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

Hello, everyone. This is Mirna Maher from EFG Hermes, and welcome to Jazeera Airways Second Quarter 2021 Results Conference Call. I'm pleased to have on the call with me today Rohit Ramachandran, Jazeera's CEO; and Krishnan Balakrishnan, CFO. I'll now hand over the call to management for a quick presentation, and then we'll open the floor for the Q&A session. Rohit, please go ahead.

Good afternoon, everyone, and welcome to Jazeera Airways earnings webcast for the second quarter of 2021. Over this call, I look forward to updating you about the last 3 months and the outlook for the near future as the situation around us in the region and globally is evolving and indeed improving by the day. The second quarter of this year was one of the most challenging yet. On one hand, the frequent and unpredictable airport restrictions meant that the second quarter was one of our weakest in terms of operational and financial performance since the beginning of the epidemic, although we carried many more passengers than the second quarter of 2020. On the other hand, we achieved several important milestones that have set us up for a positive take off as operations resumed in Kuwait and elsewhere. Overall, the situation has been improving since end of June, and we can cautiously say that we believe the worst is now behind us as we hit the trough of the cycle during the month of February to May. Vaccination rollouts remain a bright spot, with more than 60% of the target population already vaccinated and the 75% target by September announced by the Ministry of Health is now within reach. The number of daily cases of COVID in Kuwait are now in the 300s compared to almost 1,800 per day just a few weeks ago. This has validated the strategy of prioritizing vaccinations and has given confidence to the health authorities in recent weeks to gradually reopen parts of the economy, including travel. As discussed during our last call, we continue to launch new destinations that have appeal to different segments of our target passengers and continue to focus on innovative solutions to bypass the highly restrictive limitations at Kuwait International Airport. Our network offers 9 destinations with quarantine-free entry, which constitutes some of the most active destinations over the past few weeks, as leisure travel gradually resumed after such a long time. Travel was initially authorized for vaccinated Kuwaitis on the 22nd of May, and the pent-up demand to travel generated huge demand for our newly launched leisure destinations in Turkey, Sarajevo in Bosnia, Bishkek in Kyrgyzstan and Tashkent in Uzbekistan. Our aggressive strategy of launching new and unprecedented routes from Kuwait was validated by immediate profitability on these routes, as I will share when we discuss route profitability later in this presentation. I would now like to take you for a review of our second quarter as well as the first half of 2021 operational performance. During the quarter, Jazeera carried 104,000 passengers against 44,000 in the same quarter of last year. Load factors were slightly higher at 51% but this, of course, was affected by the one-way restrictions during most of the quarter. In other words, in many cases, we were unable to carry passengers on the return leg back to Kuwait. Utilization stood at 3.4 hours compared to 1.4 hours in the second quarter of 2020. Yields were back to more normal levels at KWD 68, down from KWD 174 in the second quarter of 2020. Looking at the next slide for a comprehensive reporting on the first half. You can see the impact of the first 2 months of 2020 changing the scene because those 2 months, we had relatively normal operations last year. We carried 208,000 passengers with a load factor of 54.5% and a utilization of 3.5 hours. Now to take a look at our financial headlines. Jazeera reported a revenue of KWD 7.4 million, in line with the second quarter of 2020, but our operating loss was down to KWD 6 million from KWD 3.2 million same period last year, while the net loss came in at KWD 6.5 million for the quarter. Here, we can see that our revenue was less than the first half of 2020 at KWD 15.6 million, down from KWD 26.7 million in the comparable period last year. Our operating loss was KWD 11.3 million, and net loss was KWD 11.7 million. Operations at our Jazeera Terminal T5, of course, were similarly restricted during the second quarter as a result of all these limitations on travel, with a very limited airport capacity that affected the airport terminal operations. During the second quarter, T5 delivered a revenue of KWD 306,000 and a net loss of KWD 430,000. Moving on to a discussion about our operational performance during the quarter. As mentioned in our last call, a major part of our effort was directed towards planning for the future and setting the scene until we resume proper operations. Accordingly, we launched new destinations during the first half of this year, including London Heathrow, Yerevan, Bishkek, Tashkent, Colombo and Addis Ababa. Further, as you can see in the slide, we resumed operations to some of our summer destinations like Beirut, Tbilisi and 3 destinations in Turkey, namely Istanbul, Bodrum and Trabzon. And we also operated some additional charters to Antalya. I'm glad to say that all these destinations are operating at high load factors and are proving to be a success in Jazeera's network. The main focus was on connecting flights, and this was to bypass the restrictions at the airport at that time, with this elaborate method of connecting passengers from A to C via our home base Kuwait, B. In other words, because we were unable to carry passengers into Kuwait for the majority of the first half of this year, we managed to connect traffic from places like Nepal and Bangladesh to Saudi Arabia via Kuwait. I would like to now focus on giving you some evidence about this bold initiative that our team in Jazeera took. Now the next 3 slides show you the route profitability and the positive contribution that we achieved from the -- from all our routes, but particularly the new routes that we launched. Now these routes are not normal routes that one would launch from Kuwait. The majority of these routes have never been operated from Kuwait. But we did an in-depth market study, and I think we took a bold decision and placed some bets to ensure that when even a little bit of traffic demand resumes as a result of relaxation of travel restrictions, and this started with Kuwaitis who were vaccinated on the 22nd of May, people will want to travel. People want to get out. And so it's reflected, as you can see in these graphs. The yellow lines, which show in net terms the profit contribution of every route before the allocation of fixed costs. And as you can see, almost all of them are to the right. Same for May and same for June. Our outlook for the remaining months of the year is actually very positive as we see the recovery curve headed in the right direction since July, and it continues strongly in August. We expect to see the improvement in revenue and the daily allowance of passengers continue to increase and more categories of travelers are allowed to enter the State of Kuwait on return flights. Let me give you the evolution of these restrictions. The year began with 1,000 passengers per day being allowed to enter Kuwait on all carriers put together. And as you can imagine, that was disastrous for our business. In the middle of Q2, that went up to 5,000 passengers. But still, expats were forbidden to enter Kuwait. Vaccinated Kuwaitis, as I mentioned, were permitted to travel from the 22nd of May. And finally, vaccinated expat residents were allowed to return to Kuwait effective just the 1st of August, 2 weeks ago. Just this week, the authorities have advised us of an increase in the daily arrival limit at Kuwait airport to 7,500, which will go into effect over the next few days. It is important to note that passengers from the so-called high-risk countries of India, Pakistan, Egypt, Bangladesh, Nepal and Sri Lanka are not yet permitted to enter directly into Kuwait from their home countries. These, of course, are our main markets, and we will not be able to go back to normal operations and results until they are permitted. Nevertheless, I believe this approval will be given in a phased manner over the next few weeks as the cases in Kuwait continue to drop. This, coupled with the increase of vaccinated individuals in Kuwait as well as within our rest of the network, set the ground for a better second half of the year. From our end, we are looking forward to taking delivery of 2 additional aircraft towards the fourth quarter of this year, which will take our fleet to 17 by the year-end. With this, I conclude my section of the presentation and will now hand over to our Chief Financial Officer, Krishnan, for the financial overview.

