Q1 2026 Cathay Pacific Airways Ltd Earnings Call - Q&A
Speaker #1: Point is that we noticed that the passenger and freight revenue recorded in the first half are quite strong, and how does management expect the air passenger fares and freight rates to trend in the latter half of the year and next year?
Speaker #1: Amid changing macroeconomic, environments, and could you please kindly explain the outlook by different regions? This is my first question. Thank you.
Speaker #2: Freight rates and—
Speaker #3: Thank you.
Speaker #2: Do you want to do the—
Speaker #1: Okay.
Speaker #4: Well, thank you for the question. So I think, well, AFS is really a product of demand and supply, right? The market determines what AFS we can charge.
Speaker #4: In Hong Kong, it's a very competitive market. We compete with over 140 airlines in here, so we need to provide competitive fares. So starting—actually, I'll start on the travel side.
Speaker #4: On the passenger side, actually, in the first quarter of this year, we saw very strong underlying demand. That is actually an extension of the strong demand we already saw back in quarter 4 of 2025, so that extended into the first quarter.
Speaker #4: And even into the second quarter, if we strip out the Middle East situation, the global underlying travel demand is still very strong. So we definitely benefited from that.
Speaker #4: And in the second half, when the Middle East situation occurred, we definitely saw that the passengers who will consciously avoid the Middle East hubs and choose to travel via other Asian hubs as well.
Speaker #4: So we in Hong Kong benefited from that. So on top of the already strong underlying demand, we do grab additional traffic because of this hub shifting.
Speaker #4: So that's on the demand side. So on the supply side, yes, we added a lot of capacity ourselves, so 12%. But I guess still, demand is pretty strong.
Speaker #4: So that's why that will naturally lead to an increase in AFS. So I think a similar story on the cargo side. Again, the underlying demand is pretty strong.
Speaker #4: Driven by the whole AI boom, so this is really the main reason. The Middle East situation in quarter 2 also has some impact, but maybe not as pronounced as on the passenger side.
Speaker #4: But still, yes, Middle East because of there's some—there's still some shippers who might avoid going past Middle East. So we do also benefit from that.
Speaker #4: I think on both passenger and cargo side, again, I want to stress that it's because of our network, our comprehensive network, and capacity in place, which allow us to capture all these opportunities.
Speaker #4: So again, it's because of the very strong demand which drove up the prices. So as to second half and looking forward to next year, just like I mentioned, I think, well, obviously we do believe the underlying demand is still strong for both passenger and cargo, but of course we also need to watch out for any developments in the Middle East.
Speaker #3: Thank you. Are there any questions? Oh, the lady in the middle, please.
Speaker #1: Thank you, Benjamin, for taking my question. This is Chen Lei from Morgan Stanley, and congratulations on the very strong first half results. I have two questions.
Speaker #1: The first question is about Hong Kong Express. So I think in the earnings results, Benjamin mentioned that it has on track to a profitable year.
Speaker #1: So if the fuel price stay elevated at the current level, do you think the second half could be a profitable or we still see some uncertainties?
Speaker #1: Second question is about cargo. So I think in the monthly results, Benjamin mentioned that there are some small uncertainties from the e-commerce demand in Europe.
Speaker #1: So my question is, is there any initial impacts you have seen from the regulatory changes regarding the e-commerce cross-border e-commerce cargo in Europe area?
Speaker #1: And as a percentage of your cargo demand, how large is that, like e-commerce cargo to Europe? Thanks.
Speaker #2: Maybe I'll take the HK Express question first. Thank you for the question. So just to clarify, HK Express lost 73 million dollars at the EBIT level.
Speaker #2: Which, yes, as you say, was higher than—or sorry, smaller loss than last year. A better position. But they were affected by the high fuel prices in Q2.
Speaker #2: As to their progress for the second half of the year, as Lavinia talked about, Outlook, we're cautiously optimistic. I think they are—if we look at their fundamentals, so their on-time performance, their cost discipline, their operating efficiency, and if we also look at some of the routes that they opened last year, or destinations rather than they opened last year, we can see those are improving.
Speaker #2: As to what their actual result will be in the second half, I can't comment specifically. I would wrap it into being cautiously optimistic for the overall passenger business.
Speaker #2: But in some ways, because they don't have the network that CATHAY Pacific has, as you'll have seen for other carriers globally, they are more vulnerable, I would say, to the high fuel prices.
Speaker #1: But can I add that? HK Express, they didn't make a lot of strategic changes there. I mean, to make them more resilient. If you recall, I think maybe a year or two years before, they are very concentrated on the Hong Kong-Japan.
Speaker #1: So Japan makes up a big part of the network, and they relied a lot on Hong Kong as the point of sales. But I think over the past couple of years, or especially during the past year, they have really tried to diversify.
Speaker #1: So expanding into other parts in Asia, into Chinese mainland, into Southeast Asia, and also not just solely rely on Hong Kong as the point of sales.
