Jazeera Airways K.S.C.P. (JAZEERA) Earnings Call Transcript & Summary

Good morning, and good afternoon, ladies and gentlemen. Thank you for joining us today. This is Rita Guindy. And on behalf of Arqaam Capital, I'm delighted to welcome you to Jazeera Airways' Q3 2020 Results Conference Call. We are joined today by Mr. Rohit Ramachandran, CEO of Jazeera Airways; and Mr. Krishnan Balakrishnan, Jazeera Airways' CFO. Without further ado, I'll now turn over the call to Mr. Rohit.

Thank you very much, Rita. Good afternoon, everyone. Thank you for Arqaam for hosting this call. It's with great pleasure I welcome everyone to our earnings conference call for this third quarter of 2020. By now, I'm sure you are all familiar with our standard format of conducting the earnings call. So we will move forward together, reading along the coming slides in order to provide you with all the details of our operational and financial performance during the quarter, which will be followed by Krishnan's discussion on the financial section. And finally, our Q&A session, as usual. Now if I may direct your attention, please, to Slides 5 and 6. By way of update, although I'm sure you have kept abreast of the situation in the country, let me first quickly navigate through the overall operational environment in Kuwait, which will lay the ground to partially explain our performance during the quarter. Given the current circumstances, commercial operations from Kuwait International Airport were suspended last March, as you all know. And then we're scheduled to resume on the first of August with a limited capacity. However, on August 1 itself, the authorities released a list of 32 countries, which was then increased to 34 countries, that were classified as high-risk and therefore, direct flights from those countries were not allowed into Kuwait. Further, passengers originating from these countries are not permitted to enter Kuwait until they spend 14 days in another country, which is outside of this list. This long list includes most of our high-traffic destinations like India, Egypt, Pakistan, Lebanon, Nepal and Bangladesh. Furthermore, and from the standpoint of our destination countries, we have seen a gradual easing of some restrictions in countries like the Kingdom of Saudi Arabia and Turkey, for instance. This meant, of course, that our scheduled operations were limited to a few destinations, particularly Dubai and some airports in Turkey. Later in September, we added Riyadh to the list on limited frequency. We have continued to explore new opportunities and launched new destinations like Dhaka and Muscat, which were announced and started operations, which technically falls into the fourth quarter of this year. Let's now move to Slide 8. While reviewing our performance for the third quarter, you will see that we carried 65,000 passengers, which was significantly lower than the same quarter last year. Which also, if you recall, was the most active in the history of Jazeera. However, as we discussed in our last call, is attempting to create comparisons between this year and the last year is practically meaningless. A simple indication of that is the utilization figure of 2.4 hours during this quarter, which falls far short of any reasonable operational value. Yields during the quarter was relatively high as Kuwait International Airport resumed scheduled operations, which took away from us the constraint capacity we had over flight -- charter flights to Egypt, India and others. Moving to Slide 9. You will see that revenue dropped by 83% to KWD 6.1 million, while our operational loss came in at in KWD 6.5 million and the reporting -- the reported net loss for the quarter was KWD 5.6 million. I would like to highlight here an important point, which is the impact of IFRS 16 in the treatment of our aircraft lease restructuring in the financial statements. In actual fact, we have received significant savings on our P&L for the period from March to November as a result of the lease restructuring and the negotiations we did with our aircraft lessors. However, with IFRS 16, this is reflected in our books across the tenure of the lease as well as some small lease extensions in some cases. Without the treatment of IFRS 16, our Q3 loss would have narrowed to just KWD 4 million. I will touch upon this a little bit later in the presentation. And also, we'll have more details from Krishnan when he speaks. Moving onto Slide 10, which is the 9 months performance for the airline. The numbers look slightly softer than the third quarter alone because of the spillover from the first 2 operating months of the year. However, on a blended level, you can see that our aircraft utilization is still low at 4.5 hours per day, and that should essentially explain all the other numbers on this slide and the next one. During the first 9 months of the year, we carried 606,000 passengers, which is less than what we initially planned to carry in the third quarter alone. In the following slide, we see the financial impact of this extraordinary operating environment, with revenue down 60% year-on-year to KWD 33 million, coupled with an operating loss of KWD 14.7 million and a net loss of KWD 15.5 million. As mentioned earlier, and it's the same for these 9 months, the loss would have been just KWD 13.9 million instead of the KWD 15.5 million, if the impact of IFRS 16 was not tabulated. Just as a matter of interest, the total savings for this year from the lease restructuring is about KWD 6 million. Moving to Slide 12. We take a look at the impact on Jazeera's terminal T5, which also, of course, suffered from the airport closures as well as the significant slowdown in our operations. During the first 9 months of 2020, the facilities segment reported a revenue of KWD 1.2 million and a net loss of KWD 1 million. Let's now move to Slide 14 and an overview of the operating environment. And as highlighted earlier, operations continued to be distressed during 2020, given the impact of