are looking for some specific examples, take American carriers, for example, they're still doing extremely well in the domestic market, and they can afford to sell a lot cheaper when they're competing on long-haul market. So that's one of the many examples. Another example is our Australian route. That was a challenge, if you remember, full year last year but actually, first half this year, it stabilized quite a bit. We have seen Middle Eastern carrier and some Southeast Asian carrier pull out capacity from Australia. Same apply to Mainland Chinese carrier flying to Australia. There are some reduction in capacity. If you look at the route that we have launched, many of them are we are the only operator along the route. And in general, the third and fourth freedom yield is better because we are the only game in town. But on the other hand, for sixth freedom traffic fleet through that route, there are alternatives. A few can fly through different hubs. So the competition is a lot keener. And your second question was on the -- I don't have a breakdown between Q1 and Q2. And even the months within the quarter, behavior is quite different. For example, May was not a good month, but June was much better than May. So there is no continuous trend, if you like.

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Ben Hartwright, Goldman Sachs Group Inc., Research Division - Executive Director [15]

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Could you comment about the forward bookings? You've mentioned that it was weak across the board. Also, in your June traffic announcement, you said it was high load factors in the premium class, but yields were down. Is that trend still continuing? And also the trend for the next 2 months, are you still seeing the same pressure?

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Kar Pui Loo, Cathay Pacific Airways Limited - Chief Customer & Commercial Officer and Executive Director [16]

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Yes. Let's talk about front end without the impact of what's going on in Hong Kong because we want to look at the underlying. June front-end the environment was strong, load factor reflect that. But competition is strong at the same time. As I mentioned, that we have seen many of the corporate, they now are really going for lowest logical fares. So there are competitions out there, people have choices. And you've got to continue to deliver great schedules, product and service to make sure that you are competitive. So I think from then, what we have seen now is demand is still out there. But definitely, pressure is on, on yield.

Booking overall moving forward, the weakness we have already -- we have already witnessed. We have already seen weakness in inbound coming to Hong Kong. We started to see more weakness for traffic leaving Hong Kong, and we may be just seeing the beginning of it. August is a summer peak. So many of the bookings, they came in actually quite early. They have been around and will be around. September will be a challenge definitely. And October is a little bit down the line. But the history has been telling us that, once things settle, every single downturn, once things settle, people come back pretty quickly. So we would like to see things going back to normal as soon as possible, and we'll be ready for that.

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Unidentified Analyst, [17]

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Just 2 small housekeeping questions. The first one, can you remind me your capacity plan? I just want to make sure there's no change to that. And secondly, still on the cost, I'm focusing particularly on the landing charges because, I mean, in the first half, basically it's marginally down whereas capacity increased. Just I don't want to be -- so anything one-off in these items? Or else, I would just assume this run rate is going to carry on in the second half.

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Kar Pui Loo, Cathay Pacific Airways Limited - Chief Customer & Commercial Officer and Executive Director [18]

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I'll address capacity because since we have last met, we have been adjusting capacity a bit based on demand. On the passenger side, I think, full year, you're looking at roughly somewhere between 6.5% to 6.7% growth, ASK, and ATK growth is around 1% because we parked -- we retired 1 of the BCP. We don't renew the LS contract.

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Martin James Murray, Cathay Pacific Airways Limited - CFO & Executive Director [19]

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There's nothing exceptional in that number. So you can continue with it, too.

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Heidi Leung, Macquarie Research - Analyst [20]

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Heidi from Macquarie. I want to ask any guidance on the staff and aircraft maintaining costs in the second half?

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Martin James Murray, Cathay Pacific Airways Limited - CFO & Executive Director [21]

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Again, on the staff side of things, yes, there is productivity improvements, as mentioned, and also the reorganization. So again, we would expect to see continued trend on that front. And on the aircraft maintenance side, similar things. There's many, many initiatives, as I mentioned, particularly working with suppliers and looking at lean tools and productivity improvement, et cetera. So we'd expect to see those unit cost trends in both those areas continuing. As we said, the focus is on those controllable costs. And the ones that we're using discretion with is on the customer-facing marketing distribution costs on that side where we've got the flexibility. But on the controllable costs, we do expect efficiencies improvement to continue going forward.

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Unidentified Analyst, [22]

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Sorry, if I can ask another follow-up question on cargo. Alongside the global slowdown, we've also witnessed a bit of downturn in terms of tech cycle in the technology sector with the product launches and all. So how are you seeing this -- probably this tech cycle than the one that we have witnessed in the past? And is it also adding extra pressure on how the cargo is going to perform in the second half of 2019?

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Kar Pui Loo, Cathay Pacific Airways Limited - Chief Customer & Commercial Officer and Executive Director [23]

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On cargo, actually, we still see a launch of new products. So definitely, there are still new generation of electronics coming out. Overall volume, we don't know what will happen to this new product, but e-commerce growth is still there. And so in terms of volume, there is still demand. But if we go back to 8 to 9 months ago, there was a period that really a lot of front-loading back in October, November last year, there was a super peak. So you need to go back and think about how's the inventory being burned by the consumers and how soon they need to replenish. That's point number one. Number two is definitely everyone's impacted by the trade dispute. And maybe when a deal is conclude, some of the pending demand will come out, but we don't see it at the moment.

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Martin James Murray, Cathay Pacific Airways Limited - CFO & Executive Director [24]

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Okay. If that's the final question, then I can be around for about 5 minutes for those who want a quick one-on-one. But thank you very much for your attendance.