Speaker #1: Doing a lot of marketing and further expanding the distribution, particularly in the Greater Bay Area. So I think they have been doing a lot to diversify their strategy, which will also help them with, well, withstand some of these external pressures.
Speaker #2: Cargo.
Speaker #1: Okay. On the cargo side, yes. Okay, the question is about the tax. Which was newly imposed on these small parcels going to Europe. Yes, I think we have been watching that.
Speaker #1: But I think it's still a little bit early. Usually July and August are the slightly slower months on the European route because everyone is going for summer holidays and all that.
Speaker #1: So well, we didn't see any particular impact on the European routes as yet because of the introduction of this new tax. But I think it's still early days, so we'll keep a close watch on whether there's any impact.
Speaker #3: Great. Thank you. Any questions from the floor, please? Yes, the gentleman in the middle.
Speaker #5: Good afternoon. I'm Carolina Chen from Signal Link Security, and first of all, congratulate to your team on a very strong set of first half results.
Speaker #5: And I have two questions. The first is on the quality of earnings. Could you help us to rank the main driver of underlying YOY improvement across passenger, cargo, Hong Kong Express, and so on?
Speaker #5: And the first is the passenger business. We see that you get around 10% passenger capacity growth for 2026, but in the first half, the RPK growth about 15%.
Speaker #5: And the SK growth about 11%. So how do you think about the balance between the capacity, load factor, and the yield on the second half year.
Speaker #5: Thank you.
Speaker #2: I mean, I can start and you can add if you like. So as I was explaining earlier, in terms of the first half result, the underlying numbers before associates or non-recurring items we went from the 3.8 billion profit to 4.8 billion.
Speaker #2: And yes, the underlying numbers there are very much driven by the higher load factors, the strong demand on the passenger business, and also on the cargo business.
Speaker #2: As to how they'll play out in the second half, I think as Lavinia explained, earlier, we're cautiously optimistic. But there's possible opportunities, there's possible risks.
Speaker #2: So it's hard to judge. But overall, for the second half, we're talking about the underlying numbers when we talk about our sort of Outlook comments.
Speaker #2: And so overall, I would say cautiously optimistic. But yes.
Speaker #1: I think you well noticed that, yes, RPK growth exceeds ASK growth. So that's why Outlook factors went up quite a lot. So an 87.5%, like Rebecca mentioned, well, that is actually our record since 2025.
Speaker #1: I think that is really a pretty high load factor. And if we actually look at the front back end, I think even the premium cabin is the load factors are pretty strong as well.
Speaker #1: So I think that is one of the reasons why we have very strong results.
Speaker #3: Okay. Thank you. I think we have time for one more question from the floor, and then we can go to the questions from online audience.
Speaker #3: The lady at the back, please.
Speaker #6: Thank you for giving me the opportunity to ask questions. So I'm Amy from BOFA. So I have two questions. One question is related to the cost.
Speaker #6: So for the ex-fuel cost, we can see some of the changes in the first half, like the maintenance cost. So for the second half of this year, what is the trend for the ex-fuel cost?
Speaker #6: And do we have any items we need to pay attention to for the ex-fuel cost? And second question is more related to the capacity because we know the 10% target for the capacity growth for this year.
Speaker #6: And for this year, we also have like T2 opened and the third runway systems. So do we have any roughly sense on the capacity growth in next year and going forward?
Speaker #6: So especially for the slot addition under the third runway system. Thank you.
Speaker #2: Thank you for your question. Yes, cost was, as I elaborated earlier, an area of focus. In terms of the variances, as you note, maintenance is one of the ones that has been higher in the first half.
Speaker #2: Sort of phenomenon we typically see is that the first half, because it's slightly lower capacity, than the second half typically. Will mean that when we spread the costs over the full year, it's typically a wider base we're spreading over, and therefore you see potentially a slight benefit.
Speaker #2: But you can't guarantee that. I think also, as I mentioned, we tend to, particularly on cargo, do more maintenance in the first half to avoid sort of the cargo peak.
Speaker #2: As to how they'll all play out through the course of the year, I think there are inflationary pressures in the supply chain, in landing, parking, overflying, et cetera.
Speaker #2: So I can't give a prediction specifically, but I think it's an area that, yeah, needs a bit of attention when you're doing your models.
Speaker #1: Well, in terms of capacity growth, we actually had gone through a couple of years of pretty rapid capacity growth, particularly when we rebuilt out of COVID.
Speaker #1: So in those three years, we actually year on year, the increase was quite big. And even after last year, after we returned to 100% pre-COVID level already, this year we are still adding around 10%.
Speaker #1: So that's again a pretty big base. So we had been growing quite rapidly in the past couple of years. Going forward, do we want to continue to grow?
Speaker #1: Of course. Like I said, I think the three runway system is a golden opportunity for us. And where slots are actually available. So we do want to add as many flights as possible.
