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

Good morning and good afternoon, everyone. This is Omar Maher from EFG Hermes. On behalf of my colleague, Hatem Alaa, I would like to welcome everyone to Jazeera Airways 3Q '22 results call. I have the pleasure to introduce Mr. Rohit Ramachandran, Chief Executive Officer of Jazeera Airways; Mr. Krishnan Balakrishnan, VP Finance; and Mr. Mostafa El-Maghraby, Head of Investor Relations. As usual, the call will begin with a discussion of the key highlights of the period, and this will be followed by a Q&A session. And I will now hand the call over to Mr. Ramachandran to begin the presentation. Thank you very much.

Good afternoon, and sorry about that small delay. Welcome to our earnings call for the third quarter of this year to discuss our results for the most active quarter as well as for the cumulative first 9 months of the year. I understand that this time around, the results came out shortly before this call. So perhaps some of you didn't have enough time to go through them. But rest assured, as we are set to discuss in great detail, another record-breaking quarter for Jazeera in terms of passengers carried, aircraft movements, revenue and most importantly, profitability. I hope that you all have enjoyed a good summer season like Jazeera did and that you are back to office fresh and focused for the earnings season after 2 tough summers in the last couple of years. We will discuss our operating and financial results in detail and walk through key matters like market dynamics, fuel and updates on our fleet and network growth plans. After which, our CFO, Krishnan will provide ample analysis on how these results aim to be. As usual, we will begin with Slide 6 for a review of our third quarter operational performance. This quarter differs slightly from the last 2 in that we can now make some sense from comparisons with the corresponding quarter of last year. And when I say some, I mean that the dynamics delivering the 2 quarters are so different, but at least from a numerical perspective, they present a more meaningful comparison. During the quarter, Jazeera broke the 1 million passenger threshold for the first time in its history, a figure that only a few quarters ago seemed out of reach in the minds of many outside the company. Not for us, though, or we knew we are getting there, and we knew how to get there. We designed our plan and executed it against all odds during the pandemic and now against a war somewhere in the world or simply a lack of imagination in some quarters. I would like to use this chance now to invite you all to adopt this notion and deal with it as the new normal for Jazeera. Few more quarters down the line, and we'll be discussing similar figures for Q1, Q2 and Q4 as Jazeera carries on its growth plans. Looking back, load factor for the quarter was over 80% compared to only 65.5% last year. While aircraft utilization was north of 14 hours, more than double that of the same quarter of last year. Yield, the tricky part, came in at a very healthy KWD 55 compared to KWD 101 in the third quarter of last year. I said very healthy because this is a very strong yield in any normal year of operation, although it is lower than the same quarter last year for the exceptional reasons and capacity controls that you recall. Moving on to the following slide, we will see the financial results for the quarter. With so much satisfaction, I'm proud to present to you the highest ever revenue reported operating profit and net profit reported in the history of Jazeera despite all the headwinds. During the quarter, Jazeera achieved a revenue of KWD 63.2 million and operating profit of KWD 16.1 million, which is 25% above the same quarter last year and a net profit of KWD 13.8 million. I repeat, this was no easy quarter with jet fuel stuck at or close to peak prices and refusing to correct downwards. Yet still, the sense of contentment we get from seeing how this business model performs when allowed to function just operates to perfection. In fact, and I don't want to divert away from our standard reporting approach, but I have to highlight that the ability of this company to generate cash and free cash flow is just beyond what is normal in this industry and even in the vast majority of cases, I dare say in this part of the world across many other industries as well. Krishnan will walk us through some of the details in his finance section. In Slide 8, we will look at our comprehensive operating performance for the first 9 months of the year, during which Jazeera carried 2.6 million passengers with a blended load factor of 76.4%, utilization of aircraft at 13.1 hours per aircraft per day and an average yield of KWD 510. It's funny, perhaps even shocking in a way, how some of our team members, myself included, are not satisfied yet with these results. It will be very interesting if one day, some of you can attend one of these meetings, which we have internally, where we discussed how to double this passenger number or why we only achieve this load factor and what is our action plan to push it above the 80% mark for the full year, which is indeed our goal for next year. On Slide 9, we review the financial results for the whole 9 months, where revenue came in at KWD 140 million, operating profit at KWD 26 million and net profit at almost KWD 21 million. All record figures for Jazeera driven by pure operations. In fact, as was the case in the second quarter, there was a one-off gain generated from the sale and leaseback of 2 engines, but more importantly, there was a nonoperating noncash loss of KWD 2 million, which relates to foreign currency as the U.S. dollar continued to appreciate and we have to revalue our long-term leasing contracts under IFRS 16. Kristian will elaborate more on these in his section, and no doubt, we will cover this during the Q&A as well. In this slide, you can see a numerical representation of cargo, ancillary revenue and our push towards digitization. All looks good, but perhaps you might be wondering about the drop in cargo revenue. So I think an explanation is due here. To start, let me say this is purely a matter of physics. Last year, as you recall, we carried less passengers but at very high yield due to the restrictions imposed at the time. This meant that the weight of every flight was less than normal, and hence, we could carry more cargo. Obviously, this is not the case this year. More importantly is that you understand there's a direct correlation between weight and fuel consumption with fuel prices being so high this year, many times than not the economic equation directed us towards carting less weight and cargo in order to consume less fuel and generate a better return. This