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 Fourth Quarter 2022 Results Call. I'm pleased to have on the call today, Rohit Ramachandran, the airline CEO; and Krishnan Balakrishnan, CFO. We'll start by a presentation from management, and then we'll open the floor for Q&A. [Operator Instructions] Rohit, please go ahead.

Thank you very much, Hatem. Good afternoon, everyone, and welcome to the annual results earnings call for the fiscal year 2022 and also the last quarter of last year. Incidentally, this is not only the first call of the year 2023, but also my 24th earnings call and the sixth annual call for Jazeera, so it's a great privilege to have you with me this afternoon. I'm sure by now that you have seen the results that were published yesterday, and so we'll go straight into the results in the usual way that you're familiar with by now. Let's begin with Slide 6 and 7 for a review of the fourth quarter and then we move on to the full year performance. In Slide 6, you can see our operational performance during the quarter. I would like to draw your attention to what I mentioned during our last call in that we were looking forward to making 1 million passengers per quarter our new normal or a new floor for our business. This quarter, we came very, very close to achieving that, flying 978,000 passengers. For a fourth quarter, that's quite an achievement for Jazeera. This was driven by a relatively high load factor of 78.7% and a utilization of aircraft of 12.4 hours per aircraft per day. Both were significantly higher than the same quarter of the previous year. But we have indeed since then in the new year surpassed even these healthy numbers. Yield was lower, as expected and as predicted, given the abnormal circumstances of the extremely high yields of the previous year, that is 2021, along with the ongoing normalization as time passes by in the post-COVID environment. This theme was with us during the year. And hopefully, starting Q2 of this year, we'll have a more reasonable comparison between quarters on all fronts. In Slide 7, I'd like to draw your attention to something I mentioned in the last call as well, which is that fourth quarter is expected to be a normal one by regular standards, typical to Jazeera Airways that you've seen over the last several years. Accordingly, even though we achieved very healthy revenue growth close to 25% growth, our operating and net profits were lower than the previous year, which was exceptional. It is important to take a moment to review the dynamics of the changes, which are attribute to 2 main factors. The first is the higher yield of the fourth quarter in the previous year, coupled with a lower level of operations, which, when combined, meant a much higher margin than normal. The second factor, which we will speak about in more detail is the negative impact of fuel price on the fourth quarter of the year, indeed, almost the entire year of 2022. In Slide 8, we take a look at our comprehensive operating performance in the full year, starting -- during which Jazeera carried 3.6 million passengers with an annual load factor of -- in excess of 77%, utilization of 12.9 hours per aircraft per day and an average yield of KWD 48. All in all, from an operational perspective, we reap this year very highly as it is the first time where we truly get to stretch our muscles and start expanding and grabbing market share from competitors. In fact, just literally 1 hour before this call, I received fresh off the press, the market share statistics for Kuwait for January. And for the first time in history, we are exactly at par with our friends across the street. In other words, we, along with the other carrier in Kuwait carried exactly the same market share with half the fleet. And that should give you, I think, as our investors great joy. We now feel that Jazeera is no longer the small player it used to be with 7 or 10 airplanes that existed in the markets just a few years ago. But now within the region is a force to be addressed and respected. Slide 9 summarizes all of the above, along with our previous discussions in the full year numerical financial achievements. As you can see, against all challenges, particularly fuel price, Jazeera closes the year with unprecedented record numbers. Revenue increased 126% to KWD 182 million, while operating profit was up 148% and net profit registered a historic KWD 20.1 million, which is 184% above 2021. In Slide 10, we monitor other regular KPIs that all showed decent growth, as you can see. Cargo revenue, as explained in last quarter's call is lower due to the same reasons discussed then, as we resume our normal passenger operation, the available room as well as payload for cargo has become less and less. In my opinion, I think 2022 was, towards the end, a very normalized year and is typical of the trends that you've been seeing with respect to aviation in Kuwait for the last many years. Moving on to T5 in Slide 11. Again, another record year that beat expectations. As expected, the terminal benefited, obviously, from the higher passenger movements, but that would not have been possible if it wasn't for the expansion conducted to extend and increase the capacity of the terminal that enabled it to handle these large numbers. As for 2023, we are comfortable that we will again carry the passengers that we have planned, which is expected to be significantly higher than 2022. Back to the numbers. The growth in all fronts is visible as we achieved a revenue of KWD 10.2 million and a net profit of KWD 7.8 million and what I consider an impressive net margin of 76%. In the following few slides, we'll take a look at our operations. In Slide 13, you can see the development of our geographic footprint in terms of passengers carried. This is very important for us to convey in order to forecast the full future growth in terms of passengers. Aside from Egypt, which is close to full capacity and penetration, we fly and see growth in many other regions in the coming 4 to 5 years. That's evident in the distribution of the graph. I spoke about market share, and you can actually go to the DGCA website in Kuwait and review for yourself because these numbers are actually published. Further, our market share for the year speaks volumes of our business model, our plans and our intent to continue developing and contributing to the active passenger movement in Kuwait International Airport. Slide 14 covers multiple initiatives and achievements that contributed to our 2022 results, which we want to document and share with you. We have been continuously updated on most of these during the past year, so I'll only mention a few highlights. In terms of cash collections, I'm glad to finally say that we have been able to collect the outstanding COVID repatriation amount from the government of Kuwait to the