the COVID-19 virus globally and it's direct implications on passenger traffic, and more importantly, government restrictions. In Q3, we resumed scheduled commercial operations to Dubai, Bodrum, Trabzon, both the airports in the Istanbul and then at a later stage, we added Riyadh, which is in Saudi Arabia, once the authorities in the kingdom allowed the resumption of operations. We continue to do charter flights to the Indian subcontinent and also selectively to other destinations. In Slide 15, you can see the impact of this restrictive operating environment on our average daily sectors and accordingly, the number of passengers that we carried compared to the same period last year. The number of destinations, however, is on the higher side as we flew to several destinations that fall outside of our regular network, either for repatriation of Kuwaiti nationals or for charter flights and cargo flights, which are driven by market demand. In Slide 16, internally and from a financial perspective, we continue to adopt our austerity measures with a strict focus on managing our cash position. As you are aware, we have suspended our dividends for 2019 and activated bank facilities in order to weather the stock. Currently, we have rested our cash burn to around KWD 1 million per month. We are satisfied with the outcome of these measures so far and believe that our financial position is very strong and shall safeguard the company for the foreseeable future. I will speak upon this point slightly later in my presentation as well. For the brief outlook on the fourth quarter of this year and on 2021, we move forward to Slide 20. Our view remains the same as what we had discussed earlier in that revenue will continue to be under pressure as long as the global situation and particularly, the current restrictions in Kuwait International Airport remain intact. We foresee a gradual but definite recovery through the first 2 quarters of 2021. I'm particularly happy to announce that we have reached favorable agreements with our lessors in order to partially waive 2020 payments for aircraft leases, which will create much needed cash savings. Krishnan will walk you through the impact of these agreements from an accounting perspective in the financial section overview. Further, as you all know, we had planned to take delivery of 4 aircraft during the fourth aircraft -- fourth quarter of 2020. We have now managed to reach agreement with the lessors and the manufacturers to postpone the delivery of these airplanes, half to the first quarter of 2021 and half to the fourth quarter of 2021. On a positive note, and as an initiative by the 2 national carriers of Kuwait, which is Jazeera and Kuwait Airways, we have jointly submitted a proposal to the Ministry of Health to facilitate international travel and reopen 2-way traffic into Kuwait International Airport, while still safeguarding public health. This proposal is based on multiple testing and provides incoming travelers into Kuwait divided into low-risk and high-risk countries. Essentially, we have asked the authorities to lift this ban on 34 countries and reduce the quarantine from 14 days to 7 days. And in return, replace it with more aggressive testing. Of course, all passengers coming into Kuwait would have to have a PCR test proven negative before they leave the origin. As soon as they land in Kuwait, they will undergo another PCR test at the airport, then going to a 7-day quarantine. And then at the end of the seventh day, do a third PCR test. And when they are declared negative, they're released from quarantine. This proposal is currently being studied by the health authorities here in Kuwait, although the initial feedback is positive. Although no time line is committed to by the Ministry of Health, we are hopeful that this plan can be implemented without presenting any unforeseen delays to the reopening of the airport. It goes without saying that if implemented, this will generate a very encouraging boost to operations to and from Kuwait airport and hopefully, should be the first step towards a sustainable recovery. One final point before I close. It is something worth noting that Jazeera has not so far received a single penny in support from the government of Kuwait, unlike our global peers. Despite this, we have managed to curtail the cash burn to the minimum. Although it's no secret that we are in discussion with the government to alleviate some of the major costs in the form of discounts to Kuwaiti carriers for many years. What does this really mean? It means that at some point, when corona ends and operations revert to normal, Jazeera will have, by far, the lowest cost base for years to come. From a completely unbiased perspective, I'm very pleased with these set of numbers. Of course, nobody, especially me, likes announcing a loss. However, with the circumstances that we faced this year, the aggressive action that we took within the company, it has strengthened Jazeera significantly. The serious controls we put on our costs have now reduced our monthly cash burn to below KWD 1 million. We are also very aggressive on the commercial side, as you have seen from the new routes we have launched in the middle of the pandemic. We are working within the constraints placed on us by the government and smartly taking advantage of any opportunities on a day-to-day basis and sometimes, even on a minute-to-minute basis. As a result, you may be surprised to hear -- and this is not something that I normally announce on our quarterly earnings call, but I thought you would like to know that we actually broke even for the month of October, which is the first month of the fourth quarter. This is a huge achievement for any airline in the world, particularly one that is not supported by the government. With this, I conclude my section of the presentation, and we'll now leave you in the capable hands of Krishnan for the financial overview. I'll be back with you for the Q&A session. Krishnan, over to you.