continues to be assessed by systems every day as we monitor both fuel and shipment prices and try to extract the maximum economic benefit for this situation. Moving on to T5 operations on Slide 11. As expected, with record passenger movement, the third quarter achieved a revenue of KWD 3.2 million and an impressive cash margin of 87.5% for EBITDA of KWD 2.8 million and a net profit of KWD 2.7 million. At the risk of repetition, these are historic results for the terminal as well further confirming that Jazeera is firing on all cylinders. Aside from the passenger service charge, retail revenue has significantly picked up along with other streams. But above all, duty-free operations are becoming a personal obsession as it beats all expectations, recording sales of KWD 3.3 million or close to KWD 1.3 average per passenger, which is way above our best case scenario when we budgeted for this business. I look forward to sharing with you all the P&L and the final profit number for this very new business of ours at the end of the financial year. In the coming section, we will discuss key achievements and challenges that took place during the quarter to keep you up to date with our operations. In this slide, I'm glad to show you that our market share remains in the high 20s even though during the peak season when all airlines sharpen their teeth and call their full fleet into action or sometimes in the case of Jazeera even, bring additional aircraft. Our market share on the network alone is 31%, which is noteworthy in my opinion. Further, you can see the network evolution as we continue to charter new territories and expand to new destinations. We used 2019 for comparison here being the last full operational year. You can immediately see how our European destinations are yielding results. Indeed, there is a summer factor here. But nonetheless, this is a combination of creating demand in certain cases from scratch and attending to foregone demand in others by attending to destinations that were previously served by competing carriers. Growth in South Asia is also evident as we continue to serve more destinations across all 5 countries in the Indian subcontinent. Moving on to this slide, which could tie things up as we carry that record number of passengers achieving 2 other factors with Jazeera's fleet being the largest in its history so far, but also having the largest aircraft movements in our hub of Kuwait International Airport. I recall being asked during last call about the timing of taking delivery of the 2 new aircraft we received a couple of weeks back, being after the high season, and my position was that even with these 2, we are still short of the demand we see and the service volume we wish to deploy. Well, let's do this in the mix, we decided to extend the term of the wet lease we got during the summer through to next February to cater for this business right through the winter months, which are coming up. I reiterate that network expansion takes a lot of pre-planning, mobilization and testing until it returns a satisfactory level of profitability. So the work we do now is planned to provide a solid 2023 across the board, but more specifically, a very smooth and busy peak summer season next year. On the fuel front, I'm sure that you're all aware of the price movement during the quarter. We had a sort of a minor correction in July when the spread between jet fuel and Brent were starting to restore itself towards its normal level, which is about a $10 gap, only to reverse course in August and closed the quarter with an average spread higher than that of the second quarter. Now the gap between Brent and aviation fuel is about $25. From our end, we are monitoring and assessing the situation and planning accordingly. This requires a fanatical attention to every cost line item. Our network continued to grow as planned with 4 new destinations in Saudi Arabia and more on the way. I'd like to spend a moment talking about Saudi Arabia. You might be surprised to know that Jazeera is now the largest foreign airline operating into Saudi Arabia. We have over 70 flights per week into the Kingdom. Just for Umrah, we have 6 flights a day into Jeddah, 3 flights a day into Madinah and 1 flight a day into Taif. That's a total of 10 Umrah flights. We also added a second destination in Uzbekistan in the city of Namangan and a new destination in China, which Xi'an. Both are innovative destinations that have never been served from Kuwait. Further, Jazeera joined the shuttle flight program for the FIFA World Cup in Qatar with flights between Kuwait and Hamad International Airport for all matches between the 21st of November and 18th of December. Sales has already started and will offer a modest support to our fourth quarter. On a different note, I would like to use this opportunity to extend our heartfelt support to the people of Pakistan and our support for them to get through and recover from the impact of the disaster floods that hit the part of the country. Jazeera, as part of the international disaster flood relief efforts across the country and through the great Red Crescent Society pledged to carry over 2.5 tons of cargo containing medical supplies and the necessary equipment donated by the people of Kuwait to the people of Pakistan. Lastly, as we always share with you our short- and medium-term outlook, we see an active fourth quarter driven by less leisure travel and more passengers commuting to visit friends and family as well as Umrah-related travel. As we often do, we take advantage of the fourth quarter to experiment and start new destinations in order to have them reach maturity by the following year summer. We are in active negotiation for the following years, fleet additions and are looking for a solid and hopefully another record-breaking 2023 in terms of passengers carried as well as the bottom line. We are happy with the current formula and will gradually continue to push the boundaries and do it in a larger scale year after year. Some welcome support can lend its hand if fuel prices subside or the number of total passengers in Kuwait International Airport returned to their 2019 levels. Either situation is good. Both together are perfect, but it neither takes place, then it's more of another 2022, not bad at all, I would say. I recall at the beginning of the pandemic, when aviation specialist research houses forecasted that the industry will only fully recover in 2023. This seems like ages ago, but here we are edging closer to the beginning of 2023. By a year, we hope will set new records and achievements for Jazeera. With this, I now conclude my section of the presentation and will leave you in the capable hands of our CFO, Krishnan for the financial review.