Good afternoon. Let me take you to Slide #25. Thank you, Rohit, and I will be very brief. If you let me take you to number -- Slide #25, where we have the key parameters relating to the second quarter. You can see that the yield has been dropping compared to last year. However, it is still much higher than the previous years. And the operations as such, in terms of block hours, we actually did more, 81% more than the previous year. And in terms of flights, we did 85% more. If you please go to Slide #26. The financial performance, which already Rohit has briefly touched upon, we ended the quarter with a loss of KWD 6.5 million as compared to KWD 3.9 million for the previous year same quarter. The revenues were lower primarily because the yield was lower. In 2020 second quarter, we had charter flights, which actually provided a much higher yield as the number of passengers were low but still we used to get the full revenue for those flights, whereas in 2021, we have been operating scheduled -- semi-scheduled operations, if I may put it that way. And yields are lower, though much higher than the previous years. So we did compensate the loss of yield with the number of passengers that we carry, but more or less revenue remained at the same level. The expenses were higher by 22%, though the block hours actually were much higher, about 80%, 81%, and the flights were higher by 84%. And that's primarily because we have managed to curtail our fixed cost to a very large extent year-over-year. And that is the reason you see only a 22% increase in cost, whereas the block hours increased by 81%. Let me take you to the cash flow position. We ended the year -- or the quarter with KWD 19 million cash. And primarily, this reduced compared to the KWD 28 million in the previous year same quarter and by about KWD 9 million because of the losses we incurred over the period from last year, July until June of 2021. If you go to Slide #27 these are the same highlights, parameters, which already, I think Rohit touched upon so I will not dwell on this. If you see the block hours, there is a reduction in the block hours compared to the previous year by 40%. This is primarily because Jan and Feb of 2020 were almost fully operational, like Rohit mentioned earlier. So that's why the block hours and the flights were much higher last year compared to what we see in the first half of 2021. Taking you to Slide #28. In terms of the financial performance, we lost KWD 11.7 million for this first half 2021 as against a KWD 10 million loss for 2020 first half. And here again, the revenues were lower compared to the previous year because of Jan and Feb being fully operational months in 2020. In 2021, the yield was lower, and like I mentioned already, because of our charter flights were yielding much higher revenue per pax as compared to the operations of the scheduled operations that we had in 2021. If you look at the direct operating costs, they were lower than last year by 20 -- 19%. One of the factors, which impacted our cost, was the increase in the fuel price. There was a 53% increase compared to 2020 prices, in H1 of 2020, which added to the cost. And if you look at the operating profit, we did KWD 11.3 million loss as against KWD 6.3 million previous year. The cash position, we've already seen. If you look at the fuel price chart, that's more for your information. I will take you to Slide #30, on the capital increase. So as on 30th of June, our loss is KWD 18.7 million, accumulated losses, which is more than 75% of the issued share capital of KWD 20 million. Now in April, the Board, in anticipation of the future losses that we would be incurring given the level of operations, the Board already recommended to the shareholders that a 10% capital increase be made through a rights issue, and offer price was set at KWD 500 fils per share. 80% of this KWD 500 fils was towards share premium. The issue was fully oversubscribed by 210%, and the allotment was completed on July 14. So even though we -- as on 30th of June, we were not meeting the 75% criteria, we were able to move -- we were ahead of threshold of 75%. By 14th of July, that has been fixed. The cash has been received of KWD 10 million. And the Board has now recommended to the shareholders that we adjust the share premium against the accumulated losses. So now the process is being completed. And in this quarter 3 results, this adjustment of losses against the premium will be done. And as a result, our losses accumulated will be less than 49% of the issued share capital of KWD 22 million. With that, I conclude my section of this presentation and open the floor for questions. Thank you.

