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

Hello, everyone. This is Hatem Alaa from EFG Hermes. And welcome to Jazeera Airways Third Quarter 2021 Results Conference Call. I'm pleased to have on the call today Rohit Ramachandran, the company's CEO; and Krishnan Balakrishnan, VP for Finance. We'll start with a presentation from management, and then we'll open the floor for Q&A. Just as an initial reminder, to ask a question, you can either type in the Q&A chat or you can click on the raise-hand button on the right-hand side of 2 screens. Rohit, Please go ahead.

Thank you very much, Hatem. And good afternoon, everyone. Welcome to our earnings call for the third quarter of this year. I'm not sure if you want me to skip my presentation entirely and go straight to the Q&A. But for the sake of consistency, we will cover the usual metrics upfront and then, of course, discuss any questions that you might have. I'm very pleased to report today Jazeera's highest ever quarterly net profit, which ironically took place in the middle of all the restrictions and challenges that have affected us for the last several quarters. The general environment is improving, and the outlook is now more clear and bright than it has ever been in the last difficult 20 months. However, I would like to point out that this was not the case until the very end of Q3. If you recall, we entered the quarter with airport capacity allowing only 5,000 passengers per day, which then grew to 7,500 passengers and then again to 10,000 passengers per day, only towards mid-September. Also, you will recall that direct arrivals from our key markets, such as Egypt and the Indian subcontinent were only allowed towards the end of the quarter. It is fair to say that operations during the quarter were no walk in the park. Every flight had its own story, its unique set of challenges, and obviously revenue management and planning departments have their hands full. And then that situation lasts only for a day or 2 before a new set of regulations set in and we are forced to revisit our plans all over again. The secret sauce, if I may say so, is the execution expertise of our leadership team to pivot and aggressively take advantage of monetizing every single opportunity that presents itself. Our battle-tested management team right through the pandemic continuously reduced costs, optimized processes and wasted no time to immediately generate the maximum possible revenue when the doors began opening. We have a lot to cover today, and I would like to allow for enough time to take your questions. So with that, let's move straight into Slide 8. We start with a review of our third quarter operational performance. During the quarter Jazeera carried 303,000 passengers against 66,000 passengers same quarter last year. A healthy growth, given the circumstances, although it being from a distorted low base. Nevertheless, a very positive one as it signifies a shift from one era to another. As discussed during the second quarter call, we focused on leisure and holiday destinations for the summer, and when possible, took full advantage of high-traffic legacy destinations within our network. Load factor for the quarter stood at 65.5%, higher than the 51.8% of last year, which, if you recall, was mostly driven by one-way passengers. Again, we didn't have the luxury of deciding on the number of return passengers due to the existing restrictions, but we made the very best of the situation. Aircraft utilization improved to 7 hours. Of course, this is still much less than where we want to be and where we have been in years past, but largely improved over the 2.5 hours of the same quarter last year. I'll cover some of our thoughts in this regard a little bit later in the presentation as well. Yields were very high at about KWD 101 as a consequence of the very simple economic rule of supply and demand. The ease on restrictions did not go hand-in-hand with the pent-up demand, and accordingly the result was an increase in ticket prices. We planned every single flight according to these dynamics and made maximum use of this elevated pricing environment to achieve the results that you see here today. Moving to Slide 9. You can see that the 9 months operational performance for the year. As you know, the first 2 quarters weighed heavily on the performance. And so you will see that the number of passengers and load factor were still subdued despite the third quarter results, while utilization was on par with last year, and yield of course is significantly higher, driven by what I just said in the previous screen. Moving on to the following slide to look at the third quarter financial headlines. Jazeera reported a revenue of KWD 31.7 million, up from KWD 6.1 million in the same quarter last year, which is a 420% increase. Operating profit came in at KWD 12.8 million against a loss of KWD 5.5 million last year, while net profit registered the highest ever quarterly figure in the history of Jazeera at KWD 11.8 million compared to a net loss of KWD 5.6 million in the comparable period last year. For the comprehensive 9-month financial results, Jazeera made a revenue of KWD 47.3 million, which was up 44% from the 9 months of last year. And an operating profit of KWD 1.6 million. And most interestingly, a net profit of KWD 70,000. This means that we have successfully wiped out all our losses for the year so far. This is compared to an operating loss of KWD 11.8 million and a net loss of KWD 15.5 million for the same period last year. Our focus on ancillary revenue did not fade away, as you can see on this slide. Cargo operations witnessed an 83% increase, while ancillary revenue jumped more than double during the quarter. We have repeated over and over that ancillary revenue is an integral part of our LCC business model, and we will continue to focus on generating more ancillary revenue opportunity all the time. Moving to Slide 13. Operations in our Jazeera Terminal T5 have also improved as a natural consequence of the rising number of passengers generating footfall and actually rejuvenating life in the terminal. Excitingly, T5 has not only returned to profitability during the