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 First Quarter '23 Earnings Webcast. I'm pleased to have on the call today from Jazeera Rohit Ramachandran, CEO; and Krishnan Balakrishnan; CFO. We'll start by some presentation from management, and then we'll open the floor for Q&A. [Operator Instructions] Rohit, please go ahead.

Good afternoon, everyone, and great pleasure to join you today for the first quarter earnings call of 2023 to discuss our financial results. As we will see during our presentation, the year has started on a very good note in terms of operations and financial results. And barring any major external factors, Jazeera is on its way to a record year. During this first quarter, which is typically never the strongest for GCC carriers, we achieved several important benchmarks, and that makes me confident that this will be a stellar year for Jazeera coming up. Let's dive straight into the operational highlights. We will begin with Slide 6 and 7 for a review of the first quarter operational and financial headlines. In this slide, you can see our operational performance during the quarter. First off, we stayed true to our target of more than 1 million passengers to be carried quarterly. But more interestingly is the way we achieved this. By that, I'm referring to our load factor during the quarter, which came in at 82.1%, recording the highest first quarter load factor ever for Jazeera. This is a target that we set for ourselves and communicated with you previously, and are now really working to standardize the 80%-plus load factor year-round average. To reach these figures, utilization, the aircraft utilization per aircraft per day, stood at 13.7 hours, which is relatively high for the first quarter, one of the highest in the industry, in fact, yet reflects more use of our assets before going out to acquire more aircraft. You know my closely held view that it's better to be half an aircraft short than to be half an aircraft extra. Yield was lower as totally expected, given the uncharacteristically high yields of last year, the same quarter, you might recall, when restrictions were only lifted towards the end of February, and that meant that almost throughout the first quarter of last year, we had 2 months of relatively low supply into Kuwait and hence elevated ticket prices. We can look at this as the first normal organic yield environment since the first quarter of 2019 and having it higher by KWD 3 compared to 2019 is for sure good news. Jazeera reported a revenue of KWD 48.3 million, 35% higher than the first quarter of 2022, with operating profit of KWD 3.6 million and net profit of KWD 2.8 million (sic) [ KWD 2.3 million ]. Both these numbers were lower than the comparable period because of the higher yield of last year first quarter. I'm sure everyone understands the favorable dynamics of being able to charge a higher fare while incurring lower costs due to less operations, which was the case of the first quarter, but by all means was not the standard in the industry. The earnings quality of this quarter is significantly higher, in my opinion. You can start to see the scalability effect of more flying hours, allowing us to move more cargo, as well as the impact of carrying more passengers that is reflected in both the e-commerce sales and the ancillary revenue. You can see sustainable improvements on all fronts. Moving on to our terminal, T5. We see continuous improvement in all financial and operational metrics with a revenue of KWD 2.8 million, EBITDA of KWD 2.2 million and net profit of KWD 1.9 million. All of these numbers are significantly above the first quarter of last year, as you can see. Our expansions are ongoing. And in the first quarter of this year, we made some significant expansion into the capacity of the terminal. We feel very comfortable and confident in our ability to carry more than 4.5 million passengers during this year, if need be. All duty-free and retail operations, along with all other revenue streams have been ramped up and are firing on all cylinders. More about this in subsequent slides. I will also provide now a quick update on other key operational matters. I'm glad to announce that, based on official numbers we received from DGCA Kuwait, Jazeera had the largest market share during the entire first quarter in terms of passengers carried and aircraft movements out of Kuwait Airport. Let me just dwell on this for a minute. What this means is despite having a fleet size of almost half compared to our friends across the street, we carried more passengers than them and operated more flights than them in spite of the fact that all our fleet is narrow body. This is a very integral milestone in the ongoing evolution of the company. Doing this while maintaining our profitability is a reflection not only in the ability to expand our operations but also speaks volumes of the potential of the aviation market in Kuwait as a whole. I know I said this several times before, but I'd like to reiterate that despite all its challenges, the Kuwaiti travel market offers amazing opportunities for a lean and entrepreneurial operator like Jazeera. During this quarter, Jazeera initiated procedures to establish a 49% owned company in Saudi Arabia to function as its first hub outside of Kuwait. In fact, we see this as a solid stand-alone airline that will gradually fly on its own, given the promising prospects of Saudi Arabia. We still have to go through a prolonged legal and structural process with the Saudi regulators and other official entities, so I won't share more information on this in our usual style until we have more formal approvals in place and I can share more details with you. As a measure of cost control, we entered into a hedging contract to secure fuel prices and fuel costs for the year. The aim of this is to see through 2023 without any major surprises from external factors like last year, which, if you recall, ate away a significant chunk of our potential profit. We continued launching new destinations, and Moscow was the highlight of the quarter, being Jazeera's first-ever destination in Russia. It's interesting to say that we had big plans for Russia ever since 2018, but we had to always put it on hold for one reason or another. So we finally kickstarted this process, and we aim to add several others in the coming months and years. We also added Samarkand, which is our third destination in Uzbekistan. Fleet-wise is actually a very interesting story. We added just 1 aircraft so far this year, but 3 more will join our fleet before summer in the month of June. And we are going to get our fourth aircraft for the year immediately post summer, which means by the end of the year we will be at 24 airplanes. We are also proud to have commemorated International Women's Day with an all-female crew, both pilots and cabin crew as well as the engineers working on that particular service on the Riyadh flight on the 8th of March of this year. Moving on to our short-term outlook. We foresee a fairly flat second quarter as there are no major events other than the 2 Eid holidays -- one was immediately post Ramadan last month and one at the very end of June -- while the busy summer season will start towards the very end of June in the Eid al-Adha holiday. This means that like last year, there will be less travel concentration in the second quarter against a much more robust third quarter of this year. Overall, like I began, market dynamics are positive, very supportive, and we expect to see a very good year by the end of the third quarter and the fourth quarter. With that, I complete my section of the presentation and hand you over to our Chief Financial Officer, Krishnan.