Thank you, Rohit. A very warm afternoon to everybody. Taking on to the next slide on the financial review section. So if you look at all the parameters, as already explained by Rohit, everything was addressed, except that the yield was better than what we have seen in the past. But that is a temporary thing. As a result, if you see the results in the next slide, everything looks negative. And I don't want to dwell on it. It's already covered very well in those sections. We know it's because of the lower level of operations. The balance sheet section, I will cover in one of the later slides. For the 9 months as well, we had the same -- similar scenario. All the parameters were not in our favor. And as a result, we had a loss which was not -- a KWD 15.5 million loss for the 9 months as against the KWD 16 million profit the year before. I'll take you to the balance sheet slide. If you see the balance of cash has increased from KWD 18.4 million in 2019 to KWD 23.3 million in 2020. Now the prime reasons why this has happened is because of the higher profitability in '19. And of course, also the drawdown of the loan that we did in the first quarter of '20. Unfortunately, this was offset to some extent by the losses that we incurred in the 9 months of '20. However, we are free to commit -- collect about KWD 5 million for the government charters that we did in the last 6 months. As of date, we have already received more than KWD 2 million from them. The balance KWD 3 million is still to be collected. The fixed assets actually decreased compared to last year because we did the sale and the impact of the 2 engines towards the end of 2019. The total assets and liabilities primarily have changed because of the IFRS 16 impact. We added 3 aircraft in Q4 2019 and 1 more in 2020 first quarter, plus the IFRS 16 impact of the modifications that we did to all the leases, what earlier was covered by Rohit, in terms of what we negotiated with [ Jazeera's ] lessors. We got a lot of benefits from them for 2020. And in some cases, we extended the current aircraft fuel at the end of '20. So the impact of that also has to be taken in IFRS 16, and it gets spread over -- benefit gets spread over the lease term. And as a result, even though we saw a cash benefit of about KWD 2.4 million in this quarter, unfortunately, only about KWD 800,000 could be recognized. The balance got spread over the rest of the lease term. Even in the next quarter, this coming quarter, we expect some more benefits to flow through because we concluded some of those agreements in October, and therefore, could not account for them in the previous quarter. But you will see, again, there will become more benefits coming through, but not entirely transferring to the P&L. But in cash, yes, we did -- we will have a good savings. And the retained earnings also decreased because we had a loss in this 9-month period. With that, I conclude my section of the presentation. And I hand over the rest to Rita.

Thank you, Krishnan. We are now open for any questions that you may have.

[Operator Instructions] The first question comes from Nishit Lakhotia from SICO.

I have a few questions. First, on the average aircraft, I see the aircraft had declined to 13 from 14 last quarter. So was one of the aircraft reduced in the fleet or something that I might be missing here? And talking about the fleet expansion, I know you've got the delays in terms of taking aircraft, but 2 are coming in the first quarter when things are likely won't be as normal, and you would be just building up your utilization with perhaps more relaxation of rules. So is there any way of -- any negotiation going on to perhaps delay those 2 aircraft to latter part of the year? Or that is something that is not possible, currently? So that's on the fleet side. The second question is on the terminal operations. I would assume we are not charging any lease to your tenants on the terminal. So how is that going to be approached, if it is gradual easing out of traffic increasing? What would be the trigger point when you would start asking for rent from the air side, land side tenants on the terminal and we'll see more revenue coming out from tenants? So is there something that I'm missing here that you're already charging and you're not getting? Or it's only the duty-free impact? So any color on the terminal operations outlook would be helpful. And also a bit on your hedge situation, how do you see this? That's again, a big drag. I know on your equities or it's perhaps your -- in terms of the quantity that you've hedged and the quantity that is being utilized now. So any color on the hedge situation would be helpful.

