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Welcome to SATS's Second Quarter Financial Year 2018 - 2019 Earnings Conference Call.
Before we begin, SATS would like remind you that certain comments made during this call may contain forward-looking statements. Many of these forward-looking statements can be identified by the use of words such as may, will, expect, anticipate, estimate, assume, continue, project, plan and similar words and phrases. The company's actual results and future financial condition may differ materially from those expressed in any such forward-looking statements as a result of many factors that maybe outside the company's control, including, but not limited to, changes in the business environment. The company does not undertake any obligation to update its forward-looking statements.
I will now hand over the call to Carolyn Khiu of SATS. Please go ahead.
Thank you, Serena. Hi, this is Carolyn. Good evening to everyone who is on this call. A while ago, we just released our results for the second quarter and the first half of fiscal year '18 - '19. With me here are Alex Hungate, PCEO; and Manfred Seah, CFO, who will take you through the results. So to get the ball rolling, I'll hand you over now to Alex.
Thanks, Carolyn, and thanks for everybody joining this evening. I'll take you through the executive summary and the operating stats and then I'll hand over to Manfred. First of all, headline numbers. PATMI decreased 9% year-on-year in the quarter to $65.7 million. Revenue grew at 4.2%, slightly higher if we exclude the deconsolidation of SATS Hong Kong to $453.1 million for the quarter. And then share of after-tax profits from associates/JVs declined 22.2%, primarily due to the non-recurrence of one-offs from last year, but also impacted by emerging market currency weakness and lower volumes in certain markets. However, operating margin improved. The increase was 0.5 percentage points to 14.6%, with positive jaws across all cost categories.
The interim dividend will be $0.06, which is the same as last year. You may remember last year, we increased the interim from $0.05 to $0.06, keeping it at $0.06 this year.
Now moving on to the operating statistics. For the group, passenger handling went up 13.6%, driven by increases in ASEAN, in particular, but also other increases in Singapore.
And then now, we've got flights handled. So the decrease here, that's because of the deconsolidation of SATS Hong Kong. Excluding the impact of the deconsolidation, it would have grown 4.6%. And then cargo went up 3.3%, and gross meals produced went up even faster at 9.5%. That includes our aviation and non-aviation food business. And then, the star performer in terms of increase is the cruise business, which grew from 33 to 113 year-on-year or 342%.
Now I'll hand over to Manfred for the financials.
Thanks, Alex. Good evening, all. I shall now take you through SATS's financial results for 2Q FY '19. Please refer to Slide 7. Group revenue increased $18.3 million to $453.1 million. Both Food and Gateway achieved volume growth. Excluding SATS Hong Kong, which was divested in July '17, group revenue would have increased by $22.2 million.
Operating profit grew $4.9 million to $66 million, with improved operating margin of 14.6% as compared to 14.1% last year. Share of earnings declined $4 million, mainly due to lower contributions from our Indonesian JVs at Brahim’s, offset by positive contributions from new JVs such as GTR and Mumbai Cargo.
PATMI decreased by $6.5 million, mainly due to the absence of one-off gains on asset disposal last year, which amounted to $7 million.
Moving on to first half results. Group revenue increased $31.2 million to $892.5 million. Food and Gateway grew by 2.6% and 4.8%, respectively, from volume growth despite continuing pricing pressure. Excluding the deconsolidation impact of SATS Hong Kong, group revenue would have increased by $46.8 million, that's 5.5%.
Operating profit improved by $16.3 million to $130.9 million. The margin achieved for this period was 14.7% compared to 13.3% last year. Share of earnings was lower by 4.2% -- $4.2 million due to lower contributions from PT CAS, PT JAS and Brahim’s, mitigated by contributions from new JVs such as GTR and Mumbai Cargo.
PATMI grew slightly to $129.6 million, notwithstanding the absence of one-off gains in the current year.
Normalizing the gains last year, underlying PATMI was $7.1 million up. SATS gearing remains healthy at 6%, with free cash flow of $63.4 million being generated in first half FY '19.
Now Slide 9, I shall leave it to your own reading. This is just a detailed breakdown of the comparison of the results.
Slide 10, on financial indicators, I shall just cover the first half comparisons only. Group OP margin improved to 14.7% compared to last year of 13.3%, with revenue growth outpacing OpEx. Year-to-date, PATMI margin dropped to 14.5% due to the absence of one-off gains. Basic EPS remain the same as per last year, and our board, as Alex has mentioned, proposed an interim dividend of $0.06, which is similar to last year.