quarter, but has actually now surpassed the third quarter 2019 EBITDA, which was our best year so far, and coming very close to the third quarter 2019 net profit level. We see significant improvement in financial performance for the terminal, and it's on the way to normal life as traffic returns to the airport and leasing activity once again picks up. We have several initiatives in place ready to be implemented in the terminal once normal operations get back to full strength. I'll cover some of those in the outlook. Moving on to discussions on our operational performance during the quarter. We have launched several new routes targeting active segments, as discussed in earlier investor calls. Namely, we started London Heathrow, Bishkek in Kyrgyzstan, Sarajevo in Bosnia, Yerevan, Tashkent, Antalya, Colombo and Addis Ababa. In addition to resuming flights to Beirut and Tbilisi. And this is while flying frequently to Turkish holiday destinations of Istanbul, Bodrum and Trabzon. We are glad to announce that despite all the scheduling challenges we faced due to change in regulations, Jazeera achieved an 88% on-time performance as an airline, while our hub of the Jazeera Terminal T5 reported a superb on-time performance of 95% since the beginning of the year. These are the standards that we have always held ourselves up against and will continue to do so in the future. Fleet-wise, we are continuing our expansion and our fleet now comprises of 8 a320neos, the new-generation aircraft, and 8 A320ceos, after taking delivery of 3 brand-new A320neos during the year 2021 so far. And additional aircraft will join our fleet in about 4 weeks' time, and we will close the year with a total of 17 aircraft. With this, we have completed our existing commitments for aircraft and will take on no new aircraft during 2022. Next year will be a year of consolidation, digesting our fleet growth and bringing the airline back to full robust good health. You can imagine the potential upside of raising the aircraft utilization from 7 hours to 14 hours in combination of the lifting of restrictions which have already occurred. Initiatives discussed before for T5 are now materializing, as you can see in this slide. We managed to expand the arrivals area to include a new baggage belt, increasing by 50% the baggage handling capacity for arriving passengers. We also expanded our operations through 2 gates connected to air bridges and 2 with ground transportation, which are ground gates, and are coming very close to commencing operations in a new operational support building. All these initiatives aim to increase the efficiency and accelerate the flow of passengers during departure and arrival to carry more passengers given the design capacity of T5. To be specific, we are in the midst of making certain structural and process improvements to T5, which will add even more ground gates and raise the capacity by about 500,000 passengers annually before next summer, that is before July. With that, it is now time to remind ourselves, our investors and all of Jazeera's stakeholders of the promises made and the commitments we undertook almost 18 months ago. We implemented immediate decisive measures to safeguard our financial position and liquidity, including the suspension of the 2019 dividend payment after waiting the drawdown of bank facilities that were not previously tapped and renegotiated aggressively all our cost structures with our suppliers. We promised and delivered on maintaining a healthy cash balance through strict cost and payment controls. Jazeera also completed a capital increase in the first 9 months of this year as a precautionary step to adhere to regulatory capital requirements. We focused on alternative sources of revenue during the suspension of commercial flights so that we ensured continued revenue streams even when the airport was closed to commercial traffic. We launched new routes in a very challenging environment and managed to postpone delivery of 4 aircraft from last year when there was no business to this year, thereby saving a tremendous amount of lease rent on those airplanes. Most important of all, I had also assured all our stakeholders that Jazeera will come out of the pandemic stronger, leaner, hungrier and definitely more profitable. Our cash position is the highest in the history of Jazeera at the moment, which our CFO, Krishnan, will cover in the financial section of this presentation in even more detail. All of these promises delivered are really the core of our goal to continuously build shareholder value. This picture is an interesting one from about 3 weeks ago when I attended the IATA AGM in Boston and Richard Quest from CNN happened to be there. We had a little chat, and he was so impressed with the story of Jazeera that now he wants to do an actual segment on Quest Means Business on CNN International. I'll keep you all posted about that. For the coming months, we remain positive with the airport reopening fully as it has been announced by the government. In addition to opening return flights for all non-Kuwaiti passengers as well. As witnessed in the third quarter, the travel appetite in Kuwait is very strong. People have had enough, and they just want to travel. Worldwide as well as within our network, with vaccination rates accelerating at a fast pace, this is great news for our industry. In the near future, we will see a tangible recovery in the fourth quarter of this year. We're already halfway through it practically, and hopefully the same in the first quarter of next year before operations stabilize completely during the beginning of summer next year. At that time, I also expect yields to stabilize at more sustainable levels. Through all this, our focus on cargo operations, which we've actually learned quite a bit during the pandemic, and will now be a permanent and growing part of our business model. Our cargo operations as well as our ancillary revenue will remain unabated. With that, I complete my section of the presentation and hand it over to our CFO, Krishnan, who will present the financial section, and then I will come back to take any questions that you might have. Krishnan, over to you.

