Cathay -When the going is not so good

Opening Remarks by Chairman Patrick Healy

Thank you for joining us today as Cathay Pacific announces our annual results for 2019.

What I’m going to do is to talk first about 2019, and then I’ll say a few words about the

impact of the coronavirus on our business in the first few months of this year. And then

we’ll take questions.

So, 2019 was very much a year of two halves.

As you will recall from our mid-year results, what we saw in the first half of 2019 was

further evidence that our three-year transformation programme was continuing to deliver

solid improvements in profit. We reported a net profit of HK$1.347 billion at the Group

level for the first half, including a profit of HK$675 million at the airline level, and both of

those figures represented very significant improvements on the first half of the prior year.

And that was despite the global trade tensions which adversely impacted cargo revenue

in particular. So all in all we were very encouraged by the progress demonstrated in the

first half of 2019. Our transformation programme has made us stronger and more resilient.

Our non-fuel unit costs continued to trend downwards year-on-year, decreasing 2.7% per

ATK for the full year, and this reflects our relentless focus on productivity and efficiency.

On fuel, we continue to invest in more modern and fuel-efficient aircraft, and that played

a role in bringing our net fuel bill down by 13.4% in 2019.

The second half of the year, however, was obviously a very different story. Traditionally,

as you know, we would normally expect the second half of the year to be stronger than

the first, but clearly that was not the case in 2019, as we were severely impacted by the

social unrest that disrupted Hong Kong in the second half of the year. Official figures show

that tourist arrivals into Hong Kong were down 39% in the second half of 2019, and we

certainly saw a very substantial decline in demand for travel to and from Hong Kong at

that time. In fact, our inbound traffic was down 36% for the second half, and outbound by

7%. Now, we compensated for that decline to a certain extent by increasing our focus on

transit traffic, which grew 7.5% in the second half. And while that allowed us to maintain

relatively healthy load factors in the face of declining demand for direct travel to and from

Hong Kong – so overall load factor for the year was down by only 1.8%points to 82.3% -

it did have an adverse impact on yield, with passenger yield down 3.9% to 53.6 cents. So

all in all, our core airline business reported a HK$434 million loss for the second half,

compared to a HK$675 million profit for the first half.

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Nevertheless, despite all the very significant external challenges we faced in 2019, we

were profitable for the year as a whole at both the Group and the airline level. And as you

saw, this afternoon we announced an attributable profit of HK$1.691 billion for the Group

in 2019, compared to HK$2.345 billion the previous year.

I’d just like to make a few additional comments on 2019 before I move onto 2020:

Firstly, in view of the difficult outlook for 2020, we successfully increased our unrestricted

liquid funds to HK$20 billion at the year end.

We also launched our fantastic new brand campaign “Move Beyond”, which signals our

ambition to become one of the world’s greatest service brands. And we remain absolutely

committed to that vision despite the external challenges that we currently face.

And last but certainly not least, we completed the acquisition of HK Express in July. HK

Express is now a wholly owned subsidiary of Cathay Pacific and it will be a key component

in our portfolio of brands as we develop our business over the long term. In November

we announced that HK Express will begin taking delivery of 16 new A321neo aircraft from

2022 onwards, as we start to realise its development potential.

So that is my very brief summary of 2019 – very much a year of two halves as I said.

Now moving onto 2020. Clearly the outbreak of the coronavirus is causing widespread

disruption, on top of what was already a very challenging environment. This is a time of

tremendous anxiety and concern for all our staff and customers. As you know Cathay

Pacific has an unparalleled reputation for safety and in this situation as at all times, we

are of course prioritising the safety and wellbeing of our staff and passengers above all

else.

After a promising start in early January, we experienced our most challenging Chinese

New Year period ever. Demand dropped dramatically and cancellations of bookings have

continued since then as governments as well as companies around the world impose

travel restrictions of various kinds, and as individuals themselves choose not to travel.

The scale of the challenge we currently face is unprecedented. The outlook is very

uncertain. Having said that, we remain confident in the future of Cathay Pacific. We are

a resilient organisation, with an iconic brand, an outstanding team and a winning customer

proposition, and we remain confident in the future of Hong Kong as an aviation hub and

in our ability to thrive in this region over the long-term.

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In the short term, however, what actions are we taking to weather this storm?

First and foremost, we have cut capacity (measured in Available Seat Kilometres) by

approximately 30% for February and by 65% for March and April, with frequencies cut by

approximately 65% and 75% over the same periods.

Second, we are asking all our vendors and business partners for relief in the form of

deferrals and discounts to help us preserve cash. Cathay Pacific is a very good customer

when times are good, but we expect all our vendors and business partners to come to the

table now when we need them to. And those discussions are ongoing.

Third, we have invited our staff to participate voluntarily in a special leave scheme, under

which they may accept three weeks’ unpaid leave over the coming four month period.

And I am touched and humbled to report that fully 80% of our entire staff have now signed

up for that voluntary programme. It makes me immensely proud to see the entire team

come together in solidarity to battle through this crisis.

Beyond that of course we are constantly reviewing all discretionary spend and cutting

back or deferring wherever possible.

No one can predict when these conditions will improve. I already gave you our planned

capacity and frequency cuts for March and April. In addition, I can tell you that, as at the

end of February, passenger load factor declined to approximately 50%, and year-on-year

yield has also fallen significantly. We don’t yet have planned capacity cuts available for

May but obviously we need to remain agile as we continue to monitor and match market

demand. Nevertheless, it is inevitable that despite all the measures I have just outlined,

we will incur a substantial loss in the first half of this year.

Finally, I would just like to take this opportunity to thank every single member of the

Cathay Pacific team for the incredible professionalism, dedication and resilience they

have shown in recent months during some very tough and anxious times. I couldn’t be

prouder of our amazing team.