Now Slide 11, covering segmental revenue. Overall, revenue of both Food and Gateway divisions have increased for the 2 periods, 2Q and first half. Aviation remains the dominant sector for the group, accounting for more than 86% of the group revenue for the 2 periods. Growth in non-aviation revenue mainly comes from our cruise center business, which grew 3x and revenue increased at our Kunshan central kitchen. By geographical spread, Singapore remains the key pillar, accounting for more than 82% of the group revenue.
As you can recall, we started tracking the SATS share of revenue. This is the aggregated revenue, which is non-IFRS. This is to illustrate SATS revenue growth generated from the various regions. In first half FY '19, combined revenue grew by 8.1%. This compares to console revenue growth of 3.6%, with the Singapore accounting for 62.8%. And in FY '18, Singapore accounted for 65.4% of the aggregated revenue. The growth was primarily attributed to Singapore growth of $28.8 million from the better performance of SCCS, this is our cruise center business, new JVs such as GTR as well as Mumbai cargo, which contributed positively to the revenue in ASEAN and India, respectively.
Now on Slide 13, group OpEx has increased across all categories except for other costs. Included in other costs was an exchange gain of about $4.4 million for the first half FY '19. The increase in stock cost, raw materials and license fees were in line with the increase in revenue. The higher depreciation charge is mainly due to the new cargo facility in Saudi Arabia.
Slide 14 sets out the associates and JVs performance. Share of associates has decreased by 22.2% and 12.5%, respectively, in 2Q and first half. Our Indonesian associates have underperformed mainly due to higher concession fees payable to authority. Weakening market sentiment has also put pressure on the rupiah, which has a negative impact on our profit contributions.
Despite the underperformance, PT CAS group is still amongst the top contributors. The other significant contributors include AAT, our Evergreen Kitchen and AISATS as well as TajSATS. New JVs such as GTR and Mumbai Cargo have contributed positively to the share of results.
Slide 15 sets out our financial position as at 30th September 2018. Now I'll just cover 2 items here, which has shown some significant change. The one is -- first one is the higher investment in joint ventures resulted from additional capital injection into GTRH, this is our GTR Holdings, as well as our ground services joint venture in Beijing.
Group cash and short-term deposits are lower -- is lower due to dividend payment of $134 million in August and additional investments. Net debt to equity ratio, as I mentioned earlier, remains healthy at about 6%.
This is my last slide, which covers the cash flow position of the group. An increase of net cash from operating activities for first half is mainly due to higher profit generated from operations in the financial period.
Net cash used in investing activities is higher than last year, mainly due to additional capital injection in GTRH and BGS and the absence of proceeds from disposal of assets held for sale. Net cash used for financing activities is higher mainly due to higher dividend payment as compared to last year.
In conclusion, the group generated $103.4 million from operating activities with a free cash flow of $63.4 million during first half '19.
Now I shall hand you over to Alex, who will cover the outlook.
Thanks, Manfred. So the outlook, particularly coming a day after the U.S. elections, is of interest, I think. So we do see the trade tensions and the weakening sentiments impacting emerging market currencies as we've seen in these results and also, trade volumes to some extent as well in some routes. At the same time, the higher oil prices during the quarter and the increased competition in the airline industry will continue to result in pricing pressure for SATS. However, notwithstanding these short-term challenges, we do believe that aviation volumes and the demand for safe quality food are set to increase and therefore, we intend to continue to pursue our growth strategy, both organically and inorganically.
We'll also continue to invest in our people and technology, to digitalizing services, enhancing our culinary capabilities and improving productivity.
Okay. Thanks. Serena, maybe you can open up the lines for questions now.
[Operator Instructions] Our first question, we have Louis from Crédit Suisse.
I got 3 questions from me. The first one is just a quick one. I think, Alex, in the opening statements, you mentioned the reasons for the weaker associate earnings. So I just wanted to confirm if there were any one-offs in the associate lines other than the reasons mentioned in the slides.
There are some small one-offs in 1 or 2 of the associates, nothing large enough to kind of single out and describe, but there were a couple, yes.