Thank you, Rohit, and a very good afternoon to all the participants on this call. The -- on the next slide we have touched upon the capital increase, which was concluded during this quarter 3. In July, we got the cash and the allotment of shares was completed. Subsequently, an AGM was called for all the shareholders to approve the adjustment of the entire share premium of KWD 8 million against the accumulated losses of the company. This was done on the 20th of September. And thereafter, the adjustments for -- adjusting all the accumulated losses we had against the share premium was concluded, and that's what we have seen in this report. The share price issue was at KWD 0.500 per share. Moving on to the next, Slide #24. Primarily the same KPIs which already Rohit has touched upon, and so I will not dwell too much on it, but the yield improved, the number of sectors improved, and therefore the entire level of operations increased, as well as the load factor, which was higher than the last year's third quarter. Going on to Slide #25. As a result of the higher level of operations, other revenues were much higher, coupled also with the increased load factor and the increased yield. So that's why you see a 422% increase in revenues as against an increase in flights of about 227%, increase in block hours of 227%. The operating cost also obviously had to go up because the number of block hours went up, but it was still much lower in terms of percentage figures. If you look at the operating profit, we were better by 332%, a loss of KWD 5.5 million last year versus a profit of KWD 12.8 million in third quarter of 2021. That was an improvement of 332%. And the net profit improved by 310%. In terms of the balance sheet, yes, our cash position has improved dramatically. I will go more into details of the cash in the Slide #27 when we touch the 9-month figures. So going on to the next slide, 27, if you look at the operating -- the key parameters, again of course this touched already by Rohit. And so I will not dwell on this one for too long, except that the block hours were slightly higher, and the sectors were slightly lower, but the yield was much better in this year as compared to the previous year. In 27, if you look at the performance, our operating revenues and expense basically reflect the level of operations that we have seen as it changed. Of course, if you look at the operating profit, it is better by 113%, KWD 1.5 million as against KWD 11.8 million loss last year. And the net profit was 100% better than last year. Marginal profit of KWD 70,000 in this year as against a loss of KWD 15.5 million last year. If you look at the cash position, it has improved by 75%. However, if I exclude the capital increase of KWD 10 million as well as the repayment of loans that we did, both the overdraft has been entirely paid off. And also, we have paid 2 tranches of our Murabaha loan. After taking those out, our improvement in cash has been KWD 16.5 million -- just about KWD 16 million in the YTD position from January onwards of 2021. And this is a remarkable development for us, especially given the circumstances we went through in the first half of the year. The other assets and liabilities primarily have changed mainly because we took 3 aircraft so far in this year, and therefore the ROU assets and the lease liabilities have gone up. With that, I conclude my portion of the presentation, and we will return this to Rohit to take question.

Thank you very much, Krishnan. Let me just close the screen here so that we can see each other. Right. So I'm now open to take any questions that you might have. Thank you very much.

Again, as a reminder, to ask a question, you can either type it in the Q&A chat or you can click on the raise-hand bottom on the right-hand side of your screens. Again, you can type in the Q&A chat or click on the raise-hand button. We have I think a couple written questions in the chart from Ali. What are the -- what's the expected average amount to be spent as CapEx per year starting 2022?