Speaker #1: But having said that, I think, well, I've shown in the fleet slide just now that whilst we have 105 aircraft on order, we need to wait for them to be delivered.
Speaker #1: So this year, we'll have eight narrow bodies being delivered between CXN and UO. But those are narrow bodies. So for CATHAY, I think the main wide body aircraft to be delivered next is the 777-9, which I've mentioned will join us in the second half of next year.
Speaker #1: So it's only when we have more aircraft then we can add more capacity. So next year maybe well, we're slightly constrained by new aircraft, but yes.
Speaker #1: But our intention to grow will not falter. And once we have well, we'll continue to grow next year, but maybe at a slightly slower pace than this year whilst we are waiting for our new aircraft, especially the wide bodies to be delivered.
Speaker #3: So now turning to the online question. The first one is about Middle East. How is the current situation of spillover connecting traffic from Middle East, Ms. Larkin?
Speaker #3: Do you see bookings picking do you see bookings picking when conflict escalates?
Speaker #1: Yes. We I say that we and Hong Kong, similar to some of the other Asian hubs, we definitely have benefited or, well, not I shouldn't use the word benefit because it's a war.
Speaker #1: But we do see some passengers changing their travel patterns and try to avoid Middle East hubs and go for other hubs in particular. So actually, in quarter two, so apart from, well, you might naturally expect that, say, a lot of the Asia, Europe traffic who used to which used to go via Middle East hubs will go will now be diverted to other hubs.
Speaker #1: Yes, definitely we get more of that traffic. But on top, for example, we also see quite visible growth in some of the major traffic flows, like the Kangaroo traffic going from Australia to Europe and UK.
Speaker #1: And say, on the other hand, on the other direction, also from India to US. So these are big traffic flows, which the Middle East carriers played a significant part during normal times.
Speaker #1: But again, during the last quarter or even currently, I think because of some change in travel behavior, we do get a bigger share and we see more numbers coming from these major traffic flows.
Speaker #1: So yes, we are definitely seeing some increase in connecting traffic because of the Middle East situation.
Speaker #3: Thank you. And the second question from online audience is about fuel cost. How much in percentage terms has CATHAY been able to recapture from the higher fuel cost from superchargers and higher ticket price?
Speaker #2: So maybe just to talk a little bit about fuel costs. We if I look at the fuel costs in the second quarter compared to the first quarter, the cost is a gross level is double.
Speaker #2: But in Q2 versus what it was in Q1. In terms of as Lavinia touched on, I think, the ways we mitigate that cost is through our hedging program and also through the levying ing of surcharges.
Speaker #2: If I look specifically, at Q2, the surcharges plus the hedging has probably covered about 50% of that increase in fuel cost. So it's somewhere off the full increase, but it is mitigating about half of it.
Speaker #3: Thank you. So can I ask if there are any further questions from the floor? Oh, yeah, this one. Gentlemen, in front, yes. Thank you.
Speaker #1: Thank you for the opportunity. This is Bruce from HSBC. I have two questions. The first one is about financials. Could you help us understand, apart from the 1.4 billion deemed disposal gain, what are others non-recurring items that is accounted in the first half?
Speaker #1: And the second one is, we're seeing very strong yield performance in the first half. And we're wondering how much of this is structural because of the improvement in product mix and how much of this is like cyclical due to the increase in fuel price and what is our outlook for the second half?
Speaker #1: Thank you.
Speaker #2: Okay. I can do non-recurring. You can do the other one. So in the non-recurring line, I don't know whether you've seen the actual announcement.
Speaker #2: We have two lines, the 1.4, as you say, and then another non-recurring item. There's a gain on disposal in there. And there's provisions for historical matter in there as well.
Speaker #2: So a few one-offs.
Speaker #1: In terms of the yield, well, we are talking about yield, not just fares, right? So yield is, of course, influenced by a number of factors.
Speaker #1: But most important is still the fares. As I've explained, so the underlying airfares, they are really a product of supply and demand. And given the very strong underlying demand, which, as I explained, which we expect to continue to the second half.
Speaker #1: So I think that part, the strong underlying demand should still be there. But I also mentioned that in quarter two and even up to now, we do see a shift in hub traffic.
Speaker #1: So and we do see more connecting traffic. So whether that part will continue to stay with us or whether it will gradually normalize when the situation stabilizes, we have to watch.
Speaker #1: But overall, demand is still strong. And like I mentioned, there are also some other well, positive factors. So for example, when we look at the front, back, and mix, we are still seeing a lot of good corporate traffic flow and premium leisure and much traffic coming into Hong Kong.
Speaker #1: So our front end has been doing pretty robust. So that will help in the mix as well. So I think these are factors which will affect the ongoing yield developments.
Speaker #3: Thank you. That's all the time we have. If we have thank you to our speakers and thank you for all your questions. That concludes the briefing today.
