Aegean Airlines S.A. (AEGN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Costantino, your Chorus Call operator. Welcome, and thank you for joining the Aegean Airlines conference call to present and discuss the first half 2024 financial results. At this time, I would like to turn the conference over to Mr. Kouveliotis Michael, Deputy CFO. Mr. Kouveliotis, you may now proceed.

Good afternoon, everybody, and welcome to our first semester and second quarter call for 2024. Let me first say that I'm with our Deputy CFO and Executive Board Member, Mrs. Stella Dimaraki; and our Investor Relations Manager, Mr. Anthi Katelani. So we welcome you to our call, and we are all here for your questions. Let us get with our initial comments, which are not going to be very detailed. I prefer to keep them relatively short in order to give space and time for Q&A, which I believe is much more efficient for this call. So Aegean for one more time, has reported strong performance in the seasonally weak first half of the year in terms of growth in passenger numbers, in revenues, in flight activity, a number of flights, and in terms of developing its investment towards the MRO and the training facility and of course, in terms of profitability. We are very happy with the performance of the Q2 and the half 1 overall as both has exceeded very close or be very close to the previous record year. Regarding the passengers and the revenue, I would like to comment that in the first half of the year has carried 7.3 million passengers that represents 9% increase compared to the same period of last year. The growth has been balanced between international passenger traffic recording an increase of 9%, which have -- international passengers have reached 2.6 million and in parallel, domestic passenger traffic recording an increase of 8% to 1.8 million passengers. Load factors have reached 81.2%. The balanced growth in passenger traffic mainly comes from the increased traffic in Athens International Airport, which has -- the increase has reached 13% and Thessaloniki Airport, which also has showed -- presented an increase of 12%. Aegean has increased during the first half frequencies on flights to and from London Heathrow which from 3 have -- daily have gone to 4 daily from 2 and from Istanbul up to 4 daily flights and other main European capitals like Paris, Rome, Frankfurt from Athens and Thessaloniki, Barcelona, Madrid and Cyprus. Overall, the market in Greece has increased -- has been increased by 11%, and this shows quite a strong demand for Athens for Greece overall as a destination. But still, we -- and Athens also has been -- has reached even higher levels of growth to 15%. Aegean, in line with the market in the first half, we have expanded capacity of 11%, and we are continuing to being among the few carriers that we are above the 2019 levels of capacity by 17%. Revenues have reached almost EUR 750 million, which are 10% higher than half 1 '23, with RASK and yield remaining at the same levels as last year. EBITDA stood at EUR 147.6 million, which is 6% higher than half 1, keeping a steady margin -- EBITDA margin at 20%, which still remains one of the strongest EBITDA margins in the sector. Profit before taxes in half 1 '24 amounted to EUR 31.6 million compared with EUR 48.7 million in 2023. Profit after taxes stood at EUR 22.9 million from EUR 37.1 million in half 1 '23. So all these remains strong numbers, bearing in mind that different aspects that affect year-over-year comparisons. Regarding our cost structures, the main issue and the main element that has affected our excellent performance in the half 1 of 2024 is still remaining the GTF engine issue, which we have explained to you during our previous call quite specifically and in further detail the nature of the issue, which still remains visible and is affecting our cost structure in 2024. It is important to know that the nonscheduled mandatory engine inspections and repairs, which started on October 2023, require -- which require a grounding a significant part of our new aircraft fleet, significantly impact our cost structure in terms of fuel, maintenance, and aircraft lease costs. An average, as of today and -- actually on average for the first half of 2024, an average of 8 aircraft were not available, were grounded, so they were not operational which have caused quite a significant impact in our plans and our operations. In order to minimize the capacity impact caused by the GTF engines, we have extended lease contracts of aircraft expiring -- older aircraft -- older technology aircraft which were expiring in Q1 and Q2 2024. And since the previous year, which were not about -- which were not planned to be extended. Additionally, we have adjusted flight operations by reallocating capacity previously deployed to third-party operations abroad, and we have redeployed them and brought them back to our main bases in Athens and Thessaloniki. As we have already informed you, we have agreed with a compensation structure and package with Pratt & Whitney with the manufacturer, which is already going on and being executed. The compensation, although