So we have a number of projects, a few of them that we have alluded to so far, and a few that are still in the stage of finalization. I don't expect any significant CapEx in terms of 7-figure numbers in KD terms at the moment. And if there are, what we will look at would be the entire business case in isolation for each of those projects to justify its existence. And then in terms of -- we look at our cash and these projects in terms of capital allocation. So we will see whether we use our own cash or whether we use any other form of financing. But in terms of any significant CapEx, nothing is planned at the moment. There is, I'm sure, a question that is related to this one regarding any future development of fleet. It is true that we are looking -- and we are in advanced stages at the moment of discussions with both manufacturers with respect to the next round of expansion for Jazeera. As you know, we do it quite conservatively. So I expect Jazeera's fleet size to be in the region of about 30 to 35 airplanes by 2026. And to reach that figure, we would need to place an aircraft order in the region of about 20 airplanes, or could be 35, if it includes fleet replacement of what we already have at the moment. That should not have any significant impact on our current cash position for 2 reasons. One, we expect pretty much all of the financing related to aircraft order to come through financing channels, which could be a number of banks that have expressed interest in this area. And also, any aircraft transaction, which includes an order, would actually be net positive for Jazeera's cash because most of these would result in a gain -- a cash gain for Jazeera in terms of a sale and leaseback at the time of delivery of those airplanes. So I hope that adequately answers your question.

His second question is, "When is the company expected to distribute dividends again?"

Right. So our dividend policy is unchanged from previous years. And the only constraint to that at the moment is the level of certain legal reserves that we must maintain. And those -- because of the accumulated losses, they kind of limit the amount of dividends that can be paid out. We have no desire to keep any excess cash within the company. And the policy of our company has always been to pay out as much dividends as prudent. So I think our Board, along with a few special members of the committee are looking at the various options pertaining to dividend and other methods to build shareholder value. And I think that will be disclosed in the weeks and months ahead.

We'll take a question from the line of Nishit Lakhotia. Your line is open.

First of all, heartiest congratulation to you Rohit and your team, fantastic quarter. It's really commendable to see the results that Jazeera reported. So I just have a couple of questions. On the credit environment, it's pretty extraordinary, like I mentioned where yields have been very high and the utilization have been low. Where do you see this normalizing assuming that the traffic now restrictions are all lifted? So do you expect yields to become normal in a couple of quarters? How is this demand on certain routes? For example, I see some of the rates that you're charging on India routes being pretty high because of the air bubble right with limited flight. So how do you -- where you see that? And this is ramp up from a January, February as well, the rates are pretty high. So do you -- can we expect the yields to remain extraordinarily high for the next 4 to 5 months? And how is the utilization going to play out during this time? How fast are you going to ramp-up in the next couple of months? Any idea on that would be very helpful. So that's my first question. Second, on the terminal. It was good to see terminal making profit in this quarter. So going forward, is -- what are the figures? Are there any figures coming from the passenger service fee on the terminal business? Is there any changes that you're expecting and more income from possible sharing the passenger service fee. So that's on the second question. And third is on the routes. How do you see the new routes that you launched, especially on the London route and all, how profitable have those been? And are most of your new routes already making money or it will take some time for it to breakeven.