Okay, okay. And on the second question. I mean, I saw the ship calls, a tremendous growth there. So with the 113 ship calls, just want -- I mean, in the first half, just wanted to get a sense of what the capacity of the terminal is and what sort of utilization are we at, some sense of that?
Well, on an annual basis, utilization is still low. Because if you imagine, there are 365 days and we can fit 2 ships. In fact, some days now, we're doing 3 ship calls. So in theory, you got a maximum capacity of close to 1,000 ship calls. However, 3 ship calls are quite difficult because one of the ships come in at 4:00 a.m. and will have to start the turnaround around 8:00 or 9:00 a.m. So it is -- it's quite logistically complicated. But let's say that you called 2 ship calls a day, the capacity, that's still 700-plus items, we are doing 113 in the quarter, so there's still more capacity. What we are seeing though, of course, is the strong demand for the Northern Hemisphere winter, where the cruises out to Southeast Asia are very, very popular. And then, the season is extending, so the shoulders are extending with the coming peak. And then the shoulder -- and then the new shoulder season is actually even wider than it was before. So that's, I think, how the market will work. The -- over time, of course, the government will consider putting in additional berths. Now, we don't know exactly how the configuration for that will work, but obviously, SATS will try to get involved in that if we can.
Got it. And lastly, in terms of your inorganic growth strategy. At this point in time, I just wanted to get a sense of whether it is more likely that you will try to pursue more large scale acquisitions like the Turkey acquisition that previously, you were pursuing. Or is it more back to a focus on kind of a slightly longer gestation projects like your kitchens in China?
Well, we look at all acquisition opportunities that come to us. As you mentioned, some of them are larger and you're aware of the Turkey possibility. But some of them are much smaller. We think that the small ones have a role and then the larger ones can have a role as well. So we look on the merits of each one and its fit with our strategy and their ability to return to our -- to all of our shareholders, obviously, is the key criteria.
Our next question, we have Ajith from UOB Kay Hian.
Alex, 3 questions from me. Firstly, with reference to the Gateway Services revenue, perhaps if you could shed some light in terms of how much the increase in volume for the Cruise business contributed to the 6.3% increase in the revenue for the Gateway Services segment? So that's the first question. Number two, with regards to the associates, if you could single out to one particular factor that affected your associates, would it be the currency or would it be the lower volume? So that's my second question. Third question is about your take on what's -- what we can expect in terms of cargo volumes going into the 3Q and 4Q. Yes, these are my 3 questions.
Very good. Okay. So let me see if I can get all of those straight. So the first one, Gateway Services revenue. It's clear that cruise was a star performer. However, Gateway revenues from aviation also grew, not quite at the same rate. So without that cruise contribution, you wouldn't see quite such a strong performance on the revenue line. However, the operating profit contribution from cruise was disproportionate because of the high operating leverage that we get from operating the cruise center. We've been gestating that business until now, helping to grow the volumes in the industry. But now that you've got the same facility basically but with a lot more of revenue flowing through it, we get considerable improvement in operating margin on the cruise business. So revenue is one thing, Ajith, but I think in this case, I would really urge you in your models to think about the operating margin as well.
On the associates line, currency was a quite a big impact, close to $2 million. However, you suggested that the other impact was volumes. Volumes played a role in some markets. We mentioned the trade tensions, et cetera, seems to have a slowed down some certain routes. But one of the biggest impacts actually in Indonesia, in particular, is that the regulator has taken a higher share of the revenue, using -- has increased the franchise fees. So that's probably going to have a continued impact into next quarter and second half of the year. Although, over time, we are now attempting to pass on those increases to the industry, but it won't be straightforward. And so you can expect relatively weaker performance in Indonesia for the next quarter or so.
You asked about -- yes, you asked about cargo volumes as well. Cargo volumes in some of our markets are showing some softness. The trade routes in and out of China, I think, are reconfiguring themselves. We see some very strong routes like Vietnam, for example, continues to do very well. So I think the China -- in general, China, ASEAN is relatively well insulated from the broader impact across the Pacific. But we have seen volumes in some of the Greater China units a little bit softer than we expected. So maybe that pattern will continue into the second half of the year.
Okay. If I may, just as a follow-up question. With regards to the increase in franchise fees in Indonesia, when did it come into effect?
Around the beginning of this quarter. And if you remember, they were slightly weaker in the first quarter as well. So there was some impact towards the end of that quarter.