Thank you, Nishit. Good to hear from you as usual. I will just address your questions on the order that you've asked them. You're right. One aircraft was reduced over the course of -- between Q2 and Q3, to be honest. End of June, one of the aircraft went back to its lessor. This was planned. It was a short term lease which was expiring. And of course, you would imagine that we were very happy to hand this back to the lessor as originally planned. So that took our fleet from 14 to 13. Now as you can imagine, with 4 aircraft due to come in, in Q4 of this year that one of the very significant battles that we were fighting with the lessors over the period of the last several months and we have reached agreement, like I said, that 2 of them will be pushed by a year and 2 of them would probably be at the end of Q1. Will we need those 2 aircraft at the end of Q1? Probably not. We can still manage with the existing fleet that we have with us. But at some point, we have to reach a negotiated position with the manufacturers and the lessor, which is where we have reached. We're still fighting with our lessors. And I think you will see over the period of the next couple of months as more airlines and more lessors go through their pains, go through their end of the year results and will be more open to more, shall we say, innovative positions on lease restructuring. So we are not stopping our engagement with them. We are continuing to push hard. I think there may be a slightly different approach when we reach Q1 of next year. Regarding T5, you're right. During the major part of this year from March all the way until last month, with essentially no scheduled operations happening through Kuwait, we were not in a position to charge the full lease to our tenants in the terminal. So during some part of it, we had to waive the entire amount because the terminal was essentially shut. Then we have currently a 50% lease that we are charging our tenants. It's been made very clear to them that under no circumstances will this be extended beyond this end of December of this year or when airport reopens with unconstrained capacity. At that point, whichever comes first, the lease for those locations go back to 100%. Regarding the hedge. Well, we were hit, as you know, with a double whammy. We were hit with, of course, the oil prices crashing and simultaneously, with our operations being severely reduced because if our operation was at 2019 levels, whatever we lost on the hedge, we would have made up on actual operation and uplift of fuel from our different stations. Now with operations slowly going back, you will find the impact of the hedge actually diminishing. I think a part of our hedge commitment disappears in February and then another big part of it disappears in August. Krishnan can fill us in on exactly those milestones. Krishnan, is that right?

Absolutely correct.

I hope that answers your question, Nishit.

Yes. That was very detailed.

The next question we have comes from Gus Chehayeb from Sancta Capital.

I have a few questions to ask. The first of which is just a high-level question in regards to what is really in the mindset of the Kuwaiti authorities when they announced the opening of the airport on August 1 and then closed down the 30-plus destinations on the same day. And since then have allowed kind of this loophole where foreign destinations can quarantine passengers that can come into Kuwait really just kind of circumventing the Kuwaiti aviation and tourism industry from those types of passengers. I'm just trying to understand, from your perspective, what's going on with their thinking as kind of they implement these measures because it seems quite dysfunctional. That's the first question. And second is just, again, on the hedging. I think there's a lot of confusion in the investment community about how the mechanics of the hedge work. And I was wondering if you could please clarify that for us in terms of how does it flow, first of all, the hedge, through the income statement and the balance sheet. Again, if you could remind us what the quantity is and really what is cash settled versus what accounting losses or gains, that would be very helpful. And then finally, you brought up an interesting point about the charter flights that were going to be reimbursed by the Kuwaiti government with another KWD 5 million coming in for the fourth quarter. Can you help us understand kind of the mechanics of those charter flights because that seems quite lucrative? I mean with KWD 5 million, that's almost as much as you had to draw on your facility and you pay back 70-plus percent of it. So that would be helpful as well. Those are my questions.