Thank you, Rohit. Good afternoon to everybody. Let us look at the Slide 19. All of the parameters have already been touched upon by Rohit. So I will not dwell too much on it. But basically, the fleet increase, and as a result, all the parameters went up, yield was lower, but that has been already addressed by the Rohit. So I'll move on to the next slide, and if you look at the financial performance for the quarter 3 of '22, our revenues have gone up by 99.2%. he expenses went up by 244%, but we'll explain why. Primarily the revenues, they're better because of the load factor being much better than last year and the number of passengers as a result, though there was a decline in the yield, which offset part of the benefit that we gain from the higher load factor. The costs primarily are higher because the number of sectors and the blockers went up. So it's in proportion to the increase in the operations, plus the fuel high prices of fuel during this quarter, which was a 409% increase over the previous year. As a result, we had an operating profit, which was higher. The revenues outdid the expenses. And of course, this is after the exchange revaluation, which Rohit touched upon, where the lease liabilities under IFRS 16 have to be revalued as of the end of the quarter, the reporting date and recognize the losses in the books or the gains. In our case, in this year, unfortunately, the KWD has been losing ground to the dollars, and we have had to recognize this loss for this quarter, KWD 0.7 million. I'll move on to the next slide, which talks about the 9 months performance. Now here, the revenues definitely did better than the budget -- sorry, better than in the previous year. We have done a load factor, which is much higher than what was in the previous year and the passenger numbers. The yield definitely again hit a mark to reduce the revenues we gained from the additional passengers. We lost a bit on the yield, but that was expected because last year's meals were a little bit on the higher side. And we spoke about that during the quarterly investor call as well. The costs were higher, but primarily in line with the level of operations. As a matter of fact, it was much lower than the increase in the level of operations. 277% was the increase in the block-off there as we actually expand only 151% more. Even though the fuel price was much higher for the previous year. Exchange revaluation book loss, which we spoke about earlier, impact for the 9 months was KWD 2 million because the dollar has appreciated against the Kuwaiti Dinar. When I come to the balance sheet, the cash balance has increased to KWD 55 million. And this is despite us having paid KWD 17 million to Airbus towards the advances for the aircraft and a dividend payout of KWD 13.6 billion. And last year, we closed the balance sheet with KWD 50 million of cash, which has now gone up to KWD 55 million, mainly because the profits have increased and the cash collections have improved. The fixed assets and the lease liabilities went up primarily because we inducted 2 aircraft during the year, and the ROU asset and the lease liabilities have been recognized. If you look at the dividend, we paid a dividend of KWD 13.6 million, which reduced the equity. And despite that, our equity position has improved from 30 to 37. So it actually should have been another 14 million better, but then that was because of the dividend. If I can go on to the next slide, #22. This primarily explains the scenario there, if the fuel had been saying as the price we had last year, what would have been the benefit to us in the P&L. So the 9 months result would have been better by KWD 13.8 million. And for the quarter, it would have been KWD 3.5 million better. It's unfortunate that are fuel prices have not been very helpful, as Rohit already mentioned. And with that, I conclude my section of the presentation and hand it back to you, Rohit.

Thank you very much for the presentation Rohit and Krishna. We are now going to start the Q&A session. [Operator Instructions] And the first question comes from Nishit Lakhotia.