Our next question, we have Rachael from UBS.
I'd like to ask, how much of your operating profit comes from cargo and foods right now?
Yes. Rachael, we don't disclose that, actually. We don't break it out. Sorry.
[Operator Instructions] Our next question, we have Richard from Phillip Capital.
I just have one question. I just want to touch on the associates and JVs again, a follow-up from Ajith's question. Because I think, Alex, you mentioned that $2 million is due to currency. So if I add the $2 million back to the reported $14 million, that's still $2 million short from last year's $18 million. So how much of this $2 million is actually from the higher tariff from the Indonesian government? Can we get a sense of that? And presumably, the rest of it is due to lower volume?
Yes. The -- I mean, there's some contribution from -- some pretty good contributions actually coming out of the new joint ventures like GTR, Malaysia and Mumbai Cargo, which is new year-on-year. So actually, the impact in Indonesia is being offset by those. But as I mentioned earlier to Louis, there's also some -- a couple of one-offs, which are detracting from the results in the quarter as well. So I don't want you to think that the rest of it's all coming from Indonesia. There are a couple of one-offs, which won't repeat in -- later on in the year. So... yes?
No, sorry to interrupt. Carry on. Please carry on.
No, it's okay, Richard. What was your question?
So what -- how much is the one-off then?
Well, it's not big enough to describe, but there are a couple of small ones, which just commenced have only come up in this quarter, which wouldn't reoccur ordinarily in your models. But that's contributed to over and above the situation in Indonesia.
Okay. Because even with the positive offset from the new contribution and then if we add back the $2 million for currency, it seems like if done -- I'm just trying to understand where the weakness is coming from. The numbers just somehow, don't reconcile.
Okay. So there's lower revenues in Indonesia from the regulatory increase in transient fees. There's -- I actually mentioned probably by name also in Malaysia, Brahim’s. We've got lower revenues from lower volumes, that's really the one of the markets that seems to be lower volume. Then a couple of one-off bits and pieces across the associates, which have occurred in this quarter. And then, offset by pretty strong growth in India, I think, TajSATS, AISATS and now, the Mumbai Cargo have all increased, but we see good volumes going across our Indian businesses. Slightly weaker in Greater China because of cargo volumes, but as you recall, we restructured AAT -- or we are restructuring AAT and the volumes from Hong Kong Airlines have come across. And that's really improved our margin there, so that's helped in Greater China. And I think probably Richard, that's a pretty accurate picture. You've got -- you kind of got a fuller picture there now.
Our next question, we have Ajith from UOB Kay Hian.
Alex, sorry about the follow-up question, but this is just regarding the operating stats. Just to be clear, the decrease in flights handled, this is on Slide 5, 3.6% that we saw on first half was purely because of the deconsolidation of SATS Hong Kong. And would I be right to assume that excluding that, it would have grown in line with Changi Airport's flight movements?
That's right, Ajith. The underlying growth is 4.6% increase.
4.6%, okay. And if memory serves me right, it seems to be higher than Changi Airport's throughput, good, but never mind, I'll just move on to my second question. This is regarding Slide 12. That share of revenue, am I right to assume that this is in reference to first half FY '19, just to clarify the growth came from...
That is correct.
First half, okay, all right, that's it for me, thanks.
Thanks, Ajith. You can see quite good growth -- underlying growth in Changi, but also TFK in Japan has done well with the China passenger growth, China itself in revenue terms and India, I mentioned earlier already. And then ASEAN because -- primarily because of the GTR venture, which is doing well in Malaysia comes through quite clearly on that Slide 12.
Our next question, we have Alfie Yeo from DBS.
I just have 2 questions, one is on TFK. The revenue seems to be growing very nicely quarter-on-quarter as well as year-on-year. Can you give us some updates from Japan? And my second question will be on Terminal 4. Is it profitable already?
Okay, thanks, Alfie. Yes, so the main driver of the success in Japan is increased volumes, and we're getting increased volumes for 2 reasons. Firstly, the new customers that I had mentioned on the last call, notably Air Canada and Air India, those are generating increased volumes. But we're also seeing a lot more Chinese visitors into Japan and that's benefiting Japan overall as an economy. And, of course, we pick up that benefit throughout activities at Narita and Haneda.