Thank you. [Operator Instructions] The first question is from Nishit Lakhotia from SICO. Any reason why yield has fallen Q-on-Q as well, leading to lower revenues despite your operational costs looking up? Is Jazeera focusing on gaining market share at the expense of profitability?

Thank you, Nishit. Thank you for your question. So it's important to understand the context of the yield this year and the yield last year. In Q2 of last year, the only business that Jazeera had was evacuation of Kuwaiti citizens from different parts of the network and repatriation and deportation of overstaying expats from Kuwait to the home countries. Both of these were paid by the government, and it gave us an opportunity under those extremely difficult operational circumstances. Similarly, in the first part of this year, in Q1, we had very limited operations. Capacity in Kuwait was constrained to just 1,000 seats per day, which mean -- which meant that anybody who had to travel out and into Kuwait had to choose from very few available seats. And during that period, of course, we capitalized on our yield. With the restrictions gradually being lifted over the course of the first half, we made sure that we also grow the number of passengers that we carry. And that's reflected both in the passenger numbers, in the load factor and indeed in the number of flights that we operated as well. Jazeera's primary focus is on profitability, always has been and always will be. And you will see that even in the new routes that we have launched, normally, routes take about 6 months to mature and start beginning to deliver a profit. In our case, as you can see in our presentation, we made sure that all the routes we launched were profitable from the first month onwards. I hope that answers your question. Should we go to the second question?