And I appreciate your good wishes. I think a lot of people within the company have worked very hard, and I'm really super-proud of our team. Let me take your questions in order. You're right, the last month-and-a-half have seen extraordinary yields as a result of excess demand and not enough supply. That of course is gradually normalizing. And I expect by the second quarter of next year it to be business as usual. Now I want to remind you, Nishit, that business as usual is something that Jazeera is very used to. I think from the day we are born, we are used to unconstrained capacity and being aggressive when it comes to competition as well as yield. We had just 9 aircraft for the majority of 2019. And with those 9 aircraft, we generated a certain result. We now have 17, and that should give an indication for what we internally have set goals for ourselves in terms of how to maximize the use of our 17 airplanes. Nothing has changed in the way we approach business. Yes, when we get an opportunity, we exploit it. But otherwise, we go back to the core of our LCC model of keeping the lowest unit cost in the industry, making sure that we compete aggressively and take advantage of all the regional benefits that we have and the geographic benefits that we have as a state of Kuwait. I expect some level of restrictions on the part of the Kuwait airport regulatory body to maintain some sort of restrictions on carriers coming into Kuwait, which was -- and this will continue for several months into the future, at least -- at the very least until the middle of next year. And that should give some level of further boost to Jazeera's operational and commercial capabilities. You mentioned utilization. Yes, we expect to go back to our normal utilization by the second quarter of next year. However, we will only operate those block hours that we think are profitable. So we are not in any rush to go back to the 14 and 15 hours per aircraft per day, even if the business does not justify it. We will only operate the 14 to 15 hours per day if we believe that the yields and the level of business justifies it. I certainly expect us to go to 15 per day for the summer peak of next year. And imagine 17 aircraft multiplied by 15 hours per day, multiplied by the usual summer high demand and the yields generated therein, that's where I expect the vast majority of the earnings for the airline to come in. And this is no different from any other previous year for Jazeera and many other airlines in the world where it is really the main earnings season, which is Q3. Coming to T5. What I want to highlight is what -- yes, thank you for observing that T5 is profitable. Yes, it is profitable. We certainly expect it to be profitable and even more profitable moving forward. Even though it was profitable in Q3, in my view P5 didn't show its full monetization capability or potential. And there are 2 reasons for this. One, as you saw from the details here as well as our press releases and other infographics on social media, the terminal is not leased 100%. Air side has been leased about 99% or almost 100%. And land side had leased about just under 40%, if I remember correctly. So there's a huge potential upside in terms of the lease potential in the land side, which are -- right now has a very interesting pipeline of potential tenants. And we are -- we've actually said no to some tenants just for -- who want to take it for the short-term at low rents and actually focusing on generating sustainable long-term, locked-in commitments for the terminal. And the last month or 2 has been a complete turnaround in the tone of discussions that we're having with large potential tenants for the terminal. And it gives me actually comfort that we've not rushed into any hasty deals to fill up the terminal with low-yield tenants. And the fact that we still have 60% of our land side space still to lease is actually one of the most promising upsides that we have in our business. The second reason why I say it's not fully monetized is that during the last 20 months, the same way we approached our suppliers for discounts in line with our constrained operations, just to be fair and to engage in a sustainable conversation with our existing tenants, we have had to give them as well temporary sort of waivers and discounts during the period that the airport was shut for business, which is only fair. That now has been rolled back towards the middle of the third quarter. And you will get he full revenue impact of the existing leased space as well. Your question regarding the passenger service fee, I'm sorry if I was not explicit. I mean it's obvious. Ever since the government announced the fee of KWD 3 outbound and KWD 2 inbound, this fee has been coming to Jazeera Terminal T5, no different from any other charges that in the past are check-in charge at T1. When we moved to T5, T5 was collecting that. Even the passenger service fee is being collected by T5. I mean, it's a no-brainer, in my view, because we constructed the terminal. We made the investments. And so the income for the passenger service fee also automatically comes to T5. Regarding your question of the routes, I'm happy to report that it is Jazeera's policy that while we do give a few months for new routes to develop and reach their full potential, not a single route, I repeat, not a single route we have on our network, including the new routes, that are not meeting and exceeding its direct operating costs. So the vast majority of our routes not only meet and exceed its direct operating costs but also meet and exceed their share of the fixed cost. And that's why you see it translating into a consolidated profit for the airline. Having said that, we are quite objective when it comes to evaluating routes on a monthly basis. When we see any route underperforming, we suspend operations to those routes. We have a long list of other routes that we want to operate. I can't wait to get my hands in 2023 onwards on more aircraft because we believe there's huge potential that's still untapped. For example, there are at least 9 routes into Saudi Arabia that I would start tomorrow, including Gassim, Hail, Abha, Yanbu, Tabuk, all of these places. And of course, AlUla now. We certainly expect in the weeks and months and years ahead to expand significantly into Saudi Arabia. Iran as well has a lot of potential. Currently, we operate a mix of pilgrim traffic to Mashhad, and cargo flights to Shiraz, but at least 5 more cities in Iran that we'd like to operate to. You mentioned the air bubble. Air bubble is an interesting situation. In November, for example, we were operating around 19,000 seats as Kuwaiti carriers between Kuwait and India and vice versa. The bilateral, which is what governs the air services agreement between the 2 countries only allows for 12,000. So it's not always that the air bubble agreement means or implies a restriction. In our case today, we actually have 50% more than the bilateral under the air bubble agreement, and we are now pushing the government of India for more ports of calls, including the smaller cities like Trichy, Madurai, Jaipur, Lucknow, all of these points are of interest to us, not currently in the bilateral. We'd like to start operating there. And our request is spending with the government of India. Similar in Pakistan, we currently operate only to Karachi and Lahore, that too very limited frequencies. I'd love to operate to Multan, Sialkot, Islamabad, Peshawar, all of these points have huge traffic to and through Kuwait to the rest of the Gulf. I hope I've adequately managed to convey that we have big plans over the next 3 or 4 years and lots of untapped low-hanging fruit still within the 3 to 4-hour range of our home base.

We will move to the chat to take a question from Shabbir Kagalwala. Are there any fuel hedges for Jazeera? And what are the maturity and strike prices, if any?