extent of KWD 2.8 million, and this receivable was cleared after quite a prolonged delay, but it is now resolved. This removes a good chunk from the outstanding receivables and moves it into our cash balances. Also a quick comment, like I mentioned earlier about fuel during the year. For almost the last 30 years, the price of Brent crude and aviation fuel have been very closely correlated, typically between $8 to $10 separate the 2 benchmarks. In other words, if Brent moved up, aviation fuel moved to the same extent. Starting with the beginning of last year, this delta, which is called crack spread, started diverging to the extent that by the middle of the year, you had a difference of almost $40 to $50 and in some cases, $60 gap between the price of Brent crude per barrel and aviation fuel per barrel. It's, I think, a testament to the very strong business model of Jazeera and indeed, the fanatical focus on every cost line item that this increase in aviation fuel prices added a burden of -- in excess of KWD 9 million to the cost structure of the airline. In other words, if aviation fuel prices remained at exactly the same level as it was in January of last year, the result would have been better by more than KWD 9 million, in other words, a KWD 30 million net profit. It's particularly pleasing for us here that despite this unplanned, unbudgeted additional burden of KWD 9 million on our costs from aviation fuel alone, we still managed to post an annual net profit in excess of KWD 20 million, which is the highest in the history of Jazeera. And I think the 1,200 employees of Jazeera, which translates to about 60 staff per aircraft, we are very proud of this achievement and our value addition to our shareholders. I invite you to take a look at the following slide, where you can see exactly what I'm talking about where our employees responded to an independent survey about how they feel working for Jazeera. And this gave us the "Great Place To Work" certification last week. 85% of our employees responded to this saying that they were made to feel welcome when they joined the company and it had a whole raft of questions anonymously posed to our workforce, and they have replied to the organization who has now accredited us with this certification. In the final section of my presentation, we will discuss our outlook for the short and long-term future from our perspective. For 2023, we see another record year for Jazeera in terms of passenger movements, revenue, and we certainly expect profitability as well. Our positive outlook is based on our growing fleet as we add another 3 airplanes over the course of the year in addition to potentially wet leasing temporary lift during the summer months, also driven by the growth in destinations and the ability to better serve certain others in terms of higher frequency. Further, I believe that unlike 2022, we enter 2023 with more preparedness for fuel despite all the positive signs that we see on that front. And the last 2 months, aviation fuel being in the region of about $110 a barrel compared to the $150 and the $160 that we saw in the middle of last year. The same applies to the terminal, and we see it handling the growing number of passengers, which not only feed into the charges collected, but also in retail and duty-free sales. Moving on to Slide 19 and 20. I would like to take this chance to present to you a sample of 2 business cases that we're working on for quite some time that are really reaping amazing benefits. The first is our duty-free operation, which has exceeded all expectations during 2022, reporting a revenue of KWD 4.3 million and a net margin of 30%, which translates to KWD 1.3 million in net profit for a company that's less than 18 months old. Not only has this initiative performed well, but its growth prospects are very promising once we decide to expand it to other airports in Kuwait as well as the region. The second very interesting initiative is the flight simulator, which we mentioned before in our calls. I'm delighted to announce that this is now in motion, and we will be receiving the simulator in Kuwait by August of this year as part of our approved Training Organization project. This will secure a future stream of pilots joining and contributing to Jazeera in a trained pipeline of talent with the same DNA that we expect within our team. So we don't have to go to the outside market and be dependent on external demand and supply of pilots. And it also is a nice little business subsidiary within our organization. It creates cost savings and adds revenue because young pilots are -- they pay for this training. Lastly, on Slide 21, as we like to do on an annual basis, I'd like to review the long-term plan and prospects of Jazeera to realign our vision with market expectations. You still see another very active 4 to 5 years in Jazeera. By this, I mean, we expect to have significant growth in terms of fleet, destinations and passengers during those years, and we'll continue to adopt the same business model that brought us to this point. In terms of our fleet, we see Jazeera operating 35 airplanes by the year 2026 or '27. This means that we will be serving significantly more than 100 destinations. All of these are destinations that we have already evaluated and we see them as value accretive to our network and our profitability. We plan to cross the 80% load factor over the coming 3 years. Our first phase over the last few years was to achieve and push ourselves above the 75% load factor, which we have now comfortably achieved. The ones who have been around with us for some time would remember when Jazeera's load factor was steadily below 70%. So gradually, we will make the 80% load factor the benchmark. By gradually I mean in a matter of months and build from that. We will also continue to focus on our business initiatives such as maintenance and engineering, duty-free, as well as the training organization. There are a few more very exciting projects being prepared to commence operations over the coming months and years, which I will be sharing with you in successive calls. Gradually, as we grow, it will make more business sense to move into certain services and bring them in-house in order to achieve economies of scale and improve overall group profitability. Lastly, our expansion plans for the Facilities segment are ongoing, and we are working closely with regulators and all concerned government entities to ensure that Jazeera gets the expansion that would allow it to continue providing its services to passengers and add to the overall infrastructure of the Kuwaiti aviation sector, indeed an integral part of it. With that, I complete my section of the presentation and hand over to our very capable Chief Financial Officer, Krishnan. Krishnan, please go ahead with your part of the presentation.