Yes. The second question is from [ Mohamad ] [indiscernible] from Jadwa Investment. Do you expect the company to go for another capital hike given that accumulated losses reached around 49% of the company's capital? And what's the average monthly run rate of losses during July and August?

Thank you for asking me that question, [ Mohamad ]. One must remember that the reason for the capital increase is not because the business needed cash. The business has enough cash to sustain for many, many months into the future. Our calculation is certainly close to 18 months. The capital increase was required, as you're aware, for technical reasons, in order to satisfy the technical requirements of the Kuwait Stock Exchange, and that was successfully completed. I'm happy to answer the second part of your question, where you have asked for the run rate of losses during the month of July and August. I'm afraid we can't answer that because I generally don't give guidance about the future months. In this case, I'll make an exception. In July, we have actually made a small profit, and I expect a slightly larger one in August. Hopefully, that answers the question. So we go to the next question by Rajat Bagchi?

Yes. Can you please remind us -- no, sorry. Can you please provide some insights into how daily average passenger numbers have been in July and August compared to Q2 2021?

In one sentence, significantly better. Thank you.

And the next question is, can you please remind us how much the Egypt and the Indian subcontinent contribute towards revenue and EBIT?

I will not go into route-wise contribution of share of revenue and share of profit, but it's significant. And certainly, once we get access back to Egypt and the Indian subcontinent in full, it will add more than a couple of million KWD to the top and bottom line.

Thank you, Rohit. [Operator Instructions] We have a question from [ Thomas Matthew ].

I just have one question on your cargo operations. I understand it is a smaller segment. But you mentioned that you expect to continue on the full-flight cargo operations. Just trying to understand what sort of guidance that you can give about the operations. I understand there's been a spike because [indiscernible] has been happening. Just trying to understand what could be like a steady-state sort of revenue guidance that you could sort of give. And where is it that you see normalization? Is it more on the volumes? Or is it on the price?

Thank you for your question. Cargo is becoming a very interesting part of our business. Traditionally, of course, cargo is not an important or a significant part of LCC business model. And a couple of years ago, the entire cargo business for Jazeera was worth about $1 million, about KWD 300,000. Just last month, I put out a press release announcing that in the month of July, we carried 1 million kilos of cargo, which is, in the current operating environment for a small airline like Jazeera, is significant. That translates to approximately KWD 200,000 in just that 1 month of profit from cargo operations. So in maturity in the current network, shape and size that we have, I would say cargo should constitute about KWD 2.5 million annually. I hope that answers your question.

I just have a follow-up question on how you see the sort of cargo operations sort of progressing from hereon in terms of pricing and volumes. Any sort of guidance would be very helpful.

Cargo, while still being an opportunistic part of our business, we have now put in some infrastructure into it, some processes behind it. We have a cargo sales team and cargo partners around our network to support. So it's a permanent part of our business. It's here to stay. But our priority business, the core business of Jazeera is very much that of passengers. Passengers will always take priority over cargo. But I believe that every flight, between 1.5 to 2 tons, an opportunity exists even moving forward. Until we have full utilization of our aircraft, which I would say is still a few months away, we will continue to operate dedicated cargo charters, primarily to the Indian subcontinent and GCC.

The next question is from [indiscernible].

Mr. Rohit, I have a question regarding the expansion plan of your company. Very similar to the one taken by your competitor in 2007 in terms of increasing the fleet capacity until 2025 to take it to 30. Under in the current business plan, would you say that your yield, therefore, will have to compress at maturity from the levels that you have achieved as a point-to-point airline? So with this expansion in fleet capacity, you are inadvertently moving into a hub system, and therefore, the yields will have to naturally compress at maturity? Would that be a fair assessment of how Jazeera Airways will mature in a post COVID world?