Well, I'm not sure this is good news or bad news, but we have at the moment no fuel hedges of any sort. We unwound them to our advantage around February of this year. At the moment we have absolutely no fuel hedges. Having said that, we have a raft of other risk management strategies and fuel optimization strategies, including on the operational side, the way our crew manage our operations, thereby saving fuel. One of the reasons, by the way, that you see the high fares on many of our routes is because we price in the fact that fuel has gone up. And so you'll find that on many of our routes our prices are a bit more than usual. Also, in about 10 days' time we have the fuel committee of our EC meeting to review once again what should be our fuel risk mitigation strategy moving forward. But at the moment, we have no hedge in place.

Okay. Thank you. Take a question from Karim Abbas in the chat. How much of the yield per passenger increase is expected to faint and supply-demand normalizes? Jazeera used to have issues with heavy pricing competition on popular short routes like Dubai, for example, flydubai and Emirates, Beirut, with Middle East, flying over Syria, and longer routes against Kuwait Airways, which used to be to price very competitively. Should we expect these pressures to return in a normalized environment?

Thank you for your question. I think I answered most of it when I said that I expect in a gradual phased manner supply and demand to normalize by the second quarter of next year and certainly by the middle of next year. I'm not sure Jazeera ever had any issues with respect to competition on the Dubai sector, on the Beirut sector and so on. What I'm very confident about is that we have the ability and the cost structure to go down and compete effectively on price if necessary, and still make money in the process while our friendly competitors and industry colleagues, if they were to sell tickets at that price, would end up losing money in the process. You're very right to say that different airlines have different ownerships and different profit goals and imperatives and pressures on them. We of course think commercial. And we have a number of different measures to handle competition. Pricing is just one of them. The vast majority of our passengers on, for example, the Dubai route that you mentioned in your question, are people who choose Jazeera for reasons in addition to price or not just because of price. They choose Jazeera because they know about a fanatical on-time performance, the fact that we have new airplanes, the fact that we have a very easy terminal to get into and out of, which is in 10 minutes you're from the gate of the terminal to the door of the airplane and vice versa. I think, yes, we will go back to tough aggressive competition at some point next year with all the other carriers that we are used to. But that's not really abnormal. That's very normal. The only difference is this time around we are bigger, we have more muscle to compete, we have better traffic flows. For example, on our fly to Dubai, it's not just Kuwait-Dubai. I carry passengers from India. I carry passengers from Bangladesh. I carry passengers of Nepal. I carry passengers from Addis Ababa because there's a huge restriction in capacity between Ethiopia and the UAE. So I have a lot of taps at my disposal that I can turn on and off depending on what the situation is and where I can command the highest yields. I hope I'm able to answer your question adequately. By the way, Hatem, I see a question from Gus Chehayeb right now.

Yes, I'll just go on to -- yes, I'll go to him next. Gus, please go ahead. Your line is open.

Congrats on this and excellent quarter. I have 3 questions. The first of which is one you just touched on. And I just want to make sure that it's abundantly clear. So on the passenger service charge, is that now 100% flowing to Jazeera, and that has been approved? I know that you're collecting it, you're entitled to it legally. But is it now 100% agreed that is flowing to Jazeera?

Correct, Gus. And yes, I have it in writing. So it is legally and properly documented, and I'm collecting all of it at the terminal. I'm paying for it as the airline, and I'm collecting it as the terminal, yes.

Congratulations. That's wonderful. Just -- so to put that in perspective then, I mean assuming 3 million passengers next year, you divide that in half to 1.5 and then multiply that by KWD 5, AND that would be the incremental profitability to Jazeera from the terminal. Is that the right way to look at it?

That's a quick and dirty way to look at it. You're not entirely off the mark. It's divided into KWD 3 outbound and KWD 2 inbound. And then there is a formula for calculating transit traffic where someone going, for example, from Tashkent to Jeddah, via Kuwait, flying 4 sectors, there's a formula in which this is collected and then allocated. But yes, I think for a quick and dirty calculation, you wouldn't be far off the mark.

Okay. And then it was mentioned, I can't remember if it was the last quarterly call or one of your more recent conferences that the government is also -- have given Jazeera some cost cuts locally. And it wasn't really clear the term of those, but could you clarify that? I think it was something like a 30% cost cut for Jazeera locally at the airport. Can you please clarify for what term that is? Is that going forward for what number of years on what costs exactly, just to make that more understandable for us.

The Ministerial Resolution 1 of 2019 grants the DDCA President the power to extend a 30% discount on all DDCA charges to national carriers of Kuwait, which are the 2 airlines in Kuwait. And as far as I'm aware, similar to our fuel discounts, there is no end date on that particular ministerial resolution.

