Air Astana Joint Stock Company (AIRA) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Air Astana Q2 2026 Results Presentation for the period ended June 30, 2026. Many thanks for joining us. Shortly, our CEO and CFO will present the operating performance and financial results for the period, after which there will be the opportunity for Q&A. Please feel free to submit your questions via the appropriate link on your invitation at any stage, and we'll try and get to as many of those as time allows. As usual, this call will be recorded and made available on the Air Astana Investor Relations website. Of course, if you have any further questions after today's call, please feel free to get in touch with Air Astana's IR team. We will be more than happy to help. With that, I'd like to hand over to Ibrahim to begin the presentation.

Thank you very much, Simon. And I'd like to add my own welcome to our Q2 results presentation. Good morning, good afternoon to all. It's been an interesting quarter for both Air Astana and the aviation industry as a whole. So I'm excited about the opportunity today to present how we have been proactively dealing with the challenges and opportunities. I would like to start where we concluded the first quarter presentation, namely on the 6 areas where we were directing our attention and will continue to do so for the remainder of 2026. Goncalo and I have been entirely focused on addressing them in the second quarter and beyond. The first and most significant is the turnaround on Pratt & Whitney that has been at the forefront of our priorities to reduce the groundings and most importantly, to increase our production. Since we last talked in May, we've had 5 C-level meetings with Pratt & Whitney in order to drive a step change in the progress on this issue. A turnaround requires both more inductions that is slots for engines to be repaired and additional engines. Today, I'm very pleased to state that as a result of those discussions, we are now aiming for 2026 inductions to be 3x the number that we had in 2025 and with a continued acceleration in 2027. The mitigating actions were further supported with spare engines reaching now a number of 26. As a result, we have halved the number of groundings in summer 2026 compared to summer 2025. And the most important news that we want to convey today is that we are looking at 0 groundings in summer 2027, enabling us to fly all of our capacity during the next summer. The second quarter marks not only a step change in our visibility on this protracted issue, but an inflection point in the impact it has on our capacity. Consequently, we are confident that the increase of asset utilization will have an improving impact in the near term, both on production and on costs. The cost discipline remained with the capacity remaining constrained in the second quarter, translating into a higher unit cost and margin pressure, which we are determined to resolve. We have begun implementing a strategic plan to address costs within the business as well as a revised budgeting process. With the clearer visibilities that we now have on engine restrictions, we have strong grounds for confidence in improvements in our unit costs. In addition, we have made good progress in a number of cost areas, particularly the successful conclusion of negotiations with both Almaty and Astana airports. Third, we benefit from a stable supply and pricing structure in Kazakhstan, which remains comparable to the February pricing, and we have been able to increase our domestic uplift in the second quarter from 70% to 80%. This effectively gives us a countercyclical cost advantage in an environment when airlines globally are struggling to pass on the extreme fuel price hikes. Fourth, the delivery of the exceptional product should not be compromised by the cost discipline. We have been able to significantly improve, not just maintain the on-time performance as a result of a focused planning and successful execution entering into the peak season. This reflection of our customers has translated into a significant improvement of our Net Promoter Score over the course of the quarter, thanks to the dedication and professionalism of the Air Astana Group staff and crew. The new normal, we discussed the impact of the Gulf conflict at the first quarter results. at which point the disruption was still in its infancy. Our agility in dealing with that and reallocating capacity has allowed us to not only increase revenue by over 18% in the quarter, but has expanded our network to the benefit of our passengers across Air Astana and FlyArystan. And finally, as you know, we are expecting the delivery of our first Boeing 787-9 aircraft. The necessary preparations are well underway, and we are looking forward to introducing them into our fleet. This will have a further positive implication for our customer experience and route opportunities going forward. Moving to the group performance and our headline KPIs. Further to the capacity reallocation touched upon earlier, we have continued to see very strong top line growth with revenues rising by 18.3% in the second quarter versus the same period of last year. The strong RASK performance confirms that we are addressing the right markets and that our business model is strong. Our capacity and load factors are broadly flat in the quarter, whilst the cost headwinds discussed have continued to impact profitability. Our RASK-CASK differential for the second quarter is a positive $0.49, marking a notable correction from the negative differential we reported in our first