For T4, T4 operation is currently profitable. Its volumes are, of course, nowhere near what it will be when the terminal is full. The terminal capacity is 18 million passengers per year. I would estimate it's running something like 9 million or 10 million. So it's got room to grow further and therefore, it doesn't have the same margins as the rest of our Gateway business yet in the other terminals where we've got much better volumes flowing through. But I think, yes, it's profitable already and we hope that it will improve as those volumes come closer to the capacity on Terminal 4.
Our next question, we have Siew Khee from CIMB.
I got 2 questions. I just wanted to check that the Food Solutions associates profit came down to $3.7 million this quarter, and that was mainly from Brahim's, is that right?
That's right, Siew Khee, yes. A little bit of currency in there but mainly from Brahim's. For example, the Indian rupee also was quite weak and therefore, we didn't get the full upside from our cash on the food side.
Okay. Also just to check, how much is GTR contribution?
We don't disclose that. All we've said so far is that it's -- it was profitable last quarter already. And then I mentioned earlier, it's made a good contribution this quarter again.
Okay, let's take a web question from here. This is from Su Wei. We want to understand the reasons for the increase in the company premises and utilities expenses. I think I'll pass that over to Manfred.
Hello, this is -- Su Wei is it? Hi, Su Wei. The utility actually went up because of the fuel costs. It's gone up by about $3 million, about 16%.
Yes. There's also increase in the water costs as well, which is relating to change in tariffs in Singapore. So we've -- I mean, there's not much we can do about that except we can become more efficient in our usage. I think you remember last year, we put in place some new chillers in one of the larger kitchens at ICC1. We're also now doing a chiller replacement in ICC2, which should make them a lot more fuel-efficient. And we've also put in place some interesting water recycling and efficiency measures as well to try to minimize our water consumption. It's something that will help our cost expense, but it will also -- it's something that we came to do anyway from a sustainability perspective.
Su Wei has 3 questions. So the second question is, there seems to be a deceleration in Greater China revenue. Is there anything that is driving that?
Yes. The main thing is the deconsolidation of SATS Hong Kong. There was a deconsolidation last July. So year-on-year, there would have been a revenue impact from that in the stated numbers. I don't know, Manfred, if you can mention the number excluding that impact, if you have it at your fingertips.
Okay. The second Q deconsolidation impact, the SATS Hong Kong is about $3.9 million top line. Yes, SATS Hong Kong revenue was $3.9 million, and the OpEx is about $4.4 million. So there was a net loss of about $0.5 million last year.
Revenue.
Yes. So with respect to the first half, SATS Hong Kong revenue was about $15.6 million.
There we are, Su Wei I think that gives you an idea. And then I mentioned also that some of the routes in Greater China have suffered from some slowdown in volumes, I think related to the trade tensions. We don't know whether those will continue the rest of the year, but we're planning for that eventuality, and that's offset by an improvement in margins in Hong Kong.
Okay. And the last question Su Wei has is with regard to PT CAS. Would we be able to pass the entire cost to the customer or do we have to pick up some of the cost increase?
Well, our intention is to try and pass on as much as possible. As I mentioned, these things are not straightforward but I think the industry understands that the regulator has increased the franchise fees. So we have a very transparent message through to the customer community, which is that this is something which is beyond our control and that we will seek to pass on. I think we'll find out the extent to which we are successful over the next 2 quarters basically, between now and the end of our financial year.
We will take another question from Sumit. It's about the net cash is down from $385 million in fiscal '17 to $185 million in the current quarter. Would you be comfortable returning to a net debt company? How much is your committed CapEx as a percentage of investment plan for the next 2 years?
Okay. I think the reduction in the cash is because of the payment of the final dividend last year, which was what, Manfred?
$134 million.
$134 million. So obviously now, quarter-by-quarter we'll replenish that. If we start making larger acquisitions, then of course, we could go into a net debt situation, and we're prepared to do that. I've mentioned in the past that we feel comfortable with the leverage ratio of up to 30% debt to equity. The CapEx this quarter was around $20 million, that's in line with the guidance I gave for the full year of around $90 million, that will fit with that guidance. And that seems to be a comfortable amount of CapEx for us, not just for plants and equipment, but also for the technology investment program.
Our next question on the audio, we have Rachael from UBS.
On GTR, would the greater proportion of your earnings growth comes from Singapore or Malaysia?