Thank you very much, Rohit, and good afternoon to all participants. I will straight away jump to the Slide #23, and I want to highlight just 2 of the KPIs because most of them have been already addressed by Rohit. If you see the increase in sectors, it has increased in the fourth quarter year-over-year by 74%, whereas the passenger growth has been 88%. Similarly, if you look at for the full financial year, the sectors increased by 187% whereas the passengers went up by 247%. With that, I'll take you to the next slide on the financial performance. The numbers for the year, Q4, if you see, went up -- operating revenue went up by 24%. That was primarily because the load factor was higher by 44.5% and the passenger numbers by 88%, whereas this was partially offset by the 57% decline in yield, which already was covered. The primary reason was the spurt of travel happening in the last quarter of 2021, which gave us extraordinarily high yield at the time. The terminal revenue also was higher in Q4 by 42%. The operating costs were in line with the increase in capacity in the sectors, 74% in the increased operations reflected a 70% increase in cost. Mind you, this was despite the increase of 149% in the fuel price year-over-year for Q4. Taking you to the next Slide 25. For the financial year 2022, our revenue was 126% more because the load factors and the passenger numbers were higher by 247%. And the yield was about 35% lower. That made a slight dent in the increase. The operating costs were higher by 123% even though our operations increased by 187% and fuel alone increased by 348% for the same period in 2021. The non-operating negative exchange revaluation of future lease liabilities had a -- took a toll on the profitability of KWD 2 million. The cash balance as of the end of 2022 was KWD 52 million, which was higher than the KWD 50 million in the previous year. This is despite the fact that we have paid KWD 25 million as pre-delivery payment advances to Airbus and the fact that we paid out dividends of KWD 13.6 million during 2022 to the shareholders. Primarily, this was because of the operating profits and the advance collections coming in and a small sale and leaseback gain as well. The increase in fixed assets was primarily due to 2 factors, the advances paid to Airbus and 2 leased aircraft, which were inducted in Q3 of 2022. So that's why the assets and the liabilities, in fact, went up. The next slide gives you the movement of the Brent and our yields. So I will stop my part of the presentation with this. Over to you, Rohit. Thank you.