quarter results. However, there is still work to do, and Goncalo will expand on all of the financial results and their details shortly. We are rightly very proud of the Air Astana product and appeal to the external validation to ensure that we are delivering the service that our passengers expect. Our operational teams have been working both internally and closely with the airports ahead of the summer peak. As a result of planning, discipline and successful execution, our on-time performance in the second quarter marked an industry-leading 87.6%, an improvement of 5.9 percentage points over 2025. Notwithstanding the summer peak, our OTP in July improved 9.2 points from July 2025, reaching 85.5%. Equally, our Net Promoter Score has continued its positive trend with an impressive 4 percentage point increase in June versus June '25. The trend in the current quarter is even more encouraging with a 12-point improvement in the month of July. The significant point here is that we have seen NPS increasing as our level of activity has also increased, which is both uncommon and a very positive reflection on the service our teams are delivering. I would like to take this opportunity to thank all of my colleagues contributing to such strong on-time performance and Net Promoter Score improvement, both customer-facing and the back office who supported these results. Our fleet plan has not changed since the Q1 announcement and still reflects our commitment to growth. Our fleet plan, this will include 83 Airbus A320 family aircraft and 3 Boeing 787s that we are due to receive in the next 12 months, representing a young, simple and efficient fleet. From a brand perspective, we anticipate that these will be split 54-32 in favor of Air Astana versus FlyArystan. Robust and stable growth in our capacity to meet the evolving demand for air travel in our region and beyond is fundamental to our fleet planning. It also supports our comparatively young fleet age, which ensures that we are flying the most efficient and comfortable aircraft available. By the end of 2027, we will have 77 aircraft in the fleet, including the 3 Boeing 787-9s. We also have a significant order book with both Airbus and Boeing for the purchases we announced in the fourth quarter of 2025. This longer-term plan allows us to evolve the ownership structure of the aircraft within our fleet. Further, it offers the flexibility to capitalize on the growth opportunities we see in the increasing transit flows through Kazakhstan. On that note, I would like to conclude the first section with 3 slides on our market environment and to give you context around the developments we have seen over the course of the last quarter. In the wake of the Gulf conflict, our dynamic capacity allocation model allowed us to expand and rebalance our network towards more international markets supported by new routes and additional frequencies across both of our brands, Air Astana and FlyArystan. This summer schedule comprises approximately 330 weekly international services, including 102 across Central Asian Caucasus and more than 500 weekly domestic services across Kazakhstan. This network expansion and particularly its regularity is a key driver of increased connectivity and transit traffic potential. China was the principal area of international expansion with the group operating up to 51 weekly frequencies to 7 destinations, which will reach 9 before the year-end and summer capacity increasing by 91% year-on-year. We also increased services to India by 41% this year that connected extremely well with 15 daily services across Central Asian Caucasus coincidentally the same number of daily services as we have on our flagship Almaty-Astana routes. This is data for the first half rather than Q2 to accurately reflect that much of the reallocation was achieved as soon as the conflict broke out, and therefore, March was a crucial month. We increased services into Europe as part of the summer program, launching new routes to Larnaca and Dalaman. Other seasonal routes include to Podgorica in Montenegro, Batumi in Georgia, Bodrum in Turkey and Da Nang and Nha Trang in Vietnam. This international expansion was across both of our brands, broadening point-to-point travel options while supporting transit connectivity through the group's Almaty and Astana hubs. FlyArystan is back on the international growth arena, adding Almaty-Xian and Aktau-Urumchi to its network in China and announced already Chongqing for Auto. It also increased its foothold in Uzbekistan with Samarkand services and Urgench that is starting from the month of September. We saw an 82% increase in international connecting traffic in Q2 on higher yields accelerating from the 65% in the first quarter. This demonstrates that the countercyclical nature of the airline in the new normal is succeeding in its new operating environments. Most importantly, the redistribution efforts paid off. The dynamic capacity allocation model worked. In each region to which Middle East capacity was reallocated, we noted higher year-on-year revenue in the first half on both an absolute and unit basis. The impressive 11% RASK growth for the first half accelerated in Q2 with an 18.5% growth in the second quarter, supported by strong performances both at Air Astana and FlyArystan. As I'm now getting into the next section, I'm running the risk of reaching out into my former CFO material, and I'll pass the baton to Goncalo, who will take you through some of the more granular detail around the financial results for the second quarter. Over to you, Goncalo.