Rachael, I'm glad I can answer this question. I felt bad about the last one. Yes, by far the greatest proportion comes from Malaysia. We operate across 15 airports there.
17 now.
17 now, that's right, yes. AirAsia is now flying to 2 more airports than they were when we first started the venture. And they grow fast and their orders of the new aircraft are very positive. So yes, Malaysia is by far the more important business. We intend to also expand our footprint with them. I think at the time we announced the venture, we talked about potentially moving into Philippines, Indonesia or even Thailand. Those are still plans that we have. The venture's going very well. I think both parties are keen to expand the footprint as we see opportunities across the Southeast Asian footprint. So I think it's a successful venture already and something that we think has lots of room to grow.
Okay. I guess, a follow-up on my first question. Just wondering, how -- in terms of your Gateway earnings, how should we model the growth coming from the next 12 months, assuming today's operating conditions?
Okay.
And I'm referencing on the operating profit basis.
On a profit basis, yes. I think you know that the Passenger Handling business has lower margins than Apron and Cargo. It's always been that way in the industry. Some of the recent technologies that we've used have improved the passenger handling business slightly, but it's still a lower margin business. The Cargo business can attain higher margins than Apron because it's more dependent on the facility. But of course, if that facility is not utilized well, then those margins can even be negative in the startup phase. In fact, we have examples of that. Within these numbers, we've got our investment in building up our Cargo business in Dammam in Saudi Arabia. And because it is a start-up, it's losing money at this point, which is what we expected. And then you've got other businesses like AAT or Air Singapore, where it's a more mature business, good market share, good utilization, and then you can get much better margins. The next 12 months, I think although we expect the trade uncertainty to potentially mute the growth in cargo, that would have happened naturally, given the economic development of Asia will be more muted than it would have been. But there should still be some growth and therefore, those cargo facilities which get more growth, relatively faster growth, will be ones where we see opportunities to improve margin. And if there are any markets where growth drops of course, then you would see a reduction in margin in those markets. So that's how I would think about it.
Passenger volumes seem to be fairly impervious to trade wars and all the rest of it. They tend to seem to grow fairly well because they are -- they're related to the demographic trends of growing middle classes, growing organization. And we expect those in the medium and long-term to continue to grow at similar rates. And that, of course, would drive both Passenger Handling and Apron revenues. And then I mentioned earlier that Apron has lightly higher margins than passenger.
Okay. But given that you said that Apron is higher than passenger and cargo is higher than Apron, the growth in passenger and slight drop in traffic would be less meaningful than looking at the growth in cargo. Would that be something that I can characterize?
Yes. I think that's fair, yes. We -- where we've got large -- fast growth in cargo volumes, that helps our margins better.
[Operator Instructions] Our next question, we have Royston from Daiwa Capital.
I have just got one question. I would like to just clarify whether the pricing power in your -- basically, your in-flight catering segment has actually stabilized already or are you still seeing a downward trend?
Royston, yes, you can -- I don't think there's any increase in pricing pressure. It's similar to what we've been working with for the last several years. It reflects the very intense competition between the airlines and therefore, that difficulty of driving up their yield. The low taxes still seem to be strong, so the volumes are there, but they're very price conscious at this point, and we expect that to continue. So while there is pricing pressure, it's a similar intensity than what we've have over the last couple of years. So our strategy is to focus on productivity. Productivity in 2 senses: firstly, in the -- trying to extract purchasing synergies from our supply chain by aggregating volume. And secondly, also by becoming more efficient in terms of labor costs, by using more capital in our kitchen and getting more automation through larger batch sizes, again, benefiting from our scale. And the batch size improvement and linked obviously with supply chain as well. So that's been working the last several years. So although you can see that the revenue line on food does not reflect the increase in meal volumes. So that's where you can impute that there's still pricing pressure. Nonetheless, the operating margins for food is still holding up. And that shows that we're keeping up with that pricing pressure with the productivity improvement.
Okay. We'll take 2 more questions from e-mail. One is from [ Ticket ] from [ ICH ]. How will the pull up from Turkey impact SATS bottom line?
Okay. There's no impact from the bottom line from Turkey because we were still at a memorandum of agreement stage with Turkish Airlines. So we hadn't actually expended any significant cost in Turkey at the time where we mutually agreed to pull out of that opportunity.