Okay. Okay. Wonderful. And then just to help put things in perspective. You've touched some of these questions. So I apologize for kind of asking them a different way, but looking at Jazeera, it's a little easier to compare the company to 2019 versus last year given that last year was such a massive one-off. So looking at next year versus 2019, what do you think yields would look like? I mean, they're much more elevated today. There was much more competition back to them, but you're in a much stronger position today in terms of your market share. Would you say yields by next year should be 25% higher, 10% higher? If you just had to give a rough guess, just to help people model what next year looks like from a yield perspective.

I'd love to help you model, Gus, but you all know that I shy away from giving any sort of forecast, whether revenue, yield, seat factor, profit, any of those things, I don't give guidance. I don't give forecast, but I try and stay as honest and conservative as possible when I give you the view of how our business will evolve. Let me put it this way. I expect yields to be elevated but gradually decline to normal levels by the middle of next year. Having said that, there will be a wide variety of destinations where different dynamics play on yield. So there will still be some routes where we compete aggressively. But there will be some routes where we make a ton of money on yield, some routes where competition is weak or nonexistent. A good example of that is what we'll be doing shortly with Almaty when we launch a flight into Kazakhstan. There's no airline operating into Kazakhstan at the moment. And between the oil traffic and the Umrah traffic and the leisure traffic that connects from Kazakhstan to Sri Lanka, which we'll be getting a big share of, I expect yields to be above what you would consider average. So there's going to be a large number of routes. But in general terms, I expect yields to stabilize around the middle of next year. Hatem?

I'll take a question from the line of [ Mahmud Akbar ]. Your line is open.

And very congratulations, it's been a very sound set of results. I think I'm just going to ask an added layer on yields for Jazeera Airways, particularly relating to -- I think I've asked this in the previous call, let me ask it in a different way. Is there a way that Jazeera can discriminate in pricing between point-to-point travelers and people who will use Jazeera as a transit, let's say, from Almaty and Sri Lanka as an example where there is much more significant competition. So overall, yields will dampen. So yields will never go back to the elevated levels 5 years ago or -- but actually this incremental addition in capacity is going to -- maybe a case of higher profit, but incrementally the yields will obviously decline over the long term. I just want to understand this point because last time we've explained it well, I hope this time you can explain it a bit, even go into more details based on your long-term experience. Because you are competing with other LCCs, you are competing with airlines that, as you rightly mentioned, have different objectives, maybe not even profitability, and they have a lot of fixed cost in it.

It's a very fair question. And this is indeed revenue management 101 when people join the revenue management industry in aviation. The first thing they learn is how to ensure that never you allow low yield to block high yield. So between the systems that we have, the predictive algorithms that we have for our revenue management systems and the skill, which is kind of voodoo, if you allow me to say it, it's between science and art, that revenue management specialists along with their systems, they have the ability to turn on and turn off taps and what is taboo is to ever find yourself in a situation where low yield is blocking high yield. Now that can happen in a number of circumstances. For example, if you panic and sell-out your flight well in advance at a lower price. I mean, it seems obvious when we talk about it now, but you'd be surprised how many airlines actually do it with one flat price and closer to the day of travel you find demand picking up and your ability to have potentially increased your prices, but you already sold out cheap. And so in simple words, you have low yield blocking high yield. Similarly, let's say, on a typical flight, which is Kuwait to Jeddah. You have many routes, many stations, many origins competing for a seat on a Kuwait-Jeddah. You have Kuwaitis who want to go and do Umrah who are in Kuwait. So that's third and fourth freedom business, point-to-point business. You have people sitting in Bangladesh who want to perform Umrah, and there is a certain market price there. You have people in India who want to go and perform Umrah, there's a certain market price there. You have Pakistan also bidding for those seats. And it's kind of a real-time online auction being conducted by our central revenue management team, where with the benefit of algorithms, forecasting, historic trends, any special events happening in and around the place like Dubai Expo, all of this is fed into the system. And eventually they come up with a demand curve and that demand curve governs pricing 30 days out, 60 days out, 90 days out, which helps our revenue management team then allocate a seat on the Kuwait-Jeddah saying Bangladesh, based on my forecast, you will have the highest yield, so go ahead, take your seat at this price, and that seat is sold. In simplistic terms, that's how we have the ability to discriminate between different kinds of traffic and the yields they bring in. I hope I've been able to answer your question.