Thank you, Ibrahim. Good morning, everyone. I'm Goncalo Pires, CFO. So over the next few minutes, I'll take you through the numbers behind the story Ibrahim just outlined. The headline is straightforward. Strong revenue growth, real cost pressure and a clear funded plan to close the gap. Let me show you exactly how the pressure sits and what we are doing about it. This table frames the whole second quarter. Group revenue up 18.3% on capacity that was essentially flat. ASK is down just 0.2%. That's the dynamic allocation story in one line. We grew the top line without growing the production. RASK is up 18.5%, but CASK up 24.3%. The gap is an important takeaway of the quarter. EBITDAR down modestly 3.7% to $93.6 million. Air Astana grew capacity 7.4%, but FlyArystan ASKs went down 16% as we continued to be affected by a number of AOGs due to the PW issue. Both brands grew unit revenue, FlyArystan RASK up over 21%. The half year tells the same story with more weight behind it. Revenue up 16% to $774 million, RASK up nearly 16%, but CASK up 22%. So margins compressed about 5 points, up to 18.6%. I want to be candid, unit costs outrun unit revenue in both periods. That's the challenge. The remaining of the financial section that I will cover is about why and why we are confident we will be able to reverse it. Quickly on capacity because it underpins everything else. Group ASKs broadly flat, but that masks a deliberate strategy. Air Astana is up 6% or 7%, depending on the period, but FlyArystan is down as we gave preference to in engine allocation to the higher-yield brand of the group. Load factor held 81.6% in the quarter, 82.4% for the half, actually up 0.7 percentage points year-on-year. Connecting traffic share rose from 6% to 9%, reflecting an increasing trend that we will be even more strategic for the group going forward. The investment of Almaty and Astana add hubs. On revenue, and this is the good news, and it's real. Group revenue up 18% in the quarter, 16% in the half, driven by unit revenue, not volume. This reflects the strong market opportunity of the group and in which we plan to invest. Both brands contributed Air Astana's revenue up 24% in second quarter. And importantly, this is quality growth, higher yielding international traffic, replacing lower-yielding domestic. It's the third straight quarter of unit revenue recovery. Now the cost side, and this is the bridge -- and now this bridge is the single most important slide in my section. So let me be precise. CASK ex fuel rose 22% year-on-year. Fuel and handling together drove 44% of the increase. Fuel because of international fuel prices nearly doubled at our overseas stations. Handling and navigation because we are flying more to international sectors. The rest is fixed and semi-fixed costs, labor, ownership and maintenance, spread across the capacity base that didn't grow, partly because of the Pratt & Whitney groundings, and that's the key insights. Much of this cost pressure is dilution, not overspend. As production recovers, these unit costs should fall mechanically. To put numbers on it, group CASK $0.0729 in the quarter, up 24%. CASK ex fuel, $0.054, up 22%. Both brands move together, so this isn't an entity problem. It's a group-wide production and input cost issue. And it's the issue we are managing directly. We have concluded negotiations with both Almaty and Astana airports. We have begun a 0 cost base review across the business, which brings us to the EBITDAR. Group EBITDAR $93.6 in the quarter, down 3.7%, $142 million for the half, down 10%. Three drivers, and I'll name them plainly, higher fuel and labor costs, the tenge strengthening, which eroded our dollar-linked margins and the Pratt & Whitney cost drag. Air Astana held EBITDAR essentially flat in the quarter, down just 0.2%. FlyArystan served most of the production shortfall. None of these are structural. Each one is something we've either already actioned or expected to ease. On margins, the honest picture, EBITDAR margin down roughly 5 points at the group level. EBIT margin compressed further close to breakeven for the half. I won't address this up. Cost growth outpaced revenue growth, and that's what took margins down. But the drivers are cyclical, not permanent. And our midterm guidance of mid- to high 20s EBITDAR margin is unchanged. We believe margins will recover. This chart is one of -- is the one I would ask you to remember. The rough cut spread went negative in the first quarter, as you remember, and returned to positive in the second quarter at $0.44 now. As production normalizes and unit costs dilute back down, this spread will widen. Management's entire focus right now is on restoring production because that's what drives the 2 lines back apart. Finally, the balance sheet, and this is our position of strength. Cash of $481 million, cash to sales at 31%. Net debt-to-EBITDAR at 2.1x, comfortably inside our sub -3 guidance. Yes, leverage tricked up year-on-year on lower cash generation and continued fleet investment. That's deliberate. We are investing through the cycle. So the message to close on, we have the liquidity and the balance sheet flexibility to fund our growth and absorb near-term cost pressure while we bring it down. Revenues are strong. The cost recovery is underway and being addressed. And the balance sheet gives us room to execute. Now with that, I'll back to -- I'll hand it back to Ibrahim.