it covers a significant portion of the burden that we are suffering from this issue with the GTF engine, it does not fully cover and offset the cost impact of the effect of the grounded aircraft. So it's the cost plus the additional -- the seats that we are missing from the NEOs versus the CEOs. Moreover, the burden of increased CO2 purchases have a significant impact on our costs too, given the ongoing in the 3-year phasing out the period of the historical free CO2 allowances in the airline sector. And finally, inflationary pressures keep affecting together with higher flight activity, 11% more in terms of flights at the airport handling and overflight expenses. Even though -- even the above issues that are impacting our cost structure, our unit costs still remain very competitive versus our peers. And in half 1, to be more specific, in half 1, our cost -- our unit -- our CASK excluding EBT level, excluding fuel costs, has increased by 5% versus half 1 2023. The U.S. dollar exchange rate movement since the beginning of the year has also affected the valuation of the assets and liabilities denominated in dollars. And actually resulted to an FX loss of the valuation of almost EUR 4 million in half 1 2024 compared to gains of almost EUR 9 million in the similar period in half 1 2023. So the overall impact is EUR 12 million mainly coming from the valuations, which -- that's why in the operating EBITDA level, we are very, very close to our last year. But on EBT level, we are having this gap mainly is coming from the valuations effect and impact of the U.S. dollar movement. Overall, we feel very good about achieving these levels. Needless to mention that we have managed to leave behind the years where until 2019, Aegean's first half-period results were loss-making. We continue to be profit-generating. And in terms of some other elements that are worth noticing is we are also very proud and very happy that our cash generation still from operating activities is still very strong. Just to give you an example with the figures, cash at the end of the year was EUR 706 million. And after the repayment of the warrants and the dividend payout, which both of them resulted to almost EUR 150 million, our cash at the end of the half 1 of June 30 has reached to EUR 814 million. So this means that the strong cash generation remains and they actually assisted us each and every half, the first half of the year from the strong presales. The CapEx also, we would like to mention that in the first half of the year, we had some CapEx amounting to EUR 36 million, which also is included in the figures that we have mentioned before. EUR 36 million mainly invested in engines -- spare engines in our MRO investment, which is coming to the end of its first phase, and in lounges. So this is today, following our cash balance stands at EUR 750 million after the investment of Volotea , which we have announced last of EUR 25 million, which we have announced last week. Regarding the aircraft, our fleet, we are taking delivery -- in the first half we are taking delivery of 3 new Neo aircraft, bringing the total number of Neo fleet at 31 aircraft which consists of 18 A320 and 13 A321 aircraft with 2 more aircraft to come before the end of the year. And onwards from '25 onwards, we have 5 aircraft to be delivered in '25, '26, and '27. This is the current schedule with Airbus and which is expected to be executed. We are very happy to have secured our first JOLCO transaction in June, which brings us both diversification into sources of funding as well as tapping the Japanese investor market, bringing both 100% financing for our fleet at a very attractive cost and also meeting a strategy to increase the number of aircraft that will eventually be owned by us. We have 2 more JOLCO transactions to complete before the end of the year. And JOLCO financing, we are interested to increase eventually ownership of aircraft and balancing exposure between euro and dollar. So okay, people's development, I would like to mention some additional comments regarding our people. This year, we will start maturing our pilot academy rationale and investments. So the first pilots, which will graduate from this pilot academy will be inducted in our personnel and which shows it's actually, it's very timely because there is scarcity out there in the market for trained pilots. And it's supposed the gradual development. It's very complemented by our MRO facility and not only that, we have done more or less the same structure for our technical academy people, which are going to be added to our family and employees in the coming 2 years. We have added the trainees very early. We have started this initiative quite early, and we are one of the first lines in our industry and in our territory that we have started this initiative. And we feel very happy and very on time to have this initiative to mature and support an upgraded development of our MRO unit, which is an important part of our company. This is more or less what I would like to have as an introductory comments. So I would like to give you some time now. We are starting to Q&A phase.