It answered my question. So just very quickly, just as a follow-up. But the next leg of expansion in the fleet involves a very different -- involves very different competition. You rightly mentioned, if I was living in Riyadh, I would rather go to the airways because it's easier to get in and out the terminals lines, et cetera. So for point-to-point business, it's a great business, but you are moving to a different model now where it's going to…

No, you're not. Sorry to interrupt. I just want to make it very clear, and if I've misled you with my explanations, I apologize. Jazeera is and forever will be predominantly point-to-point carrier, okay? The low-cost airline bible says that you should be primarily a point-to-point carrier, and we have no desire to depart significantly from the low-cost airline bible. So currently our sixth freedom business or connecting business is about 16% of our overall traffic, 16%, 1-6. Under no circumstance do I see or will I allow connecting business to go more than 20% of our total business. That's not healthy for a low-cost carrier. Is that more clear?

That is perfect to clear. So basically, what you're saying is, I think, the way I understand it now, thank you very much for mentioning the transit business, so then the sixth freedom. So my understanding now is subsequently you expect the majority of demand coming to this fleet expansion coming to people who want to come to Kuwait or Kuwait if you want to travel abroad 80% of the business.

Correct. So I mean, it's a mistake to always go on the base of historic data, although that gives us comfort as people who like mathematics, right? So if I were to say, should I launch a flight between Kuwait and Bishkek in Kyrgyzstan, okay? And I only look at historic data to justify my decision, I would never launch a flight to Bishkek, okay? There is no traffic historically the flew to Bishkek. But I know the mentality that every summer Kuwaitis want a new place to go to. Okay. Every summer, they want a new place. 5 years ago, we launched Baku and Tbilisi. It became a rage. A few years later we launched Trabzon and Bodrum in Turkey, it became a range. We launched Sarajevo. That became so successful. Next year on our plan is Vienna and Prague, along with a few other places which are of course much shorter than London Heathrow but still within Western Europe, Central Europe. So -- and it's going to be third and fourth freedom. It's Kuwaitis who are going to go in numbers based on our forecasting. I'll take one last question, Hatem.

Okay, sure. Take a question from Yousef Al -- question from Abdulrazzaq. How many destinations are you flying now? And how is the demand after the schools have started? How is the passenger travel outlook? Your deferred revenue is KWD 6 million, does it mean strong 4Q? There's a question on the passenger tax, which I think you addressed. I think the -- yes, the other 2 questions have already been addressed, so you can take this one, yes.

So demand has been good after school started. But to be honest, demand was also good before school started. Schools generally govern vacation travel demand for expats. For Kuwaitis, we still see strong demand to Turkey. We see strong demand to places like Dubai, to places like Tbilisi. And the outlook for Q4 is, in my view, similar to any other Q4. November, typically is the weakest month for any GCC airline and historically even for any Kuwaiti airline and also for Jazeera, which means that we are fighting very hard to ensure that we have a decent November. December will be better. October, which Krishnan just finished doing the numbers for yesterday, looks good. I would even say very good. So yes, we seem to be in a good place for Q4. I think with that, if there are no more questions, Hatem, that you see on your screen, which you think we have not answered, have a quick look, and let me know before we close.

Yes. So there is a question from -- there is a verbal -- few verbal questions. Want to take one last one and we will close. Okay.

Yes.

Okay. Question from [ Ahmad Alfanan ]. Your line is open.

Congratulations on the great set of results. I just have a question on the passenger service fee. So you mentioned that KWD 3 for outbound and KWD 2 for the inbound. So if we look at the number of passengers handled by Jazeera back in 2019, they were at 2.4 million. So is it fair to assume that's basically 2.4 million passengers multiplied by 0.5, just to simplify a calculation. And out of that, basically multiply by KWD 5 collected from the passenger service fee?

Yes, like I mentioned to Gus a few minutes ago, that would give you a quick and dirty approximate calculation. There's a few more layers of calculation involved. But yes, that could give you an approximate figure, a very approximate figure.

And those revenues will basically be accounted for in the terminal revenues, the T5 revenues?

That is correct. With that, ladies and gentlemen, I'm delighted to have spent an hour with you this afternoon. Thank you. If you have any follow-up questions, you're most welcome to contact Mostafa, who heads our Investor Relations; or Krishnan, our CFO. Anything significant, you're most welcome to contact me as well. Until the next webcast for the full year, I assume sometime in February, I say goodbye from all of us at Jazeera.

Thank you very much, Rohit and Krishnan. Thank you, everyone, for participating. Have a good rest of the day. Thank you.

Thank you.