And the question -- another question is from Su Wei. He's asking how flexible is SATS cost structure to face the decrease in volume in the event of an economic downturn as SATS has been increasing fixed cost over the years?
Okay. We have some variable cost as well as fixed cost, but our view is that the increase in volume over the medium to long-term is going to occur. There are very few analysts in the market who expect aviation volumes to decrease in the medium to long term. There may be some years where they're weaker and we saw that, let's say, 3 to 4 years ago, relatively weaker. But as we've now seen that we return to the trend line and it is a market where aviation and the consumption of convenient food in cities is all increasing. And the other driver, which of course, is e-commerce volumes. So if that reverses and there's a medium to long term trend of decrease in aviation, decrease in e-commerce and decrease in convenience food consumption, then of course, our strategy doesn't look so smart. But the whole strategy is based on the fact that we think those -- all of those trends in Asia will continue to be positive over the medium to long term, notwithstanding that there might be individual quarters or even years at different points where there might be decreases over the medium-long term. Our hypothesis is that there are definitely going to be increases in all 3.
Our next question we have Rachael from UBS.
One final question that relates everyone's asking. How is the food kitchen in China coming along?
Okay, Rachael. Thanks for the question. And, in fact, just finishing up the answer to my last question. In fact, we haven't quite -- we haven't increased fixed costs anyway, so we've -- although we've invested in new technologies and automation, we've done it in a way where we've managed to keep fixed cost relatively flat. So China, we do have a new kitchen in Kunshan, which you know as we've been marketing for the last -- more than a year now. We've got a lot of new customers. That kitchen is doing very well, we're very happy with it. It has reached breakeven in terms of its operating profit. And we expect same fixed cost impact there. As we increase revenues further, the margin should improve. We would like to continue to build kitchens. The next target will be somewhere up in the Northeast region and we are currently looking for a site there where we can construct a second kitchen. This time, servicing the population around Beijing. In the Beijing region, we also have 3 flight kitchens through our joint venture with capital airports, which called BAIK, B-A-I-K. So one of the opportunities there is to recreate what we've created in both Japan and Singapore where we have a large central kitchen that can very cost-effectively supply the flight kitchens with components that can be cooked in very large batch sizes and therefore, reduce our unit cost and improve our productivity. So we're now intending with the second kitchen in the Beijing region to serve both aviation kitchen and non-aviation customers. The same QSR customers who are taking our products out of the Kunshan kitchen will also want to take our products in the Beijing region. We see further opportunities in the other major cities in China. And of course, nothing to announce now, but we hope to continue that build out because we see not just the aviation opportunity but this very large opportunity to service the quick service restaurants in the major cities across China.
Okay. I understand that you're not there right now, but once the facility gets up and running on full production, do you see the margins as being better than what you can achieve for your in-flight kitchen in Singapore?
The margins for non-aviation tend to be lower than the margins in aviation if you look across the industry and across the world. So, however, in our case, we do think that because we have coordinated strategy of taking components from our central kitchen into the aviation side as well as in parallel selling to the quick service restaurants in the same greater metropolitan area, we do think that we can be at the higher end of the margin range for the non-aviation business. So I hope that answers your question.
Okay. What if I refer just specifically to your in-flight kitchen [audio gap] so excluding the other [audio gap] of this [audio gap].
So what's the question? So the question is about only the aviation business but what is your question?
For your China kitchen, if once it gets up and running, would you say that the margins can become better than what you are currently achieving for your Singapore kitchen?
I think the margins in China across all industries tend to be lower than the rest of the world. It's an extremely competitive market. We think that with our strategy and being relatively first to market in this business in the China market, we have a chance to establish ourselves with, I think, industry margins, maybe at the higher end of the Chinese scale. But we don't -- in general, investing in China, we don't expect our margins to be higher than other markets. We expect them normally to be lower, and I think most CEOs will tell you the same thing. However, of course, the volumes are considerable. The market -- the size of the market opportunity is much, much larger than most of the other markets that we operate in. The only one comparable in size in the long run is going to be India where we also have a good position and we're equally excited about the future. So the answer is no. We think China will be generally lower margin but much, much larger.
Thank you. As there are no further questions, I will hand the session back to Carolyn. Over to you.
Thank you, Serena. Thank you, everyone, for calling in. That's all for tonight. Enjoy the rest of your evening. Goodbye.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.