Thank you, Rohit. So good afternoon to everyone. If I go to the next slide, which has the statistics, most of the statistics have been addressed by Rohit with the reasons, so I will not touch upon those. If you look at the revenue compared to the previous year first quarter, we have done better by 35.2%, and that is primarily because of the load factors being higher and the passenger numbers, therefore, being higher. Even though there was a drop in yield, this was offset -- more than offset by the increase in the load factor and passengers. The terminal revenue also was much higher, by 35% compared to last year same quarter. Operating margin was 15.1% for this quarter, even though our operating costs were much higher at 47% being -- due to the fuel price increase of 19% over the previous year. And also the higher operations -- the level of operations was 44% higher. So that is why 47% costs are higher. If you look at the exchange revaluation book gain of lease liabilities, we had about KWD 353,000 benefit in this quarter. The cash balance for the quarter end was lesser at KWD 49 million compared to December. That was primarily because there was an overdraft which we have taken to make interest arbitrage. We settled it and also made money by -- with the overdraft usage. In the fixed assets grew due to the advances that we paid for various projects, which are ongoing right now. And the liabilities increased primarily because we had higher advance collections for future travel. The equity, of course, came down by KWD 11 million because of the payout relating to the dividend -- final dividend for the last year. With that, I conclude. I've addressed all these issues already in the previous slide, so I will conclude my section and hand it over back to Rohit.

Thank you very much, Krishnan. I now have the floor open if you have any questions.

[Operator Instructions] We have the first question from the line of Nishit Lakhotia.

Am I audible? Yes.

Yes, Nishit, you are.

Okay. Congratulations on a very strong quarter, at least in terms of operations and top line and load factor. I have a couple of questions, more on the profitability side. I mean if you look at this quarter, and if I can maybe compare it with 1Q '19 instead of last 2, 3 years, given the distortion, you made like KWD 2.3 million in bottom line, but the delta of almost KWD 1.8 million is coming from your terminal profits, plus you have almost KWD 0.5 million in other operating income, which I'm assuming is more of interest income from your cash. So the profitability of the airline business has been affected in this quarter. And the yields are still higher than 1Q '19 at KWD 41 versus KWD 37, KWD 38 at that time. So I wanted your perspective on where do we see this profitability heading on the airline business if you didn't have that cushion of the terminal profit currently in this quarter? That's my first question. Second, on the DGCA ruling of market share, any development on that in terms of the incremental future market share as you've been in discussion for India and Cairo routes, anything on that comment? And third, on the hedging reserve, I see a negative KWD 0.5 million in the balance sheet. Was there any P&L impact from that this quarter?