The first question comes from the line of Natalia Svyrou Svyriadi with Euro bank Equities.

I hope you can hear me. I was wondering if you could give us an update on capacity growth. So you had said you were intending low capacity growth in Q3 '24. So I was wondering how this has been evolving. If you could give us an update and maybe if you have any indications on Q4? And also, how are the pricing dynamics going in the period, Q3, Q4, especially the Q3, very important period? And I also have one more question if you could give us some color on the current hedging positions in fuel and then euro?

Okay. Let's start from the hedging. In fuel, we have hedged around 69% of our needs for 2024 and 41% of our 2025 needs at the levels of -- which are currently around 14% higher than the current spot -- the current forward levels of the market. Regarding the dollars, we are hedged for 53% of 2024 needs and 32% of our '25 needs, more or less at the current levels of the dollar rate. Now, regarding -- let's -- going back to your question regarding pricing environment and what we see in Q3, which is the main element and the capacity that you have asked for, in Q3, we see that we are very close to the 2023 levels of Q3, a slight decline, but not -- we are happy of the demand that we see. The demand is there. Of course, the competition is also there. So there is a slight decrease on the pricing levels, but nothing worrying. And the capacity in Q3, we are planning to offer, and we have offered actually because we are coming to the end of Q3, 2% to 5% to 7% higher mainly from Athens more seats in the market, which is quite close to what the competition has also offered.

But overall, Natalia capacity is expected to flattish as we discussed in the beginning of the year. We are offering more capacity on the shoulder months. Hence, in Q3 overall network capacity is broadly at the same level of last year with the growth that Michael mentioned out of Athens.

Okay. So you've moved it more towards Athens. You had also mentioned that Q4 capacity will be a bit higher in the previous call, like Q1 and Q4 would be more capacity in the summer months. Does that stand also?

Yes. According to the current plans and what we have published, capacity in Q4 is expected to be around 5% higher than Q4 2023.

The next question comes from the line of Caithaml Jakub with Wood & Co.

This is Jakub. Also 3 questions from my side. First, I would like to follow on Natalia's question on pricing. Can you help us understand what does it mean in terms of us for the third quarter for the fourth quarter? We have seen, again, some cautious comments from Ryanair. So just trying to understand how does Aegean stack against some of the bigger peers in Europe. And the 2 remaining questions on cash flow. First, we have seen in the first half, higher year-on-year cash payment for amortization of the leases. Could you remind me what have been the drivers of the year-on-year increase? And on the free cash flow, is it possible to give us some rough indication how much do you expect Aegean could make in 2024 for the full year in free cash flow after lease payments?

Yes. Regarding the fares and the pricing in Q3 and Q4, actually in Q3, I have to repeat what I have answered previously that the average fares are slightly -- are very close, but slightly lower to last year's levels in the period. So we are -- okay, we have a different model versus Ryanair. But on the other hand, we don't see that significant drop in our fares, especially in Q3. It is lower, but it is not slightly lower, but it's not something very, very worrying to announce. Now, the free cash flow, it's -- we expect to be strong and actually, which will assist -- which will help or according to the current plans, we will continue to have the same dividend policy and the same dividend scheme as this year. And to be honest, sorry for not hearing very well your question about the amortization on the cash flow. I didn't understand it. So can you please repeat it?

Yes. The lease payments in cash terms have been higher year-on-year in the first half compared to first half '23. What was driving this?

It's a combination of delivering aircraft, new aircraft, having the AOG aircraft that we are still continuing to pay rents on that and extending the CEO aircraft which are flying actually and are replacing the capacity needed for 2024. So overall, cash flow-wise, it is affecting our outflows. And actually, this is the main reason.

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Kouveliotis for any closing comments.

So yes, I have to repeat that we are very happy from our half 1 financials and results. And we hope that this -- and we expect that this year is going to be another very successful year. Of course, operations-wise, we are still facing challenges. And it's not only within Greece, it's all over Europe with air traffic control, mainly issues that are delaying the flights overall, but we are happy to announce and to see that we have been improved a lot compared to last year because we have done some changes in our operations and network and infrastructure. And we are improving. We're not in a position that we are happy, but at least it's in the right direction and the delays are significantly lower than last year because of, as I said, mainly from our network design and other improvements in the operations. In Greece, we are also -- we would like to mention that even that the air traffic has increased by 24% versus 2019, which shows that there is demand, the demand is growing, but in parallel, the competition is also growing. But it also shows that -- and it's a fact actually that we experienced more pressure in the infrastructure, and that's on that aspect in airports and air traffic control, which all both items are very, very high in our agenda because they are -- they are affecting a lot of our operations. We are very eager to see the expansion of Athens International Airport so in order to support higher capacity numbers of passengers. And we see that overall, we are affected by this, as I said, in the growth, and we need -- we are very sensitive on trying to improve this impact.