[Operator Instructions] We'll take the first question from the line of [ Bismil Onair ].

I just wanted to get a better understanding on the reason for the quick normalization of yields. I understand that you mentioned that yields declined due to having higher yields and higher base effect in 2021. But it seems that the normalization and catch up in yield, have happened faster than what we were expecting. Can you please shed some more light on that? What were the reasons behind that quick normalization? And where do you expect yields to go from here?

I'm not too sure whether it was surprising because even in the last 2 calls, I have been highlighting, and I think whenever we have received inquiries from our investors, we've been highlighting that yields starting from post summer last year are very much back to normal. This is simply a function of the travel demand and supply equation. Travel has come back to the normal seasonal patterns where the peak travel demand is during the summer months. And that kind of coincides with our Q3, and that's reflected in the very healthy Q3 that you see over a period of many years for Jazeera. And Q4 is typically a quieter period. Demand is less, whereas supply went back to full normality. In other words, earlier Kuwait International Airport had certain constraints and airlines were being given the rights to operate in that highly constrained environment with minimal frequencies with the winter season -- at a winter season of 2022, starting with October and Q4. They went back to normal, travel demand went back to normal. And so yield stabilized at that level. Having said that, I think compared to most airlines, because of our very lean cost structure, we can absorb and digest lower yields than practically any other airline in the region and still end up making a profit. And you have seen that in the past, and you will continue to see that as we move into Q1 and Q2. And definitely, Q3 is a completely different aspect of the business altogether.

[Operator Instructions] We have a few questions from Mohamad El Masri. We'll take the first 2. First one is, how would you manage the increase in jet fuel -- if prices persist in 2023?

Right. It's important for us to understand, Mohamad, the factors that led to the divergence of Brent crude and aviation fuel. So I think we did see Brent crude moving up. And typically, airlines that hedge in the past have hedged the Brent crude derivative. And in this particular instance, those that did hedge did not really benefit because the issue at hand was not Brent. The issue at hand was aviation fuel, for which an instrument did not exist until relatively recently in terms of hedging that derivative. I'm glad to report that starting with December and certainly, it's visible in January and now February as well, the early part of February, that aviation fuel has -- is still slightly divergent from Brent in the sense that it's about $25, but that gap is much less than the $40, $50 and $60 that we have seen in the past. So I expect this still to be something under our microscope. And it's extremely frustrating, as you can imagine when every single cylinder within the airline is functioning to optimum capacity, but you have a situation like this, which adds a burden on your P&L. That is now much less starting with December and certainly in January. We still have a great degree of caution when we approach the subject of hedging because airlines around the world have had varied experiences, some of them quite painful with their risk management strategy in that area. But there are some logical steps that we are considering. And if and when we get around to doing any of them, we will certainly share this by advising the Boursa of our plan.