Thank you, Nishit. Good to hear from you. And as usual, the first question. Let me address certainly the first 2, and I'll leave the third one for Krishnan to address. Let me begin by saying that the earnings and the business relationship between the airline and the terminal are integral, which means that there can't be one without the other. So I want to lay that as a foundation for the answer that I'm about to give you. Now airline business in the GCC, they don't follow a quarter-to-quarter relationship, which means that you typically have a quarter -- the first quarter is generally the weakest, then you have the second quarter, which is also not very strong, but the third and fourth quarter is typically when airlines in the region and many across the world make the bulk of their earnings. There have been many years in the past when airlines in this region, including Jazeera, don't make any profit at all in the first quarter, but go on to generate very strong results on an annualized basis. So -- when we have a quarter like ours, when in the first quarter, you generate a strong profit even for the airline, I take your point that it may appear temporarily that the margin has been shrunk for the quarter. But I encourage you all, because that's the nature of the business, to look at it in terms of an annual performance. If you recall the last earnings call of the CEO of easyJet, she herself had a very similar question posed by an analyst, and her answer was very much the same. After having posted a loss in a quarter, she was very comfortable attesting to the fact that they expect a record year in that particular year, and she went on to deliver as well. I don't give forecasts or guidance, and you all know this well. But I can tell you that the airline is well placed for a record year this year as well, regardless of the perception that the margin in Q1 has shrunk somewhat compared to the previous year. I hope that answers your question, Nishit.

Rohit, just on this one, if I can just follow up. You said quarter-on-quarter, but you seem to be a bit modest on your second quarter outlook. And I didn't kind of get that, because you have 2 Eid holidays this quarter, which was not in last year's second quarter. So why are you being modest then on the second quarter outlook with 2 Eids in 1 quarter coming in, which wasn't the case.

It's a good question. So the Eids were -- the first Eid this year was in the end of April, which was also there the previous year. However, this year also had the entire month of Ramadan in the month of April, which is historically a very bad travel period for airlines in the region. That is the first quarter -- first month of the second quarter. Then you have the summer holidays and the second Eid coming up by the end of June, early July. So the demand for travel, typically, those who have had to take a short break, they take it in April. Those who are planning the summer break take it in summer, towards the end of June. And so it's going to be an aggressive period where the aim would be to preserve load factors, and it's going to be a period of relatively low demand for the month of May, because when someone is planning travel for summer and just come back from their Eid's trip, it's unlikely that they're going to have a trip sandwiched in May. In spite of all that, I think when it comes to Umrah, when it comes to Hajj, and as you can see, even from the advance booking and the receivables that -- not receivables, the payables that we are holding in terms of advanced ticket collections that you can see in our balance sheet. It's all very, very strong. And so I expect a very good year on the whole and particularly a very good Q3. Does that answer your question?

Okay. Got it. Yes.

Okay, great. Coming back to your question of something that hit the headlines in the last week of December, quite bizarre, and that seemed to cause quite a lot of concern. And at that time, the first investor call that I hosted, immediately following that, I had categorically said that this is going to have no measurable impact. And I'm quite careful with what I commit to you all on this call. I'm very happy to have stood by my word. You can see there's been not one seat reduced from our allocation to India, not one seat reduced on our allocation to Cairo. On the contrary, in about 2.5 weeks' time, we are launching additional services to the new airport in Cairo. In addition to our existing services to the existing airport in Cairo, the Sphinx airport, the new airport in Cairo, will see Jazeera being the very first operator from the GCC with direct flights from Kuwait to Cairo. So the answer to your question was even then I didn't perceive any risk to our business. And now I perceive even less so. There are discussions going on with the government, but with the changing government, there's obviously some complexity involved there. But there will not be and there has not been any change in our quota of seats available to us to sell to India or to Cairo for that matter. Does that answer your question?

Again, just a small follow-up. So you mean that in the summer month schedule, right now, you don't have to make any changes whatsoever based on this ruling that was announced in December?

We have not made any changes in any of the months, winter, summer, nothing.

Okay, got that.

Krishnan, do you want to answer Nishit's question regarding the hedge reserve?

Sure, Rohit. Yes. So we have created the reserve out of OCI and it does not hit the P&L, Nishit.

[Operator Instructions] We have a question from Sidharth Saboo: the increase in costs in the quarter, is the reason is that you are already preparing for the higher passenger numbers in the following quarters and your costs will remain lowly stable ex fuel cost in the coming quarters, and you benefit from higher revenues?