Thank you very much, Goncalo. And if I may, I would like to conclude with a few words about our investment case and outlook for the remainder of the year. Ahead of that, please remember that if you have any questions related to the presentation, feel free to submit those via the relevant link on your invitation, and we'll do our best to cover those shortly. Our investment case remains very solid based on the 5 strengths that we strongly believe are supporting and underlying that the strength of the business case forward. Our dual brands, Air Astana and FlyArystan allow us to satisfy the complete spectrum of passenger demand and significantly to stimulate air travel. Increasing connectivity has been the basis of Air Astana's development since its inception and it will continue to be. With clear focus, commitment and professionalism, the team has delivered a great OTP performance. Our customers, they recognize the change as reflected in the Net Promoter Score. I once again would like to take this opportunity to thank my team for delivering these outstanding results. We are very clear on our priorities. Goncalo and I as well as the rest of the management team are focused and committed delivering on them. Our biggest challenge was the constraint on growth. We finally see light at the end of the tunnel, closer than we've ever seen and earlier than expected. This will further support our ability to execute on the amazing mega markets around us. Also, our ability to reallocate capacity with resilience and agility, the Gulf conflict was yet another test case for that model, but it is a dynamic model and allows us to continually capture and respond to the emerging trends in our demand conditions. We have often said that if there wasn't a major international airline based in Kazakhstan, you would set one up to benefit from the unique geographical location. Never has this been more pertinent than at this point in time. The growth of demand within our region connecting to our region internationally and connecting Europe and Asia through Kazakhstan is enormous and has further expanded under the new normal. The demand response to our high double digit growth in the neighbouring markets supported with our extended home markets across the region are the strongest testament to the validity of that foundation. We are at the intersection of the global preparation. We are uniquely positioned to support that, a strategic advantage that no other competitor can either match or buy and that is the strongest ground of our exponentially growing ambitions and the reason for excitement and we are only at the start of the road.

Ibrahim and Goncalo, thank you for your comments. Ladies and gentlemen, that concludes the presentation of the results for Q2 2026. We do now have some time left for Q&A. Please feel free to submit any questions you may have via the link on your invitation and we'll do our best to answer them. Thank you to those who have submitted questions already. If we're unable to cover your question today or you have any further requests, please feel free to get in touch. I'll now hand over to our moderator for the first question. Thank you.