Pleasure, and thank you for your question, [indiscernible]. You will find that we are doing quite a lot of things opportunistically during this period, which is a departure from the low-cost airline bible. And that's purely because we are entrepreneurial and we want to exploit every opportunity to monetize our assets during this very challenging period. But I can already see over the last, I would say, 2, 2.5 months, a little bit of normalcy returning. And with normalcy returning, we move back to our core LCC rules. Will we have connecting business? Yes, we will have connecting business. But I don't ever see that being more than 20% of the overall business. 80% of our business will still be point-to-point business, what we call in the industry third and fourth freedom business. But for that to happen, Kuwait airport needs to open and Kuwait needs to start issuing visas, and people need to be able to travel in and out of Kuwait, that -- by definition. Until that happens, I'm not prepared to be rigid about our business model, and I will be quite flexible and entrepreneurial to take every opportunity that presents itself. In terms of yield, I think our plan is not to operate more and more connecting flights. It's not to operate more and more frequencies to existing routes. The fact that we have launched 9 new routes in the last 3 or 4 months in the peak of the pandemic means that there's still low-hanging fruit and innovative solutions that we can deploy. We have still not exploited completely the opportunities of Saudi Arabia. We've still not exploited completely the opportunities of Iran and Iraq. A large part of the CIS is still open. Ukraine requires services. Russia requires services. Eastern Europe is very much within our reach of our new generation neos. I think once we see a gradual resumption and reopening of restrictions in Kuwait, we will definitely have all these exotic places for our aircraft to fly. But the overwhelming focus will not be on growth. It will be very much on the P&L. It always has been and it always will be. I hope that answers your question.

That does answer my question. But -- and just a follow-up on that, I think it's the same question really. The cost efficiency, however, will not be compromised. So you don't think there will be one-off costs as you gradually build up that capacity so your task will benefit from the economies of scale. Will I be correct in assuming that?

That is correct. And if you look closely at our cost even today, you will find that if you account for the differences in number of block hours flown -- now when we look at cost per block hour or cost per ASK, last year and this year is not a good comparison because we are not flying at scale, right? But if you compare apples with apples and you get down to the unit, you will find that our unit costs, particularly in engineering and maintenance as well as aircraft operating costs as well as manpower costs are dramatically lower than what they were for the unit in 2019. And that's the result of a huge number of initiatives taken over the last 15 months to bring in efficiency, to cancel unprofitable outsourcing, particularly in maintenance and engineering. Now that we're reaching the 17, 18, 19 aircraft levels, a lot of things make sense to bring them in-house. And the focus on unit cost is going to be paramount. And this is the advantage of Jazeera over -- you mentioned a competitor 2007. I was not sure exactly which airline you're referring to. But for us, the ability to be competitive in price, depending on market conditions, and still make a profit because our unit costs are lower than our competition, that really is the essence of our business model. We'll be super aggressive in the marketplace in order to retain market share, remain competitive and at the same time, post a good profit because we have the lowest unit cost in the business. That's our goal, and that's very much the nuts and bolts of our business model.

The next question is from Belal Sabbah. Is there any update you can share about the passenger fees charged in Terminal 5? Will you be able to collect these instead of being collected by the authority?

I know that I have said this before, and I apologize for the repetition, Belal. You are very right to ask the question. We are very close to this outcome. And I hope to be able to be more specific in the next time we speak in 3 months' time. But we are very close. It has gone through many steps. It has gone through many approval processes at the highest levels. And I need a little bit more time before I can formally answer your question.

The next question is from Rajat Bagchi. Given the past recovery, has there been any structural changes to profit contribution from the terminal compared to earlier estimates pre-COVID? How do you expect rental rates to be revised going forward?

Sorry, can you repeat that? Is that question on the screen, Mirna?

Yes. It's sent to me. Given the path to recovery, have there been any structural changes to profit contribution from the terminal compared to earlier estimates pre-COVID? And how do you expect rental rates to be revised going forward?