Second question, just to confirm, in the Q3 presentation, you mentioned your market share was 27%. Has that increased to 50% as you mentioned today?

No. So there are 2 separate market shares, both of which have grown. I think when I mentioned 27%, that was the organic market share in total of all the airlines, both local and international operating in Kuwait. That has now increased to 30%. So that has gone from 27% to 30%. When I say 50% is that if you take only the Kuwait carriers, and there, we are very proud as well, has grown to exactly half the market share with less than half the fleet of our competitor.

Okay. There are a few questions on the same issue, so from Mohamad, Gus, Shahid and others. So I'll just put them into one. It's maybe share your perspective on the recent changes in the India, Cairo quotas by the DGCA. So the point that they want to be tackled is the background of this. Do you expect this to be reversed officially or through makeup measures? And if this goes through, what will be the impact on your P&L in 2023?

Thank you for that question. So at the moment, as things stand, although this rumor as well as little understood issue has been swirling around for more than a month. Our quotas to all those countries and cities that you mentioned remain unchanged. We are still operating without any changes to our frequency to Cairo, to India and to any other place in our network. We did receive this letter, which is surprising, and in our view, unjustified. As you can imagine, it's not something that we accepted in silence. We have taken it up with the appropriate sections of the regulator as well as with the government of Kuwait. And we have received indications that the matter will be reviewed from scratch very fairly. We are happy with the assurances that we have received. And I don't foresee any imminent change to the frequencies that we operate to any of these places. As and when the situation gets crystallized one way or another, in our typical transparent fashion, we will certainly let you all know. But with our own calculations, even if -- and I say this in capital letters, even if we are to see this being implemented, which I never expect to see, the impact on our bottom line will be in 6 digits. I'm not sure if I can be any more transparent than that. So if the worst was to happen and we had to comply to the letter of what was being circulated a few weeks ago, the impact to our bottom line would be in 6 digits. I hope that helps you put some boundaries around what the potential impact could be. But from my perspective, we are nowhere near that point yet. And we are certainly aiming to ensure we don't grow anywhere there. On the contrary, we believe in increasing the entire cake and the collective efforts of us as in the carriers of Kuwait and the government of Kuwait should be towards enhancing the overall bilateral agreements between Kuwait and India as well as Kuwait and Egypt. And I think that also has met with a lot of positive response from all parties concerned in this particular issue. I hope that answers your question.

A follow-up from Gus Chehayeb. Can you please update us on the status of the new larger terminal project and negotiations with the government?

I fully expected to be able to give you more clarity on this, Gus. However, the recent frequent changes in key areas of the decision-making process, and I don't want to go into more detail on that subject. The frequent changes have slowed down somewhat the final 2 steps in the approval process for this. So it's frustrating for all of us collectively. But it's on the right track. And once we get some semblance of stability in the different approval process within the government, we will be making progress on that. I see Gus has posted another question about, can you clarify what I mean by 6 digits impact? And Gus, I'm talking about net income, the impact if this was to be implemented in its entirety, which I certainly expect it will not be. I expect no more than a 6-digit impact to our net income. As you can see, now our net income is in 8 digits. So this whole issue should not be more than 6 digits.

Question from [ William Soule ], what is the current percentage of transit passengers at Jazeera? And where are you targeting this figure as you expand routes?

So this is one of those numbers that keep fluctuating, and it's not a number that's fixed or actually has any predictability nor is it a level of detail that I think should be shared. I can tell you that we try to keep the number of connecting passengers as low as possible. A good low-cost airline part of the business model, part of the bible typically keeps this around the 20% mark. At the moment, we are a little bit higher than this number, but our aim is to keep it around that number, 20%.

Question from Gunangad Singh. Can we see some de-growth or decline in passenger numbers in the first 9 months of 2023, owing to the higher base seen in 2022?

Hell no is the short answer.