Good to hear from you, Gus. Thank you for your questions. Now your very first question puts me in a very difficult position. First of all, despite my many skills and my many years of experience in this business, I cannot get into the mindset of the Kuwaiti authorities. So I'm just not capable of doing that. It's an impossibility. And mainly because, as you rightly said, it seems quite dysfunctional. If I have to guess, I would say that this is a misguided event at protecting public health in the face of overwhelming scientific knowledge on the other end. So I think what they're trying to do is protect public health and no one can fault them for that goal. But I think the main issue is with the economy coming to a grinding halt, with the ratings agencies downgrading Kuwait's outlook, with essentially loop holes that are benefiting countries like Dubai -- the UAE and Dubai, in particular as well as people coming in through Istanbul and so on. People are getting here, but it's the economies of Dubai and Istanbul that are benefiting in terms of hotels and flights. So yes, it makes no sense. And which is why, over the last 4 to 6 weeks, we, as Jazeera, have taken the initiative, although we are not experts in public health, we are not doctors. We've just simply taken the best practices of the countries in the region and put together a proposal, which was drafted in my office, then we went over to Kuwait Airways. We got them to sit with us, co-sign the proposal with us because coming from a government entity, we assume it carries more weight. We've had 4 rounds of meetings with the Ministry of Health, also discussed in-depth the technology upgrades that need to be done to the quarantine app. We've taken the lead in everything as a private sector because we realized that we need to pull the whole system out of its paralysis. What's good is that they've taken this positively. However, I think, ultimately, they will need to make a call, saying how far away they want to move from their rigid position of attempting to protect public health with the perception that letting people into the country somehow damages that. With each passenger being PCR-tested 3 times, I think if our proposal is accepted, Kuwait passengers will be the most tested people on the planet. And that's something that we would try to convince them. I'm sure it will have a positive outcome. I'm sure that within the weeks ahead, this will be lifted, and our plan or some version of it will be adopted. And that will be huge from the perspective of our earnings. Right now, we're only operating essentially one-way to the vast majority of our destinations. Imagine that they keep the hard cap of 30% of Kuwait airport capacity in place, but lift the ban on incoming from 34 countries. Essentially, our costs remain the same because our operations remain the same, but our revenue doubles because now we can carry passengers in both directions. So that's what we are aiming towards. Regarding the hedge, I will leave it to Krishnan to explain how -- the exact accounting treatment of the hedge, but the hedge essentially was a risk mitigation tool that we used to estimate that we take 50% or 30% of our monthly fuel usage, okay, and then hedge it at an amount that we considered at the time to be appropriate. With the understanding that if the price goes up, then our hedge protects us and if the price goes down, then the savings we make from our operations protect us. So that was the goal. Of course, the reality was something never seen before in the history of commodities, which was, at some point this year, oil going into a negative figure and still remaining far below what it was last year. I will quickly handle your fourth question regarding charter flights and if we can do more, and then hand you over to Krishnan to explain the hedge. You're right. So these charter flights and this KWD 5 million figure fall into 3 main categories. One is the amount of repatriation flights that we did for Kuwaitis who were stranded all around the world, which fell within our range. We bid for and we got that business, and we brought them home. The second was the deportation of expatriates in Kuwait, who had either overstayed their visas or some of those cases. So based on the instructions of the Ministry of Interior, we mounted several operations to carry these folks home. And third was cargo, that cargo flights that we did on behalf of the government. Now as Krishnan mentioned, we have already got paid for KWD 2 million out of the KWD 5 million. But of course, that happened after the closure of the third quarter. So it's not reflected in this particular statement. But the remaining KWD 3 million also has now reached the final stages. It's been approved by the DGCA, and it's currently with the Audit Bureau. It takes time, but I have no particular concern. And I believe, again, in a matter of a week to 10 days, we should have the entire amount in our custody. Krishnan, do you want to talk about the hedge a little bit?

Yes. Sure. So how it works is that there is, of course, the hedged rate, which at the time, we had taken the hedge on an average a $55.50 per barrel. Every month, whatever is the average rate for the previous month is compared and whatever the differential has to be settled in cash. And it is recognized in the books in the following months as and when it is settled. The second aspect of the hedge is where we are not utilizing the fuel to the extent we had hoped. That is, today, our monthly exposure is 50,000 barrels [ of hedge ]. And if we are not using or not planning to use that in the next few months, we also take a hit to the extent we are not able to use it within the next 12 months. So we estimate for the next 12 months at the end of every quarter. And to that extent, we also take a hit. So you already are seeing the P&L impacted by the write-off because of the quantity we cannot be using, though they are hedged. And third aspect is, if you look at the hedge reserve amount in the balance sheet, it shows a figure of KWD 2.3 million. That represents, as of September 30, whatever is the balance hedged quantity until the end of the term multiplied by the differential between our hedge rate and the market rate as of September 30. So this is the maximum amount of loss that we will incur over a period of time if the fuel rates do not change as compared to the balance sheet date. I hope that clarifies, it is quite a [ large ] topic. If there is something specific you need to know more, please do ask.

In other words, just to close out Krishnan's comments. If we start flying more, the impact of the hedge -- or the adverse impact of the hedge reduces significantly. Am I right, Krishnan?