[Operator Instructions] Our first question reads, this feels like a big change in the process on your engine issues. What can you say about the impact on capacity and profitability outlook?

Thanks. I'll share that question with Goncalo as it has both an impact on the ability to expand capacity, but also to dilute the cost and widen the gap between the RASK and the CASK. We stated that the key turnaround that we've seen in this particular quarter is with Pratt & Whitney. We are very pleased that the number of inductions have increased. We are aspiring and demanding for more. And with the number of inductions increasing, we have not only reduced the number of groundings this year, which help us addressing new markets, particularly China, India, but also in the rest of Asia and the region. But also have a much stronger outlook for the remainder of the year and particularly for summer 2027. It's the first time in many years that we are looking at a scenario where we aim for 0 groundings, which is a strong indicator of where we expect the capacity growth to go and also the impact on our ability to reduce the unit cost that has been a pain point in the first 2 quarters of this year.

Thank you, Ibrahim. So the answer to the question, of course, we do not or cannot have a clear guidance on what we will generate in terms of revenue, profits or margins next year. But I think it's easy to understand that an airline is not made to have aircraft on the ground. So the clear priority of the management, as stated in this presentation is precisely that, to have our aircraft flying, which for the first time in some time, the airline will be able to do in the peak season, in the most important season for our ability to generate profits in next year, which will be the summer of '27. Our assets are fairly expensive, so you should be able to monetize them. And as long as we have a percentage even in our structure of fixed costs, which go roughly on 40% of our cost structure, that's our ability to dilute them and be able to increase the margins.

Our next question reads, as of 30th of June, the group had no outstanding fuel hedges, yet average fuel prices at international stations rose 98% year-on-year. And the entire growth strategy is built on expanding international flying. That pushes a growing share of uplift into the most volatile and now unhedged segment. What's the hedging plan for H2 2026 and 2027? And what drove the decision to unwind hedges right at the start of this price cycle?

So there were no unwinding, but just positions that were built at the beginning of the year and that matured at the end of the first half. It was a conscious decision by the company not to hedge jet fuel at levels that we considered very high and affected by a crisis that eventually will fade. Hedging jet fuel at $1,500 or $1,400 would be basically monetizing a crisis, which we believe that will deliver a solution soon for which we'll have the opportunity to hedge at lower prices. So that's not hedging is a way of managing the cost. I remind you that the company has a structural hedge by having more than 70% of our jet fuel consumption at prices that are not affected by the crisis. So we do not consider ourselves exposed necessarily or as exposed as other companies to this crisis. Also, when we fly international, we uplift domestic. In some cases, we can actually tanker on our way back into a domestic uplift structure. So our way to manage the jet fuel cost is exactly to maximize the level of uplift consumption that we can have with domestic prices, which for the second quarter reached 80% levels.

Net debt EBITDAR has risen to 2.1x from 1.3x. Operating cash flow is down nearly by half and cash to sales is near the lower end of guidance. How does continuing dividends and buybacks fit with deleveraging and the upcoming fleet CapEx cycle?

Yes. So on the policy dividend, we do not have an announcement to make given that that's the decision for the bond at the end of the financial year -- for the Board at the end of the financial year. Regarding, of course, the cash flow generation and the balance sheet performance, that's a consequence of the results that we are now presenting with margins that have fallen since the same period last year. And of course, our inability to generate enough production to be able to dilute fixed costs. However, we have a very strong balance sheet. All our balance sheet indicators, including cash to sales and net debt to EBITDAR are within the guidance that we deliver. It's important for everyone to understand that we will continue to deliver on growth by investing in fleet because we believe in our markets and in our ability to increase production with the investments that we already made by reducing AOGs will increase cash flow generation and reduce margins and increase margins in the future.

You mentioned the conclusion of negotiations with your domestic airports. Can you expand on the nature of those discussions and what it implies for infrastructure development in Kazakhstan?