Yes. Congratulations on fantastic results. I have a couple of questions. I have more than that, but I'll come back in the queue later. The first is on the fleet expansion for the next 2 years, if we can have some kind of idea as to what you are targeting in terms of expanding fleet. And that brings me to the next question on the terminal capacity. Where are we in terms of how much more can we accommodate in this existing terminal and any development whatsoever in this regard for the terminal. So that's my first question. Second is on the Qatar shuttle arrangement and how do we look at 4Q, given that now the terminal is contributing quite a bit to the bottom line and 4Q otherwise, it is a weak quarter for Jazeera. So should we expect any material upside from the shuttle operations? And will 4Q be now not in negative anymore given that we have some level of cushioning coming from the terminal operations. I'll just stick to this. I'll come back in the queue later.

Thank you. Good to hear from you, Nishit. Thank you for your questions. I'll start with the fleet expansion. We have taken delivery of the last 2 airplanes last month, and that concludes temporarily the direct order delivery that we have with Airbus until they commence delivery in 2026 of the new aircraft orders that we had placed during the last Dubai Airshow. So between now and 2026, for our organic growth, we have taken a strategic decision not to go with A320neo aircraft for a number of predominantly operational reasons, and we have decided to go for short-term leases for 7 aircraft over the next 3 years. So we've just concluded an RFP process, and we're getting a lot of interest from aircraft lessors to deal with Jazeera, they consider Jazeera, a very, very good company to place their airplanes with. We're getting offers for CEO aircraft for short-term leases of 3 to 4 years, which are at an extremely, extremely good price point, and that's what we will be doing to bridge the gap between now and 2026 when our orders commence delivery. So in other words, 7 airplanes between now and 2026. In terms of terminal capacity, as you recall, we've had several rounds of upgrades in the terminal, which is at each stage, increased its capacity. We here right now in the very last days of what we call Project 1.5. So in another 10 days or so, we expect that to be unveiled, which adds 2 more Aero bridges, 2 more ground gates and approximately 1 million passengers more than current in terms of the terminal capacity. We also have another project ongoing, which will add an X, which is an additional building of check-in as well as baggage adjacent to our existing terminal, and this will be more like a temporary structure to bridge the gap until we can talk about the very large project that I have alluded to in the past. This project, which I mentioned, which is a temporary extension of our terminal will be ready at some point second half of next year. Coming to your question regarding the FIFA World Cup and the shuttles that we as well as a few other GCC carriers are operating. We have the shuttle, and it will have some modest impact. We have 2 to 3 flights a day, depending on the day to Doha. The take-up has not been great, both for Jazeera as well as for other airlines operating the shuttle across the GCC, including UAE carriers from my conversations with them, which is why we are carefully calibrating the capacity that we end up deploying for this. Yes, you're right. Historically, the fourth quarter is a modest negative for most carriers in the Gulf, including us and we are making every effort to keep that as modest as possible. But I expect this year Q4 to be in line similar with Q4s in the past. I hope that answers your question, Nishit.

Next question is from Belal Sabbah in the Q&A box asking where do you see the passenger yield stabilizing?

Thank you, Belal. I think we are there. I think right now, you're probably seeing the last remnants of the yield surplus that we have been experiencing post COVID. I think during the course of this quarter, you will find yields back at a normalized level.

[Operator Instructions] Nishit, I think you had some follow-up questions. So perhaps you can go ahead now.

Yes... Actually, mine was on the yield fell. So the yields are still significantly higher than what it used to be in 2019. So Rohit, what you're suggesting is that this level of KWD 55 is kind of sustainable or possibly a bit more of contraction, but this is a new norm, and the passengers would be paying this kind of yield until we see a material correction in oil price? Is that what I understand correctly?

The 55 number initiative is you're referring to Q3. And yes, I would say that for Q3, that is now par for the course. Moving to Q4 and off-peak level yield. I think the yield level you see in Q4 are what you will see in the norm to be. With Q4 this year, we are coming back to Normal. I would just make 1 or 2 small points which perhaps are of interest to those of you listening on the call, there was some discussion earlier about what that KWD 2 million charge signifies. And I want to highlight that, that is basically a noncash reevaluation impact of our IFRS 16 obligations in the way that our aircraft lease contracts are valued. So normally, you see in the first half of its lease life as if it's a 12-year lease. During the first 6 years, you find it being a burden on your P&L. And in the second half of its slide, you see it contributing to the P&L. So right now, because most of the leases are in its early stage, you find that a disproportionate burden on the P&L as a result of the IFRS 16 impact. The second and more dramatic impact, of course, is the movement of the U.S. dollar versus our base currency, which is the Kuwaiti Dinar. And that's what you see playing out this year. If, for example, the reverse were to happen and the KWD appreciates against the dollar, you would see an equivalent revaluation, which would benefit the P&L. Either way, it has no impact in cash terms on the business. I hope that is very clear. If there are no other questions, then I suggest we call it a day, and I look forward to meeting you all for the annual results investing call.